Financial experts in Ireland are worried that the country’s financial crisis will lead to a spike in the number of repossessed houses in that country. Repossessions have remained remarkably low in Ireland over the last seven or eight years, despite higher rates elsewhere, but that could soon change. All indications suggest the number of homeowners in arrears and not engaging with their banks will lead to more legal action later this year.
The Irish property crash is very similar to what we saw in the UK in 2007/2008. The crash has led to about 20% of all Irish homes now being in distress. Among investors, the seriousness of the problem is only slightly better. The unfortunate truth is that a poor economy and an unstable property market are causing great concern on the Emerald Isle.
Officials at the Bank of Ireland have said they have begun legal proceedings against thousands of homeowners more than 90 days in arrears. They do not know how many of these legal actions will eventually result in repossession, nor can they predict. According to Reuters, the big problem Irish banks are having is that the level of engagement among homeowners has fallen. People are simply not responding to legal letters or other inquiries. Inevitably, a failure to engage usually results in repossession.
UK Potentially on the Same Path
Since the start of the year, a number of financial experts have steadfastly maintained that the UK is on the same path as Ireland in terms of repossessed houses. Those who fear a second housing crash suggest that prices have risen too far, too fast. They fear the price hikes are not in line with other financial indicators, including household income and inflation. If these experts are right, the bottom could fall out on the housing market sometime between now and the end of 2015.
On the other hand, there is some evidence to suggest the UK is in no such danger. For example, the number of repossessed houses in London and the south-east is significantly lower than other areas of England. In fact, repossessions during the first quarter of the year have been most significant in the south-west and northern England. Those purchasing property in London and the south-east appear to be doing better financially.
That is important because the most dramatic price increases have been in London and the south-east. What’s more, the jump has been driven primarily by demand among foreign investors interested in taking advantage of the lucrative London market. Price increases have been less dramatic in most other parts of the country despite a resurgence in investment activity. All of this points to a market that is being driven by those who have money and can afford to invest it improperly. This is not a market being driven by first-time homebuyers looking for a primary residence.
Making Money in Repossessed Houses
Fruitful Property is a UK-based investment firm specialising in residential buy-to-let property. They are very high on repossessed houses as an investment tool offering greater stability then equity investments and a higher return than savings and pensions. They are just one of a number of similar firms that believe there is money to be made in repossessed houses.
A good number of these companies focus on finding distressed property they can acquire at steeply discounted prices. In so doing, they enable their clients to purchase and renovate a home while still maintaining at least some equity. This further allows them to begin making money right away on every property acquired. This strategy seems to be working very well by those who employ it.
It would seem that if the fears in Ireland do come to be, the market would suddenly be a boon for property investors. When repossessions are high, property values go down. What’s more, investors with already established portfolios will have the financial means to come in and buy more of the distressed homes. That is the silver lining in an otherwise undesirable situation.
Should the UK follow on the heels of an Irish housing crash, we can expect to see the same thing here. The only question is one of whether or not the UK is in line for a second crash. Some say we are, others say we aren’t. The best thing we can do right now is just watch and wait.