Nationalisation Watch / Govt. rethinking 3.5 billion bailout for the banks?

Squire wrote:

ibis wrote:

because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Developers costs are a lot more than 20% of sale value!!! I can't even envisage a situation where that could be true. I must be misunderstanding.

I've been quoted that by a relative inside a large development/construction company, although it would probably be based on apartments rather than once off luxury builds since that was the approximate context. Also, you can buy a site and get something built for 30-40% of what you could sell it for (at the peak) if you know a builder, so I don't find it hard to envisage the developers' regular margins being that large.

Surely the resilience of people to pay for properties worth a fraction of their mortgage is yet to be tested. It would seem that it is slightly premature to make such a judgment.

That said, as has been previously indicated, the system of bankruptcy in America allows for greater levels of default.

youngdan wrote:

Aragon. Are you of the belief that there is free market economics over here. The banks were forced by law to make the loans to people who everyone knew could not pay. In a free market you would never have had Freddy or Fannie.

What law was that? There certainly was no such legislation that I'm aware of elsewhere - the banks lent to worse and worse customers because of a profits race. They were trying to squeeze the last drops out of a buoyant property market by lending like loan sharks, not being forced by law to lend to the social margins.

ibis wrote:

Squire wrote:

ibis wrote:

because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Developers costs are a lot more than 20% of sale value!!! I can't even envisage a situation where that could be true. I must be misunderstanding.

I've been quoted that by a relative inside a large development/construction company, although it would probably be based on apartments rather than once off luxury builds since that was the approximate context. Also, you can buy a site and get something built for 30-40% of what you could sell it for (at the peak) if you know a builder, so I don't find it hard to envisage the developers' regular margins being that large.

Ibis

I am heavily involved in development (not in Ireland) and I can say with absolute certainty that if you ever decide on property as a career you should seek more realistic advice! You have site costs, legal fees, building professionals, statutory fees, construction costs, site works, connection charges, estate agents fees, financing costs etc. Most developers are not Building Contractors and if they are, and have any senses, they will split the operation into different companies.

The real cost killer is the cost of site and because they are often incurred and financed long before approvals they generally make or break a scheme. A very rough figure is 1000 euro per sq m, (very basic build) but you have then to add on all the siteworks, connection charges professional fees. Obviously the cost goes up if there are difficult site conditions, and going up does not generally mean cheaper! If you were building a 200 sq m house on a field your father gave you and were doing a fair amount of work yourself and employing direct labour you may do it for less than 200,000 but you are going to have a hard year and long hours! Don't try it unless you know good tradesmen and know a bit about construction.

I found land speculation much more lucrative than actual development. Development is not the fast road to riches land speculation is.

I find the notion that the Irish Bank's reckless lending is somehow better becsuse Irish debt laws are more onerous than the US system intriguing. Is this supposed to make the Irish borrower feel patriotic or something? Or did the banks lower their lending criteria knowing that the mortgage borrowers were hooked for life? In any case, it doesn't ameliorate the reckless lending practices by one jot.

Anyway, there are only so many recourse mortgages that were underwritten. The vast majority of mortgage loans still require the borrower to pay their loans or, failing that, to seek bankruptcy protection. Some make it sound like the rosy dell when you go bankrupt in the US. It isn't.

That was not my point. My point was merely that you are more likely to have defaults in America owing to the fact that Irish debt laws are more onerous. It is easier and less financially punitive to walk away from a mortgage which you cannot afford than it is here. Consequently less people will do it here than is the case in America.

That has nothing to do with how reckless or not reckless the banks have been. Merely that people are more likely to default in America. Bankruptcy is not nice in any country.

There was a piece on Radio 4 regarding this not too long ago. I'll see can I find it.

Squire wrote:

ibis wrote:

Squire wrote:

ibis wrote:

because developers costs have been about 20% of sale value, which means that, left entirely to themselves, and with the banks able to keep developers afloat with loans, the Irish property market would have to have fallen to below 20% of peak to guarantee the destruction of the builders. Currently, we are nowhere near that size of fall, and so the fire sale value of the assets involved is still much larger than the loans on them.

Developers costs are a lot more than 20% of sale value!!! I can't even envisage a situation where that could be true. I must be misunderstanding.

I've been quoted that by a relative inside a large development/construction company, although it would probably be based on apartments rather than once off luxury builds since that was the approximate context. Also, you can buy a site and get something built for 30-40% of what you could sell it for (at the peak) if you know a builder, so I don't find it hard to envisage the developers' regular margins being that large.

Ibis

I am heavily involved in development (not in Ireland) and I can say with absolute certainty that if you ever decide on property as a career you should seek more realistic advice! You have site costs, legal fees, building professionals, statutory fees, construction costs, site works, connection charges, estate agents fees, financing costs etc. Most developers are not Building Contractors and if they are, and have any senses, they will split the operation into different companies.

The real cost killer is the cost of site and because they are often incurred and financed long before approvals they generally make or break a scheme. A very rough figure is 1000 euro per sq m, (very basic build) but you have then to add on all the siteworks, connection charges professional fees. Obviously the cost goes up if there are difficult site conditions, and going up does not generally mean cheaper! If you were building a 200 sq m house on a field your father gave you and were doing a fair amount of work yourself and employing direct labour you may do it for less than 200,000 but you are going to have a hard year and long hours! Don't try it unless you know good tradesmen and know a bit about construction.

I found land speculation much more lucrative than actual development. Development is not the fast road to riches land speculation is.

Clearly I would be well advised to seek further advice, if the original comments were so far off base! Still, those were the figures I was given.

Based on your own experience, then, how far would you say the property market needs to fall before the bigger developers are in danger of default?

johnfás wrote:

That was not my point. My point was merely that you are more likely to have defaults in America owing to the fact that Irish debt laws are more onerous. It is easier and less financially punitive to walk away from a mortgage which you cannot afford than it is here. Consequently less people will do it here than is the case in America.

That has nothing to do with how reckless or not reckless the banks have been. Merely that people are more likely to default in America. Bankruptcy is not nice in any country.

There was a piece on Radio 4 regarding this not too long ago. I'll see can I find it.

I don't think it's just the debt laws here. It's the social stigma as well. Default on your mortgage and up sticks, and people will still be describing you as having 'fled' twenty years from now.

ibis wrote:

I don't think it's just the debt laws here. It's the social stigma as well. Default on your mortgage and up sticks, and people will still be describing you as having 'fled' twenty years from now.

Playboy of the Western World lives on, eh?

http://www.answers.com/topic/community-reinvestment-act

Ibis. I am shocked that you doubt my word

The Community Reinvestment Act was passed by that Loon Jimmy Carter. He too thought that by passing a feel good law that he could change reality.
This mandated that banks had to lend into the ghettos. This law was such a joke that it was not enforced. However Clinton came along and put some teeth into it. Now 42% of all Freddy/Fannie mortages were to low income. Any dolt could see that this was a disastor waiting to happen but as the government stood behind Freddie nobody cared and indeed why should they.

This was not they major cause of the present difficulties though. Clinton decided to sign into law the Repeal of the Glass-Steagal Law even though Roosevelt had brought it in to regulate the financial high jinks. No matter to Bill as he was taken care of.

The spin will be to regulate. That is for the dopes as Clinton took away the bit of regulation that actually was beneficial.

ibis wrote:

Based on your own experience, then, how far would you say the property market needs to fall before the bigger developers are in danger of default?

As it would happen I am looking at a lot of problematic developments for a UK based business, to try and see if there is opportunity and help arrive at a realistic value and move to a satisfactory closure, or try and come up with possible additional income from rental. Utter tedium, should have headed out East as planed, but the hope of a bargain has kept me glued.

IMHO many developers are already in severe difficulties, but the situation is not as grave as many think provided that more mortgages (sensible ones) are approved and the market does not plummet. If not it will be a complete melt down. Generally the problem is the amount developers paid for the sites. I advised many to get out, but, I think, they thought I was biding against them and maybe I made them more determined.

Let us take a real example of a site. I have altered it slightly but the essence of the cost per unit is the same. The site cost £3.200,000 has planning permission for 79 apartments. Construction costs on a fixed price contract are just over £4,600,000. Fees say 12% incl estate agents and solicitors. Total cost £8,352,000 that is £105,000 per apartment.

It is a good scheme, apartments with 2-3 bedrooms and fair sized rooms and underground car park, not a bad location, good views. I am advised by a local estate agent that they could sell for £130,000 - £135,000 without too much difficulty. A year ago they would have been anticipating £170,000 - £180,000 plus.

BUT we have not allowed for financing costs so right now the fall in prices has eroded their profit margin completely.

As I said the killer is site costs. This particular developer thought £40,000 site cost per unit could be covered in a good market. This particular site was bought in several lots, has taken a few years to acquire and will take another 2 years to finalise approvals and build. Financing £3,200,000 for the best part of 4 years at 1.65% over BOE base would cost over £1,000,000 in interest or another £12,000 per property and that is before we get into financing the construction and professional fees.

This is a real example, and one where the developer (an old family firm) started before the bubble burst, was delayed with legal problems related to land purchase, but has done nothing particularly wrong. Was anticipating about 30% profit so was not indulging in fairy land economics. It is one I think can be saved if we can get unit sales at the anticipated price or less if in advance of construction, and use the recession to renegotiate with the possible contractor, the various professions and the bank. I think they may just about break even perhaps small profit, but hopefully no bankruptcies, but if the market falls and they can only get say £110,000 per unit it will be bankruptcy. This scheme is being repeated over and over across the UK and Ireland.

With good schemes generally it all depends on site costs!

You want to see the number of what could best be described as idiot schemes, amateurs deciding they are developers, tragic. Absolutely no possibility of redemption. They were depending on rises in property value to cover their own incompetence.


Forgot to mention if you are trying to work out the cost of apartments don't forget to add a percentage of all the common space, lifts corridors, stairs, bin stores, and carparks to the cost of each apartment.

IMO There is a very real problem with developers right now, and if approached in a blunt manner it will simply get worse. What I am doing is very useful and helps sort the irredeemable from the might just scrape through. Banks are not geared up to deal with property portfolios efficiently.

Banks have been rolling over interest repayments by the big and medium sized property companies for months already. The banks have advised them to sack everyone, sell everything saleable and hunker down. The banks are hoping to hold on until sales start to move again. Apart from fire sales things are not moving nor likely to for a couple of years. It is a matter of time imo before there is a call on the State Guarantee.

Householders who are defaulting on mortgages are having the house taken back by the bank, which is allowing them to pay rent and carry on living there. This means that the banks don't have to sell the houses off cheap and acknowledge that the value of the asset has dropped 30% plus. The mortgage payer has lost everything they paid but is escaping paying the negative equity off.

cactus flower wrote:

Householders who are defaulting on mortgages are having the house taken back by the bank, which is allowing them to pay rent and carry on living there. This means that the banks don't have to sell the houses off cheap and acknowledge that the value of the asset has dropped 30% plus. The mortgage payer has lost everything they paid but is escaping paying the negative equity off.

This is something that I have heard anecdotally several times. Is it really going on?

floatingingalway wrote:

cactus flower wrote:

Householders who are defaulting on mortgages are having the house taken back by the bank, which is allowing them to pay rent and carry on living there. This means that the banks don't have to sell the houses off cheap and acknowledge that the value of the asset has dropped 30% plus. The mortgage payer has lost everything they paid but is escaping paying the negative equity off.

This is something that I have heard anecdotally several times. Is it really going on?

YES!

Don't know how common it is, but the rental option is one of the options that I would be advising. There are additional problems to repo. There are costs, and risk of a property sitting empty being vandalised.A vandalised properties represent major loss. Keep them occupied, and some cash flow, is the best option unless another possibility becomes apparent. Better than having no return.

It also allows the family time and provides a roof and their fortunes may improve. A lot of it is quite sad, the wage earner falls ill or loses their job, death in the family. What I am currently wallowing through is not just tedium but seriously depressing.

It is a strange world we live in Banks are being nationalised by stealth and are themselves becoming providers of social housing.

A Harvard economist on CNN is suggesting that National default on debts would not be the end of the world...

floatingingalway wrote:

cactus flower wrote:

Householders who are defaulting on mortgages are having the house taken back by the bank, which is allowing them to pay rent and carry on living there. This means that the banks don't have to sell the houses off cheap and acknowledge that the value of the asset has dropped 30% plus. The mortgage payer has lost everything they paid but is escaping paying the negative equity off.

This is something that I have heard anecdotally several times. Is it really going on?

The banks here prefer it. Throwing people onto the street has, you know, overtones. Irish Nationwide, I think, actually evicted a family about a decade ago, and they probably still haven't forgotten the public backlash.

cactus flower wrote:

A Harvard economist on CNN is suggesting that National default on debts would not be the end of the world...

Wow! Do the Harvard guys always have to be so right.

Squire wrote:

floatingingalway wrote:

cactus flower wrote:

Householders who are defaulting on mortgages are having the house taken back by the bank, which is allowing them to pay rent and carry on living there. This means that the banks don't have to sell the houses off cheap and acknowledge that the value of the asset has dropped 30% plus. The mortgage payer has lost everything they paid but is escaping paying the negative equity off.

This is something that I have heard anecdotally several times. Is it really going on?

YES!

Don't know how common it is, but the rental option is one of the options that I would be advising. There are additional problems to repo. There are costs, and risk of a property sitting empty being vandalised.A vandalised properties represent major loss. Keep them occupied, and some cash flow, is the best option unless another possibility becomes apparent. Better than having no return.

It also allows the family time and provides a roof and their fortunes may improve. A lot of it is quite sad, the wage earner falls ill or loses their job, death in the family. What I am currently wallowing through is not just tedium but seriously depressing.

It is a strange world we live in Banks are being nationalised by stealth and are themselves becoming providers of social housing.

I'd love to see the terms and conditions of one of the leases

I often hear it in the supermarket when I'm browsing the plant section which is near the cash registers - "You're not getting a second Mars Bar, do you think money grows on trees?" But for a 2 year-old it is true that money grows on trees. In fact money really comes from trees as it is made from paper except Australian money which comes from plastic.

Why can't we harvest all the money every Autumn from the money tree and buy ourselves what we like and bank in a Swiss account etcetera? And buy a yacht and hire Diarmuid Gorman in to make some fancy circles in our gardens? Because, even though money comes from trees it is really like fertilizer.

So this is the good thing with money - it fertilizes. Sprinkled in the right amounts around a garden it can do a great job of growing your grass and making it nice and green and growing your vegetables for feeding yourself. As with anything in life, too much of a good thing can cause trouble and this is true of fertilizer.

Too much money like too much fertilizer can cause weeds to sprout up in all locations and gives you the extra work of weeding. But some people might like that - weeding like a nutcase every day after work and not going to the seaside just weeding instead. Even more fertilizer makes the aould sycamore trees launch themselves out of the loam along with rhododendrons and some virulent ivies and how they'll mushroom and choke everything in sight and then you'll have a job and a half to clear out those boyos once they've got their teeth in your Declan Gavin number out the back!

The lesson: Greed=Weed so Go organic!

Gerry

Gerry there has put his finger on the problem - organic growth of money with nothing to back it.

Here is the wording of the Bill as Acted. I'll post it into the first post of this thread as well.

http://www.oireachtas.ie/documents/bills28/bills/2008/4508/b45a08d.pdf

There has been a bit of talk about the German bank deposit guarantees being a good sign that Ireland has made a good move. Der Spiegel carried an interview with Interior Minister Wolfgang Schäuble (CDU). Schäuble drew direct parallels to the economic crisis of the 1920s and 1930s and warned: “Such an economic crisis can result in an incredible threat to all of society. The consequences of that depression was Adolf Hitler and, indirectly, World War II and Auschwitz."

Instead of calming the situation, the government’s promise to guarantee deposits has heightened fears giving people a sense of the scale of the crisis. Like Ireland, the German government has committed itself to cover an almost unlimited amount. According to government data that Der Spiegel reports, the guarantee will include private bank assets worth some €568 billion—twice as much as the entire annual federal budget. By some calculations, the various forms of savings total €4.5 trillion.

The article says “Merkel and Co. have nothing more to increase their promises to savers. There are no reserves should the German financial system collapse... if the state really does have to compensate for lost deposits beyond the legal guarantee of €20,000 and the private banks’ deposit guarantee fund the state debt will rise for years, capital spending will fall, social welfare systems will be additionally burdened.” Its already started here. In Ireland we have the spectacle of the CEO of the Anglo Irish Bank strutting around prescribing cuts in child benefit.

The Guardian described “anger” in Downing Street: “British officials were furious with Merkel. They said she gave no indication of the move at a summit in Paris on Saturday designed to coordinate a European response to the economic crisis.” The newspaper cited a financial expert who declared, “It’s every man for himself in a united Europe.”
The Daily Mail quoted an “angry British official” who declared: “Merkel agreed that we should all work together, then got on a plane, flew home and did her own thing.”

The suggestion in the Irish media that Germany's guarantee is confirmation that the Irish guarantee was a logical, reasonable and effective step is hardly borne out.

HanleyS on Politics.ie posted this article.

http://www.independent.ie/business/irish/irelands-big-three-may-need-to-raise-836476bn-over-next-two-years-1492531.html

If the Banks have misrepresented the extent of their liabilities /overrepresented the value of their assets, where does the Guarantee stand?

HanleyS is intelligent. HanleyS should be poached.

So should fergalr. He is a personal friend of mine (yes in the real world). So I will have to get him to drop in here more regularly.

johnfás wrote:

HanleyS is intelligent. HanleyS should be poached.

In white wine maybe?

http://www.rte.ie/news/2008/1008/economy.html

The idea that there the Irish Guarantee was carefull prepared behind the scenes doesn't seem to hold water.

Government is still not ready to bring the "Terms and Conditions" forward.
Today's Irish Times has reported that Cowen is talking about all kinds of limits on the "unlimited" guarantee - in part designed to satisfy the British that funds won't leak to Ireland on the strength of it.

I would have been suprised but delighted if this had worked, but it seems in danger of unravelling before it has started.

In the meantime the British Government is sueing Iceland for reimbursement of lost deposits in Iceland's bank branches in the UK. They have pointedly remarked that there does not seem to be any money in place to back up the Icelandic deposit guarantee...

If we had got our renewable energy infrastructure up and running I might be suggesting "DEFAULT!" at this point.