Right, I think this post is just going to get lost in the “90% Drops!!” thread, so I’ll repost it here.
This is just something I’ve been mulling over for the last few days. If Something Isn’t Done we face complete economic collapse for decades to come. So we need to find a practical, do-able way out of this mess. So how do we clear the debt overhang ASAP, get the real economy gradually moving again, recapitalise the banks, avoid the taxpayer being stuck with €50bn in bad debts, and minimise ye olde Moral Hazard so that people may perhaps think twice before getting suckered into another bubble in 10 years time?
Look, if wages are static or declining and banks will not lend stupid amounts, then the only properties that will move are
a) new builds where builders simply have to shift stock, even at a loss, or go bankrupt
b) old pre-bubble houses with no, or a very low, LTV
all being sold to FTBs/STRs with a deposit.
The bubble generation and their houses are, quite simply, stuck where they are for decades to come, until they either pay off enough of the principal to be able to move or declare themselves bankrupt. And they need inflated wages just to pay the mortgage, but the pressure on wages is all downwards.
This is simply what happens after a massive credit splurge. Until the debt overhang clears, society and the economy atrophies. It’s why Japan is still stuck, going nowhere fast, 17 years after the bust. It could take them another 17 to get their economy moving again.
Ultimately, and despite the stench of moral hazard involved, the least worst option might be a shared Mortgage Arbitration Scheme for all those in negative equity.
This notion of mine, which would never happen in VI-infested screw-the-little-guy Ireland, might work something like this:
1) Prices are encouraged to hit the true floor as quickly as possible, with legalislation to enforce sane lending critera etc.
2) This will leave hundreds of thousands in negative equity, with an average probably around the €250K mark (200,0000 at €250K=€50bn. Sound about right?)
3) Impress upon everyone that there will be no Arbitration Scheme until everyone has fessed up and got real
4) While we’re waiting, get real on cutting out the massive waste and corruption that costs the taxpayer billions every year. We’re simply going to have to do this anyway, just get on with it FFS
5) This is a plan that would pan out over 8 - 10 years. Hell, it’s better than 25. Each year 4-5bn in negative equity is tackled, for the most deserving cases (where “most deserving” is doubtless subject to furious debate, but I’d suggest a mix of the poor who were sucked into subprime, and skilled workers earning under €65K in the 25-40 age bracket who we need to be moving and working to rebuild the real economy)
6) Share The Pain, Share The Gain: the banks take a hit and write off a chunk of the mortgage forever. Better to have 20% of a loan go bad than 100% of it, right? The taxpayer then redeems another slightly larger chunk (yes, yes, bear with me here), thus slowly recapitalising the banks without bailing out the builders;and allowing the mortgagee to restructure their payments on the now much-reduced mortgage. But not all the negative equity just disappears. Maybe 2/3 or so of it. Mortgagee goes from having €250K in negative equity to having €80K in negative equity, a €450K mortgage to a €280K mortgage. But they also still owe the State. Maybe not as in “you owe us €80K, pay it back when you can”, cos the whole idea is to get rid of the debt overhang and reduce the wage pressures, cost pressures and labour immobility pressures so that the economy as a whole can get back to being productive. Maybe those who avail of the scheme are subject to a 1% income tax levy for the next 40 years. Maybe in return for the scheme they get a reduced State pension or lose entitlement to certain benefits. Something like that, where the people who are bailed out will end up either contributing slightly more over a very long time or receiving slightly less (or both), over a very long time. It might even be cost-effective in the long run. And it impresses upon the banks that they can’t just get away with reckless lending; to the Punter that there is a cost for being foolish; and does not (in the long run anyway) penalise the prudent.
Course it would involve an honest government with balls of steel. Anyways, it’s an idea, just flying a kite…