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ISEQ lower-20pc of buy to let in trouble

Wednesday, October 17 09:10:45

The ISEQ is lower this morning at 3,261, down 9 points as European markets opened more positively following Moody's decision to hold the investment status of Spain's debt. 20pc of Irish buy to let mortgages are in trouble and the Central Bank wants action by the banks, Davy Stockbrokers discusses:

Stock indices rose sharply yesterday as US corporate earnings beat expectations. The Euro Stoxx 50 Pr rose 2.5pc, the FTSE100 1.1pc and the S and P500 1pc. Sentiment was also helped by the news that US industrial production expanded by 0.4pc in September. Today markets will look to the release of US housing starts in September. Starts are expected to rise sharply from 750,000 in August to 770,000 in September, indicating that the recovery in the US housing market continues at a brisk pace.

Data on arrears in Irish buy-to-let (BTL) lending were released for the first time yesterday in a speech by Central Bank regulator Fiona Muldoon. As we expected the 90+ day arrears rate for BTL lending at end-Q2 2012 was 20pc, twice the rate for owneroccupiers, at 10.9pc. Also, almost two-thirds of BTL loans in arrears have been so for more than 180 days, compared to around 50pc for owner-occupiers.

The rise in the owner-occupier arrears rate from 10.2pc in Q1 2012 to 10.9pc in Q2 2012, although substantial, was the smallest increase since the beginning of 2011. The Central Bank speech indicated that the pace of arrears formation continued to slow in Q3 2012. This gives us more confidence in our forecast that owner-occupier arrears will peak at 16.5pc by value in 2013, up from its current rate of 14.7pc.

The Central Bank speech also drew attention to exceptionally low levels of repossessions by banks: just 1,350 cumulatively, set against 29,000 BTL loans, and 84,000 owner-occupiers in 90+ days arrears. In comparison, if Irish banks had replicated the UK experience, in excess of 20,000 properties should have been repossessed, given current Irish arrears rates. That said, both the Dunne judgement and delays in passing the personal insolvency regime into legislation may have contributed to inertia by banks in dealing with non-performing loans according to Davy Stockbrokers.