The Blame Game In The Media - Banks Versus Developers

[paul65]

I think a lot of us saw this coming back in Dec '07 and Jan '08 when we were discussing banks calling in their loan book debts.

I find it amazing however that it has taken till now - 6 months later, for stories like the one below to start coming out in the mainstream media. The blame game has started.

Credit to The Irish News (31st July 2008) once again.

Banks berated for role in the collapse of building industry

The slump in the housing market is leading to acrimony among former bedfellows.

John Manley talks to one developer who believes Northern Ireland banks are largely responsible for the mess we’re in.

Patrick – not his real name – appreciates that very few people will sympathise with his plight. On paper at least, he’s a millionaire and someone who, along with many others of his ilk, gleefully rode the north’s property boom.

But 12 months into the housing slump he’s feeling aggrieved and although willing to shoulder some of the blame for the way the market got out of hand, Patrick maintains it wasn’t so much developers like him that caused the unprecedented surge in property prices – but the banks.

Worse still, he says, these same banks are now turning the screws on Patrick and his peers in a strategy which he believes could destabilise the north’s economy.

“There’s a major crisis in the residential property market at the moment and because of the way it’s being handled it’s unlikely to get any better for up to five years,” he says.

“It is possible for us to build our way out of this slump but we need the banks’ help.

“At the moment that’s not forthcoming.”

Patrick rewinds three years to the time when the upsurge in house prices across the north really took off, particularly in rural areas.

Competition for potential development land was fierce, he says, and the banks were more than willing to lend.

“In some cases the same bank would approve loans at three different levels for three different developers,” he says.

“By promising one guy more than the other two the bank was effectively setting the price of land and allowing it to be inflated. They drove the massive increase in land prices.”

At the other end of the market the banks were offering homeowners 100 per cent mortgages.

“I believe the banks behaved recklessly,” says Patrick.

“If they had done their sums properly they would have realised that things weren’t sustainable – it was becoming clear that couples earning £40,000 would have difficulty paying a £250,000 mortgage.”

He believes the flaws in the booming housing market were ignored as the money rolled in. Once again, however, he insists it was the banks, not the developers, who got minted.

“The developer has only ever had a 10 to 15 per cent pre-tax margin and much of the money they made was reinvested,” he says.

“The banks meanwhile had no similar overheads and were milking the market at both ends.”

As last summer’s double whammy of credit crunch and a downturn in house prices hit, the formerly rosy relationship between developers and the banks began to sour.

The failure to shift houses meant land values quickly plummeted, leaving many developers with multi-million-pound deficits.

It’s at this point that Patrick believes the banks could have eased the impact of the downturn. However, he claims that instead of adopting a partnership approach, the lenders began selecting developers and putting pressure on them.

“The banks have given some developers the space and funds to finish their developments but when they’re complete the developer realises that he may as well hand the whole lot over to the bank,” he says.

“Others aren’t so lucky. They’re being picked off and being driven under with the bank taking the land. They realise there’s no point in throwing good money after bad.”

Patrick says he’s seen 60-year-old men “crying their lamps out” after losing their houses and their livelihoods.

“It’s different in the Republic and Britain because the rises in prices weren’t so dramatic and the banks’ headquarters kept a closer eye on things,” he says.

“In Northern Ireland, though, I believe the banks have acted unscrupulously and irresponsibly.”

Patrick believes the north’s developers collectively owe up to £10 billion and he gets riled when he reads how the banks are meeting the first minister and deputy first minister and assuring them that the financial institutions will do all they can to get the market liquid again.

“There’s not a solvent developer in the north and you can see the consequences of that in the rising number of builders that are out of work,” he says.

“If confidence is to return to the market then it means the banks must write down their losses – our money’s already gone. They have to look on developers as partners rather than bad debtors.”

If the banks don’t change tack, he maintains, then a construction sector already on its knees will fall flat on its face.

1,550 construction jobs lost with many more at risk

More than 1,550 construction jobs have been lost in the past year as recession fears grow, new figures show.

The number of residential building workers plunged by around 70 per cent according to the Construction and Property Group, prompting warnings of market failure.

Developers, builders, contractors and suppliers have been affected by the downturn.

Construction group treasurer Brendan Cunnane said: “Using our figures, we believe that tens of thousands of jobs have already disappeared or they are most certainly at risk. We have reached a position where building on many sites across the province has completely ground to a halt.”

Falling demand for homes has been prompted by high prices, the rising cost of living and the credit crunch which has made it difficult to obtain mortgages.

“This is having a major impact on the local economy and it is imperative that all participants in the sector act collectively to get this key area of the local economy moving again,” Mr Cunnane said.

“Otherwise there is a real fear that there will be total market failure in Northern Ireland and a sustained period of recession.

“In particular we are asking the assembly, executive and the local banks as key enablers in the sector to work with us and resolve these issues by finding a zone of possible agreement to move forward.”

The group was created following a series of public meetings during July, bringing together developers, builders, contractors, suppliers and those involved in the professional services affected by the crisis in the residential sector. The meetings have been attended by more than 400 individuals.

The group said: “A poll of 50 member companies shows that more than 1,550 jobs have been lost among them since June 2007.”

Proposals to be put to government include:

- obtaining a commitment from all the major financial institutions that they will not take any steps which would further destabilise the market

- encouraging financial institutions to ensure affordable mortgages are available, particularly to first-time buyers

- reintroduction and adequate funding of co-ownership where the government bears part of the cost of buying homes

- an urgent review by the executive to ensure social housing investment and shared equity schemes are more available to low-income house seekers.

[HPCwhen?]

Thanks for posting Paul. Isn't it fun hear the big-fat-property-developers squeel? I sincerely hope that no one listens. The market failure was the crazy boom we've just experienced and now we're seeing the painfull re-adjustment to normal lending conditions. No amount of 'special pleading' from the housbuilding sector is going to change that. I've no doubt what he says about there "not being a solvent developer in the North" is completely true. Most are now only trading at the mercy of the banks. Do I fell sorry for them? Do I heck.

[Belfast Boy]

Newton Emerson also writes for the Irish News. He argues that the only way forward is for the developers to go bust.

It looks like the banks are currently squeezing the developers for all they can. As the prices continue to collapse* it will become apparent, that best way out for a developer will be to go bankrupt. The article quotes, “There’s not a solvent developer in the north..." My guess is that the banks are currently doing all they can to prevent a stampede of developers wanting to go bankrupt. If this happens, the banks would then become the owners of many local developments. I suspect that many developers are currently living in fear of what happens next. On paper, these guys were worth millions. It will be difficult for them to accept that they are now pennyless.

I have heard a story about a bank setting up a stall offering mortgages at the release of a new development. Anyone else heard of this? How desperate are the banks?

*I used the word 'collapse' to describe the current state of the Northern Ireland housing market. How else would you describe a fall of 18% in just 6 months

[pod]

“It is possible for us to build our way out of this slump but we need the banks’ help.

Yeah, I suppose there's so few houses for sale in NI at the mo'.

[Malthus]

Yeah, I suppose there's so few houses for sale in NI at the mo'.

Don't forget about Ms Ritchie and her great bail out plan with tax payers money :angry:

The state of the construction industry at the moment reminds me of the stories from the states after 1929 where production lines stopped with half built

cars on them

[vision (not Vision EA)]

This is NOT a chicken and egg story here.

Developers would not have been developing using borrowed money if they had not been able to borrow in the first place. Buyers would not have been able to buy from developers if the banks hadn't been lending the buyers money.

Developers make houses just like car factories make cars and bakeries make bread. Banks pushed the overstretching of finances, and when they decided that the maket was over ripe they pulled the plug. As usual they left it to everbody else clear up after them.

[talksalot81]

Dead right that few people will feel pity!

Both bank and borrowers are to blame but this was a risk and reward game. It sickens me that those in charge of our economics would even contemplate a 'bail out'. Every single penny bailed out is a penny stolen from the prudent. It would effectively say that, if enough people fall foul of a risk, the public will assume the liability.

[vision (not Vision EA)]

Dead right that few people will feel pity!

Both bank and borrowers are to blame but this was a risk and reward game. It sickens me that those in charge of our economics would even contemplate a 'bail out'. Every single penny bailed out is a penny stolen from the prudent. It would effectively say that, if enough people fall foul of a risk, the public will assume the liability.

Industry will always try to make money, property developers are no different to the the Belfast shipyards, the demise of which many years ago still has left a lasting detrimental effect on the areas were workers once lived.

Hand outs aren't good but sometimes industry does need a tug along up in some way for the eventual well being of the economy, and this is a very stormy sea we are now in. Complete colla[se will hurt everybody.

[talksalot81]

Complete collapse is not going to happen - not unless all developers were as naive as the chap in question. There are shrewd business people out there and they saw the writing on the wall and were able to be prepared. At the end of all of this, they will still be there.

[Rock-n-Roll]

Industry will always try to make money, property developers are no different to the the Belfast shipyards, the demise of which many years ago still has left a lasting detrimental effect on the areas were workers once lived.

Hand outs aren't good but sometimes industry does need a tug along up in some way for the eventual well being of the economy, and this is a very stormy sea we are now in. Complete colla[se will hurt everybody.

ok so we should still be pumping millons upon millons of taxpayers money into the shipyard

just like we are doing with aircraft factory

what about the ropeworks largest in the world at one time more millons

what about all the linen works more millons

then there was sirocco more millons

have you got the picture yet?

time moves on circumstances change

how many grandsons of shipyard workers would actually want to get their hands dirty today building a new titannic

how many granddaughters of the mill workers would want to spend their life in a textile mill today?

between 97 and 07 the number of construction workers more than doubled south of the border

i would suspect something similar happened here

do you think this was sustainable?

how many billons do you think it would take to put this humpty dumpty back together again?

Rock on!

[VedantaTrader]

Complete collapse is not going to happen - not unless all developers were as naive as the chap in question. There are shrewd business people out there and they saw the writing on the wall and were able to be prepared. At the end of all of this, they will still be there.

I m not so sure. If we look at the situation as a chain, originating with the banks-developers-estate agents-homebuyers. The money orginates from the banks and flows downards. In any chain, the components of the chain are only as strong and healthy as the other links. Basically, if it had not been for the intervention of the central banks, and these swap auction facilities where the CB's took collateral in the form of over-inflated assets onto their balance sheets in exhange for liquidity so the banks good stay good on their liabilities, then the whole Bristish and US banking system would have been insolvent. That I have no doubts about. They still are technically insolvent, as the debt on the collateral that the banks swapped for Gilts and so on still exists and has not been marked to market. If you think that this collateral was taken on to the BOE balance sheet when house prices were still near their peaks then the losses are substantial. This is only postponing the day of reckoning until a later date. It is like borrowing from one credit card to pay another...

Anyway, my point is this. If the orginators in the chain are mostly insolvent, then for me that means there is a high chance that most of the chain where leverage was used will be insolvent also...

Where were the parts of the chain that levarge was used...

1. The banks: The balance sheets show that alot of these institutions are leveraged at 20/30-1

2. The Developers: They bought up massive amounts of land and refinanced new peojects on existing projects valued at extrapolated prices, and peak prices...

3. The Estate Agents expanded their businesses by opening up multiple branches in towns all over N Ireland. In Ballymena, there are at least 2 EA's on every street, and some with 3 or 4.

4. The homebuyers, BTL brigade financed new homes in the same way the developers financed new land. Also single home owners MEWED to buy properties in Turkey, Bulgaria, Spain, to fit new kitchens, buy new cars etc...all based on the misperceived notion they were wealthy.

I would say where the highest leverage exists, there is a good chance of insolvency sooner or later. The fact that so many are insolvent before house prices even started to fall is a worrying sign. How will they look when house prices are down 50%? I dread to think. We are nearly 1 year through what will be a 4-5 year deleveraging process...and by that I m not saying that will be a bounce in house prices. I mean that will be how long it takes to get to the bottom...before a flattening out...

Pattens in Ballymena who have a turnover of £500,000 million a year had to lay off 200 people. They will survive as they the Tesco contracts and can build very cheap, and have bought land years ago...

I do know another local who did very well. Good business man. Has two helicopters etc. He has stopped building on 60 houses, and my cousin tells me he is getting it quite tight. So I reckon, when the dust starts to settle and the deleveraging is allowed to happen, we will see a complete annihilation of the construction industry.

[talksalot81]

I see what you are saying but my simple logic is that the construction workforce will not go away. Perhaps I overestimate the developers but there must have been some who did not let greed blind them totally and were able to minimise liabilities prior to the trouble really hitting - surely they were not all increasing liability right to the bitter end?! On that basis I imagine, from a business perspective, that the shrewd developer can cut down turnover and look to a more specialised market with a limited workforce and survive. Then, when the trouble is over, they remain established and the workforce will be just begging for any and all work available.

[VedantaTrader]

I see what you are saying but my simple logic is that the construction workforce will not go away. Perhaps I overestimate the developers but there must have been some who did not let greed blind them totally and were able to minimise liabilities prior to the trouble really hitting - surely they were not all increasing liability right to the bitter end?! On that basis I imagine, from a business perspective, that the shrewd developer can cut down turnover and look to a more specialised market with a limited workforce and survive. Then, when the trouble is over, they remain established and the workforce will be just begging for any and all work available.

Sure Talksalot. Constriction workers will be needed again, it will just become more streamlined to meet the new demands. And your right I m sure not every single developer will go out of business, but the only surprise will be how many will. Relatively speaking, it will feel seem like they will all go out og business.

Not all were blinded by greed. A good friend of mines family were involved in buidling quite high end houses. They stopped in 2004, on the basis of principle that the land was getting too expensive. they built about 150 houses and still did very well out of it. I dont know how many would have done that. Not too many I reckon. They also only built 3 or 4 houses ahead which is a sensible plan in my view....

Today I only see large developments unfinished, and I dont see much prudence. However, that is symptomatic of all bubbles. There is always overexcessive capacity at the very peak. It is always at the peak where the most expansion takes place.

Edited August 3, 2008 by VedantaTrader

[talksalot81]

Relatively speaking, it will feel seem like they will all go out og business.

Haha, quite correct - by the end of it, the few good professionals will remain and the way of the world will send the naive amateurs back where they came from!

[Malthus]

Haha, quite correct - by the end of it, the few good professionals will remain and the way of the world will send the naive amateurs back where they came from!

All crashes are a form of business Darwinism , the fit will survive and prosper . the rest will become politicians/lawyers

[Rock-n-Roll]

worth a read

http://www.telegraph.co.uk/opinion/main.jh...8/03/do0301.xml

suspect broon has not many days left to pull the rabbit out of the hat!

rock on

[Malthus]

worth a read

http://www.telegraph.co.uk/opinion/main.jh...8/03/do0301.xml

suspect broon has not many days left to pull the rabbit out of the hat!

rock on

good article , not much support for old wobble jaw in the comments section

[FrustratedFTB]

Story in todays Sunday Times by Liam Clarke titled :'Investors Struggle as House of cards falls'

Can't find it online but some extracts from the story.

'Many developers blame the banks, who were eager to lend during the boom and are now calling in loans as part of the credit crunch. One solicitor active in the property market says that assault charges are being threatened against a developer who flattened his bank manager after being put under pressure to repay an £8million loan against a property'

'Last year, near the peak, Taggart, together with clients of Goodbody, paid £98m for a site in Dundonald, in east Belfast, which they bought from Fraser Estates, alocal firm. according to industry sources, the original vendors are now seeking to buy this land back for £30m - the case is not a isolated one.'

That first quote will be of interest to those of us here who were on here last year!

[FrustratedFTB]

Story in todays Sunday Times by Liam Clarke titled :'Investors Struggle as House of cards falls'

Can't find it online but some extracts from the story.

That first quote will be of interest to those of us here who were on here last year!

[FrustratedFTB]

[FrustratedFTB]

[Smell the Fear]

Thanks for that FFTB. I find it hard to believe the developers think that the executive have a hope of bailing them out. Looks like the flippers are well screwed too.

I read that Sunday Times article earlier. It's both hilarious and infuriating that these developers think they should be given millions or billions of pounds of taxpayers' money for the sole purpose of allowing them to make fortunes for themselves, to keep the Ferrari serviced and the helicopter on standby.

That they even think it possible shows a level of desperation that causes concern for their mental health.

The mention of Fraser selling to Taggart for £89m and looking to buy back now for £30m shows that some old hands have probably not overstretched themselves and were aware of the game being played. The hubris of NI property developers and BTL speculators is on a monumental scale. As for the bankers - I'm fairly sure they are just idiots. Let's be honest, unlike the City of London NI's banks do NOT attract the intellectual cream from the NI population. Banking has always been a second rate profession in this country.

The writing is truly on the wall, I think we still have a further 50% to fall in NI at which point houses will look like decent value.

[talksalot81]

Banking has always been a second rate profession in this country.

Until you said it, I always assumed that there was nothing particularly challenging done by NI banks. But now that you mention it, I do wonder quite who or where the analysis and risk assessment is carried out.... this does take intelligence but I have never heard of anyone occupying this role.