Big storm may be brewing over residential property debt

CONSIDER THE following bits of information which are by and large undisputed and point to something unpleasant coming down the tracks:

1. Mortgage interest rates are going up. The Permanent TSB was the first bank to break ranks and confirm an increase in its variable rate on Friday. The EBS cannot be far behind. Even those borrowers on tracker rates will be lucky to get to the end of the year without facing an increase in rates as the ECB is expected to move in the second half of the year.

2. Irish households are among the world's most indebted after a decade-long credit spree. Household debt as a percentage of disposable income hit 175 per cent in 2008, compared to 48 per cent in 1995.

3. There are about 196,000 homes in negative equity, accounting for 30 per cent of mortgage households, according to the ESRI.

4. The Government plans to suck at least another couple of billion out of the economy in the form of taxes next year. Residential property tax and water charges are the current favourites.

When you put all of this together with further rises in unemployment, falling rents and a buy-to-let sector populated by small investors, it's pretty clear that a big storm may be brewing in consumer and residential property lending in much the way that the clouds were gathering over Irish commercial property and development lending in early 2008.

And the parallels don't stop there. The banks would appear - on the basis of the sort of provisions made to date - to be in denial over the impact of such a crisis in much the same way that they refused to face up to the problems in their commercial property books in 2008.

If there is a lesson from 2008 in that regard it is not to presume the banks' refusal to publicly address the issue implies feverish behind-the-scenes efforts to deal with the problem.

If the banks look like they are in denial, then they probably are in denial.

The regulator also appears to be acting true to type and has yet to take any tangible action to make the banks face up to what may be coming down the tracks. And, as before, the public is at risk of interpreting the regulator's silence as an indication that there is nothing to worry about in this regard.

Then there is Morgan Kelly. The controversial UCD economist who has an unfortunate habit of being proved right is predicting that the consumer credit defaults could overwhelm the banks once again.

As was the case with Kelly's previous predictions, his more circumspect peers are inclined to downplay the issue. But - as was also the case in 2008 - there is far less daylight between the views of outside observers and Kelly.

Standard Poors (who do seem to have learnt some lessons over the last two years) have downgraded the credit ratings Irish banks to reflect higher than previously anticipated credit losses: bigger losses than the banks themselves seem to be factoring in.

The International Monetary Fund have been alive to the issue for quite a while. In their analysis of the National Asset Management Agency they advocated structuring it in a fashion that it could also be a dumping group for non-performing residential mortgages.

The final - and most disconcerting - parallel with 2008 is the head in the sand attitude of the Government towards the issue.

As things stand there is no reason for having any confidence that the Government is even aware of the potential problem, never mind trying to assess the likelihood of it becoming a reality and frame some sort of policy response.

Instead they continue to fight the last war: getting Nama up and running. Saving the banks from the consequences of their stupidity and greed when it came to consumer credit and residential mortgages could well be this autumn's crisis.

And the danger is that the Government's failure to face the issue now will give rise to the same panic which resulted in the bank guarantee, which lead inexorably to the Anglo Irish rescue and ended with Nama.

No one - from the Taoiseach down - is pretending any longer that Nama constitutes an optimal solution.

The suggestion last week by the Tanaiste that the State may have to guarantee loans to small businesses from the Nama banks is tantamount to an admission of failure.

But the Government can argue with some justification that it was a reasonable response given the global dimension of the crisis and the unprecedented speed with which it unfolded.

Maybe so, but there is no excuse for being caught with our national pants down again if the bank's consumer loan and residential mortgage books blow up in the autumn.

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