Tag Archives: real-estate

Is there a bubble in the UK housing market?

Recently there has been an upsurge of concern about a house price bubble in the UK. New Governor Mark Carney has made soothing noises about the existence of one.

Recent developments in econometrics allow us a new test which might be able to shed some light on this; it also tantalizingly allows us the possibility of a ‘real time’ bubble dating model.

The tools are, to be technical for a moment, ‘Right Tailed Augmented Dickey Fuller’ tests. They are new, and still being refined and evolved. For some discussion of them and their use see the originating papers by Phillips et al (Phillips, P., S. Shi, and J. Yu, 2013. Testing for Multiple Bubbles 1: Historical episodes of exuberance and collapse in the S&P 500. ; Phillips, P., Y. Wu, Y., and J. Yu, 2011. Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values? International Economic Review, 201, 201–226. ; Phillips, P. C. B. and J. Yu, 2011. Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2, 455–491.)

See also work on the Colombian housing market ( Testing for Bubbles in Housing Markets: New Results Using a New Method JE Gomez-Gonzalez, J Ojeda-Joya, CR Guerra ) ; on the HongKong market (Yiu, Matthew S., Jun Yu, and Lu Jin. “Detecting bubbles in Hong Kong residential property market.” Journal of Asian Economics (2013)) ; on the German market (Chen, Xi and Funke, Michael, Renewed Momentum in the German Housing Market: Boom or Bubble? (June 27, 2013). CESifo Working Paper Series No. 4287)

These papers all give detailed discussions of the test. A program for eviews is available (see http://davegiles.blogspot.ie/2013/08/right-tail-augmented-dickey-fuller.html ) as is one for Matlab (see http://sofie.oxford-man.ox.ac.uk/sites/sofie/files/omi_wysiwyg/177/21_JunYu_15.pdf ).


To implement this one proceeds to run the tests and to extract the SupADF statistic series.

One then looks for the existence and the date of a bubble by looking at when and if the test statistics exceed their statistical critical value.

Below see two graphs. The first is the UK housing market, defined as the Nationwide All homes index. Overlaid is the Nationwide First Time Buyer Affordability index. The second is the test statistic which indicates a bubble starting in md 1999 and terminating in late 2008. While there is a slight uptick in the statistic for q2003 it is still well below its critical value and has been on a downward trend. This suggests, no more, that at present there is not a bubble; it does not suggest that vigilance is not needed.







Strategic Mortgage Default: What does the research tell us?

keysWhat do we know about strategic (could meet obligations but choose not to ) defaulters in relation to mortgages?

As I argued earlier, in the Irish case very little is known. There is a little more information for the USA, but we should be very careful about blindly or even carefully transposing US experience to Ireland. The legal, cultural, economic and social climates are very different. We seem to be more tolerant of default than the USA but beyond that…That said, here are what I see as the present state of play. Im sure I have missed some research but for what its worth…

  • As few as 15% of US defaults might be strategic (Gerardi et al. 2013) . Or it might be higher (but the methodology (Guiso, Sapienza, and Zingales 2011) used is to ask people, in effect, if they know someone who they think could have repaid but didn’t…) at around 25%. If its not 1/3 or more in the USA with more liberal bankruptcy and recourse laws then is it credible that it is 1/3 here?
  • People feel regret but not shame when they default (M J Seiler et al. 2012). There is a massive ‘fear factor’ on which lenders play, as well as asymmetrical fears of moral hazard (White 2010c).
  • Default is not just an individual but also a  social phenomena and there can be “herding” in defaults (M J Seiler, Lane, and Harrison 2012). This is perhaps an under researched area.
  • The bankruptcy code really matters with lower rates the easier it is to strategically default (Edmonds, Stevenson, and Swisher 2011)
  • The more you repossess the less a stigma it is and the more likely people are to strategically default (Wilkinson-Ryan 2011). The law of unintended consequences therefore suggests that if we move to  a significantly more aggressive repossession culture we will see cascades of defaults with the consequent knocking back of property prices and erosion of bank balance sheets…. be careful for what you wish.
  • Less information about the process is useful from the perspective of the lender in reducing the incidence of default (M J Seiler 2013). Theres no doubt that the Irish system is opaque, and perhaps deliberatly so.
  • Amongst lower income US households most defaults are not strategic. (Riley 2013)
  • There’s a contract between the lender and the borrower but even in law there can be a ranking of contracts and the social/familial contract supersedes this other contract allowing for default. (White 2010b).
  • Many defaults precipitate not from rational but from emotional decisions, thus reducing the emotional crises points can and does reduce default (White 2010a). Most people want a fair deal, which allows them to continue servicing debts at a reasonable rate but with certainty about where the future lies.
  • People don’t default, strategically or otherwise, until they are deeply underwater, typically negative equity of 67%  are required in the USA. (Bhutta, Dokko, and Shan 2011)
  • Oh, and some people might be neurologically more inclined to default than others…( Seiler, Walden, and Lane 2012). Might we see MRI scans as well as payslips being required in future before mortgages are approved?

Bhutta, Neil, Jane K. Dokko, and Hui Shan. 2011. “Consumer Ruthlessness and Mortgage Default During the 2007-2009 Housing Bust.” SSRN Electronic Journal (December 31). doi:10.2139/ssrn.1626969. http://papers.ssrn.com/abstract=1626969.

Edmonds, T N, L J Stevenson, and J Swisher. 2011. “Forgive Us Our Debts: The Great Recession of 2008-09.” Journal of Legal, Ethical and Regulatory Issues 14 (2): 1–16. http://www.scopus.com/inward/record.url?eid=2-s2.0-84863525338&partnerID=40&md5=cc9d8b72b8b94a96ca05b675fccb4560.

Gerardi, Kristopher, Kyle Herkenhoff, Lee E. Ohanian, and Paul Willen. 2013. “Unemployment, Negative Equity, and Strategic Default.” http://papers.ssrn.com/abstract=2293152.

Guiso, Luigi, Paola Sapienza, and Luigi Zingales. 2011. “The Determinants of Attitudes Towards Strategic Default on Mortgages.” SSRN Electronic Journal (March 1). doi:10.2139/ssrn.1573328. http://papers.ssrn.com/abstract=1573328.

Riley, Sarah F. 2013. “Strategic Default Behavior and Attitudes Among Low-Income Homeowners” (February 1). http://papers.ssrn.com/abstract=2282518.

Seiler, M J. 2013. “The Role of Informational Uncertainty in the Decision to Strategically Default.” SSRN Electronic Journal (January 29). doi:10.2139/ssrn.2211933. http://papers.ssrn.com/abstract=2211933.

Seiler, M J, M A Lane, and D M Harrison. 2012. “Mimetic Herding Behavior and the Decision to Strategically Default.” Journal of Real Estate Finance and Economics. Old Dominion University, College of Business Administration, Norfolk, 23529-0223, United States. http://www.scopus.com/inward/record.url?eid=2-s2.0-84866282494&partnerID=40&md5=bd88e45d25c19dc9afd2a035c384852b.

Seiler, M J, V L Seiler, M A Lane, and D M Harrison. 2012. “Fear, Shame and Guilt: Economic and Behavioral Motivations for Strategic Default.” Real Estate Economics 40 (SUPPL. 1): S199–S233. http://www.scopus.com/inward/record.url?eid=2-s2.0-84871824267&partnerID=40&md5=cc8149feb524d374946f70929bc874fa.

Seiler, Michael Joseph, Eric A. Walden, and Mark Lane. 2012. “Strategic Mortgage Default and the Decision to Follow the Herd: A Neurological Explanation.” SSRN Electronic Journal (December 27). doi:10.2139/ssrn.2194254. http://papers.ssrn.com/abstract=2194254.

White, Brent T. 2010a. “Take This House and Shove It: The Emotional Drivers of Strategic Default.” SSRN Electronic Journal (May 14). doi:10.2139/ssrn.1603605. http://papers.ssrn.com/abstract=1603605.

———. 2010b. “The Morality of Strategic Default.” SSRN Electronic Journal (May 22). doi:10.2139/ssrn.1597835. http://papers.ssrn.com/abstract=1597835.

———. 2010c. “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.” SSRN Electronic Journal (October 27). doi:10.2139/ssrn.1494467. http://papers.ssrn.com/abstract=1494467.

Wilkinson-Ryan, T. 2011. “Breaching the Mortgage Contract: The Behavioral Economics of Strategic Default.” Vanderbilt Law Review 64 (5): 1547–1583. http://www.scopus.com/inward/record.url?eid=2-s2.0-81855184667&partnerID=40&md5=4546d2ad8953dfd098aacad6d2fadffc.

Will Irish Banks need further recapitalisation? If so, who will pay?

Kipper Williams - Bank losses 30-11-12This is a version of my column in The Irish Examiner on 6 April 2013 . It was written before the talk at the Cantillon School at which the Central Bank revealed that upwards of 25b of SME loans were now impaired. That is 50% of these loans a truly astounding percentage

Back in 2011 Blackrock undertook an analysis of the Irish banks mortgage books.  Blackrock are a respected and global financial services company and were given access to the inner details of the banking sector. They looked at the capital needs of the banks under a variety of scenarios, and in effect looked at how much additional capital would be needed. Under the ‘adverse scenario’ identified by them the banks were expected to lose an additional 43b euro, and 29.5b under the base scenario. Seamus Coffey has a good post on the PCARs and losses here . Deviation from this towards or through the adverse or stress scenario raises the specter of future capital calls from the banks. To this must be added the new normal, that deposits are to be seen as potentially in play where capital needs of banks emerge. We are in many respects at or beyond this adverse scenario.


The recent IMF report should put paid to the rosy notion of corners being turned on a carpet of green shoots. Although the headline unemployment rate, at 14.5% or so, is below the stress scenario the reality, as highlighted by the IMF, is involuntary parttime and discouraged workers, and a real rate of closer to 23% are masking that this is evident. The stress tests assumed rates of 15.6% or so, so it is clear that we are breaching this, as the effect of unemployment are to make mortgages more stressed. IMF forecasts do not see the unemployment rate falling to single digit figures till after 2018.Similarily the stress tests assumed levels of falls in government consumption and in non government investment that have now been well breached. Although residential property prices have not fallen as fast as the stress tests assumed, these same tests also suggested that by now we would be seeing a modest upturn in prices. While this may be the case for selected urban markets for the economy as a whole it is highly improbable that we will see the overall residential market picking up any time soon. Falling income, house taxes and an ever-growing problem in terms of mortgage arrears combine to weigh down the market. Commercial property was also to have shown recovery by now and this is not evident overall. Thus, we are close to or over the adverse scenario of the Blackrock capital tests in many of the key areas. The revelation that the SME losses are 6 times as bad as the adverse scenario should give massive concern.


While exports have performed remarkably well these do not translate except in the loosest terms into either jobs or revenue. With banks on average losing money and with capital buffers declining (although still high) we face into a possible crunch scenario. There is a quite extraordinary high level of non performing loans in the Irish banks property loan book. Some estimates suggest that these are strategic defaulters. This terminology is technically accurate – people facing falling income make decisions to allocate income and absent widespread repossession there is relativity little incentive to prioritize mortgages. It is however misleading in a social or political perspective and makes little distinction between BTL and private residences.


BTL investments which are underwater should be treated as any other investment and foreclosed on.  Of the  31b in buy to let mortgages some 24,000 cases with 7b in debt  are in arrears of more than 180 days. These are the hopeless cases with arrears of 1b. The problem for the banks is that this 7b is probably now worth at most 3b and perhaps far less. A hit of 4b to the banking sector would deeply damage their capital base. But that is what the capital base is there for, what we put in places for, to absorb losses. When we look at principal private residences we see 14b worth of mortgages in arrears of over 180 days. The total arrears here are 1.6b, suggesting not surprisingly, that people will attempt to keep arrears on their home low by comparison to investments. Nonetheless, the reality is that 23000 people are in arrears for more than 2 years and these also are hopeless cases. If the banks repossess the homes they will not realize the 4.7b in mortgage debt and under the new insolvency regime the greater part of these will be lost. So between the BTL  and residential mortgages the banks are looking at losses of 6b and more. Then we have the SME losses, with untold billions at risk.

What is the plan for this? Where will this leave the capital bases? Where will it leave the banks in terms of seeking capital? Where will it leave depositors if the government decides not to ask the taxpayer to go to the well one more time? A series of clear statements on what, if any, joined up thinking exists as between the desire to clean the banks balance sheets, the new insolvency regime, the growing mortgage arrears problem and the lack of desire to see mass repossessions  would be nice.


Buy to Let and other residential investments : why dont people sell?

underwaterOne of the features of the Irish residential property boom and bust was the large number of people who purchased residential property for investment purposes. Figures for end 2012 suggest over 150,000 investment mortgages, accounting for some €31b. Now that the market has fallen a question that is often asked is why we do not see more of these investment properties coming onto the market? Many are “underwater” in value terms.

CMYK_87_Hunt__MarieTo try to get some answers to this Karl Deeter (Irish Mortgage Brokers), Marie Hunt (CBRE) and myself have created a short survey. It can be found here and should not take more than a minute or two to fill in. We are also distributing this form through other channels.The survey is aimed at people who are or who were in Ireland who purchased residential investment property whether that property is in Ireland or elsewhere, and where these properties (in whole or in part) are both underwater (likely selling price now less than the purchase price) and (in whole or in part) not on the market for sale.

deeter_indo_304576tPlease fill in and please pass the link round to anyone you think might be interested.


With greater transparency in prices, where now for house prices ? Have your say!

So now that we have some more transparency in the housing price area, with the publication of the property price database, where do people see the average house price going? Will greater transparency via increased volume result in prices going up or will people decide that the market is still a buyers market and bid down? Ill leave this up for the evening… Please direct people to it.

How much money will spain actually need?

As I write there are suggestions that spain will seek a banking only assistance of some €100b.

Is that going to be enough? Look at the following graphs… Bear in mind

a) Ireland is approx 1/8 the size of spain

b) Ireland has to date spent €63b on its banking bailout.

Spanish Private Sector growth (from the Eurostat macro instability website) . total accumulation is not massively different for the banks.

Second comparative house prices (from Ecowin) , rebased to 2000. Again, note that the trajectories are similar, with however the crucial element that spain has not begun the steep declines that have been the cause of the irish banks going pop.

Will 100b, or some 8% of Spanish GDP be enough given the similar trajectories to a country which has seen some 30%+ of GDP vaporised?