Sunday, September 6, 2009

When the imbeciles took over the asylum …

ebs I HAVE exchanged some correspondence recently with Fergus Murphy, Chief Executive of EBS about the fundamental accuracy and the disingenuous spin of the EBS DKM Affordability Index. 

The EBS is one of the financial institutions covered by the Government Deposit Guarantee Scheme and is believed to be  about to seek several hundred million € from the taxpayers’ to support a severely weakened capital base.  Former Chairman Mark Moran and former Finance Director, Alan Merriman, resigned abruptly earlier this year following losses and loan impairment charges that arose through commercial property speculation.

This Affordability Index is aimed at first-time buyers on an average income.  The latest iteration contends that since house prices have fallen that

“affordability for house buyers has increased substantially over the past year”. 

65% per cent of the 483,000 claimants of mortgage interest tax relief in 2006 were either single men, single women, widowers or widows.  Their average income was under €59,000 so the maximum home loan they could safely sustain was €147,500 and the maximum price they could afford to pay for a house was €164,000.  Affordability, in the eyes of EBS, would have to be based on a very high gross income : loan ratio, which is why the transaction is simply not affordable.

The tragic, but irrefutable, fact is that the average Irish mortgagee has not been able to afford any house in Ireland since the end of 2002. The outstanding level of total Irish residential mortgages provided to Irish residents by all providers increased from €43.41 billion then to its current level of €148.2 billion. But the underlying income to sustain this mountain of debt increased from €18.6 billion to €28.1 billion in 2006, before the consequences of economic collapse gained traction.

The imbeciles had taken over the asylum when it came to the provision of residential mortgages in Ireland since 2003. The self-important flaccid wimps in charge of these financial institutions’ tolerated an income-to loan ratio increase from 2.33 to 5.27.  The Financial Regulator passively observed this debacle unfold and was ineffective and impotent to defend the borrower against the buccaneering lending practices.

A total of 540,000 mortgages worth €114.4 billion have been paid since 2002.  These properties are now experiencing the consequences of negative equity and the impact of this on ‘affordability’ as well as sustainability.

The most recent Monthly Economic Bulletin from the Department of Finance provides a rational basis for understanding affordability.

House Type and Location

Average Price €

Year-to-year change

90% Mortgage

Minimum necessary gross income €

Average new house, outside Dublin





Average second-hand house, outside Dublin





Average new house, Dublin





Average second-hand house, Dublin





The average income of a mortgage interest tax relief claimant in 2006 was €59,190. The only buyer category for whom affordability has improved in the past year us a cash buyer.  But that buyer does nothing to transform the 2008 EBS loss of €37.8 million into profit or reduce impairment losses of €110 million.

IHBA The DKM EBS Index is cited by the Irish Home Builders Association to imply that a single person with an annual gross income of €44,000 and a married couple with an annual gross income of €82,686 could afford to sustain a mortgage of approximately €230,000. The Association is a satellite of the Construction Industries Federation who stated on 17 August that construction in developed countries accounts for 12-15% of GDP with the implication that Ireland could emulate this. Construction in Ireland has never accounted for more than 10.3% of Gross National Income in the past decade. There are thousands of vacant new houses in Ireland today so it is hard to see on what basis this growth in economic significance is to be achieved.  State subsidies?  State contracts?  Meeting essential needs?  Offering value for money? 

Pride goes before a fall but is it not high time to see a measure of reality, candour and honesty being displayed by all of the nation’s decrepit financial institutions, not only EBS? 

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