The Central Bank of Ireland has eventually made their decision about loosing mortgage rules to provide new home buyers with help. However, Niall Brady became interested in whether the rules will turn out to be too relaxed.
A number of politicians, journalists, bankers, and economists were asking the Central Bank of Ireland many times for briefings on the matter. They were connected to the lending rules that controlled mortgages. The update had to come on Wednesday, but all the summoning ones were warned that there may be some delays.
Such vague updates were made deliberately by the governing commission of the institution. They waited till the time when the meeting had to start and approved the long-awaited changes only then. If there was a single misgiving by one of the members, the revised set of rules would be delayed and released later.
And if there was anyone to oppose, it would be one of the members of the commission, secretary-general of the Department of Finance, Derek Moran.
If there had been a dissenting voice, it would probably have come from Derek Moran, secretary-general of the Department of Finance and one of the commission’s 10 members. Under intense pressure from government to help fix a growing housing and homelessness crisis, the department had gone public on how it believed that relaxing the mortgage rules might help.
The trouble is that the housing crisis is not the Central Bank’s concern. Governor Philip Lane has made it clear that his mortgage rules have just two aims: preventing banks from lending too much; and ensuring their customers do not borrow too much. If an unintended consequence is to choke the supply of new houses, this is somebody else’s problem.
The Central Bank’s independence was acknowledged by the finance department in its request for adjustments to the mortgage rules. “Much of the requirements to address the problems associated with the housing market — such as the need to boost the supply of social and private housing, to greater utilise existing housing stock, to address homelessness and to improve the rental sector — are matters which will fall outside of the macro-prudential remit of the Central Bank,” it said.
Yet this did not stop Moran’s civil servants from coming up with a wish list of measures aimed at easing more first-time buyers onto the property ladder, which would relieve pressure on the overstretched rental sector in the process.
According to housing minister Simon Coveney, only 760 of the 38,000 new houses sold in the past year were bought by first-time buyers.
The plan is that making it easier to qualify for a starter mortgage should help to redress the imbalance.
“We need to give a signal to the construction industry that first-time buyers will be able to get into the mortgage market,” he said in a radio interview.
Finance proposed adding a “capacity to pay” test to the Central Bank’s rulebook. This would permit banks to take into account the punishingly high rents paid by prospective borrowers while saving for a mortgage deposit.
Moran’s department also wanted much wider wiggle room for borderline applicants. It suggested that banks be allowed to divert as much as 25% of annual lending to borrowers who cannot afford the deposits required by the Central Bank’s rules, with priority given to first-time buyers.
Even though none of these proposals was adopted in anything like its original form, Moran is likely to have been pleased with the final rule changes rubber-stamped by his colleagues on the Central Bank commission.
First-time buyers in Dublin and the surrounding commuter counties, where house prices are highest and the rental squeeze most severe, look like the big winners of the new regime, which takes effect in January.
“The updated rules should enable all of those borrowing to purchase a home to find it easier to source a mortgage that suits their needs,” declared finance minister Michael Noonan, with an unstated expectation that more mortgages will inevitably translate into more houses available to buy.
Instead of the €28,000 required under existing rules, the minimum deposit for first-time buyers spending €250,000 drops to €25,000. For houses worth €300,000, the deposit falls from €38,000 to €30,000. First-time buyers with €400,000 to spend will need a deposit of €40,000, down from €58,000.
There will be no benefit for those buying second-hand properties for less than €220,000.
The savings hurdle will be even less for those opting for new houses because the Central Bank’s rule change coincides with the introduction of the government’s help-to-buy incentive.
The scheme will give first-time buyers a contribution towards their mortgage deposits of up to €20,000, worth 5% of the price of the property.
Lenders have also been helping those struggling to save a deposit, with Bank of Ireland giving them cashback worth up to 3% of the amount borrowed.
The combined effect of the revised mortgage rules, help-to-buy and banks’ cashback offers could be to slash the deposit requirement from as much as 20% to just 2%.
This approach risks returning the market to the reckless days of 100% mortgages, according to Pearse Doherty, Sinn Fein’s finance spokesman.
With little available to buy, looser lending rules must inevitably push up prices, according to Alan McQuaid, chief economist at Merrion Stockbrokers. “This will only push up the numbers looking to buy residential property, of which there is a shortage due to a lack of supply,” he said. “The only conclusion we can come to is that house prices will increase further in the short term.”
Colm McCarthy, an economist at University College Dublin, fears the impact will be greatest in places where property values may already be overstretched, such as the more desirable parts of Dublin. The more they borrow, the more first-time borrowers will benefit from the lower deposit requirement, creating the potential for an upward spiral at the upper reaches of the market, he said.
This could be preferable to the behaviour encouraged by the existing mortgage rules, however. They provide a perverse incentive for first-time buyers to move to the commuter counties in search of cheaper houses requiring lower deposits.
“The larger deposit requirement for high-value mortgages had a disproportionate impact on the market in the capital and was contributing to urban sprawl, as some buyers were forced from the capital due to the higher deposit requirements,” according to Dermot O’Leary, chief economist at Goodbody Stockbrokers.
Bernard Byrne, chief executive of AIB, the largest mortgage provider, believes higher prices could provide the catalyst for developers to finally start building again. “One of the comments from construction was that prices were too low to justify development of new builds,” he told the Oireachtas finance committee on Thursday. “I think there’s an element of pricing for first-time buyers that will have to rise to attract supply into the marketplace.”
Goodbody revised its forecast of mortgage lending to €6.7bn for next year following Central Bank’s rule changes, a significant jump on the €5.5bn expected for this year. Ulster Bank has pencilled in lending of €7bn for 2017.
The Central Bank has not thrown caution entirely to the winds. While the deposit requirement has been reduced, first-time buyers will still have to satisfy an income test, banning them from borrowing more than 3.5 times their earnings.
This double lock, requiring borrowers to satisfy separate deposit and income tests, makes Ireland unique among countries where financial regulators have intervened in the mortgage market to prevent another credit bubble. The effect could be to keep lending subdued for much longer than expected.
“We’ve kept a belt-and-braces approach,” Lane acknowledged, describing the income rule as the anchor that would counterbalance the looser deposit requirements.
While deposits tend to grab the headlines, the income rule is the hurdle that trips up most first-time buyers, single buyers and those on relatively low incomes, according to Central Bank research.
“Those who’ve struggled with the income multiple will continue to struggle,” said Michael Dowling of the Irish Brokers Association. “It’s why many couples — a guard married to a nurse, for example — will find it difficult to buy in Dublin.”
To facilitate borderline cases, up to 20% of banks’ lending each year can be made to those who fall foul of the income rule. This allowance will continue under the new regime.
Banks have shown themselves reluctant to accommodate hard cases, however, with only 14.4% of lending going to those who need to borrow more than 3.5 times their earnings.
“Lenders are picky about whom they’ll give exemptions to,” said Dowling. “If you’re earning €30,000-€50,000, it’s unlikely you’ll be granted any leeway.”
He was among the many commentators who wanted the income rule to be relaxed, noting that house buyers in Britain were able to borrow up to 4.5 times earnings.
This would be a mistake, according to Lane, because Ireland is more susceptible to economic shocks and income swings than Britain. “An income multiple of 3.5 can quickly grow to 3.7 or four times income if the economy goes into recession,” he said. “It’s a robust measure that allows for the fact that incomes can fall.”
The mortgage changes appear to have done nothing to help those already on the property ladder. They will still need a minimum 20% mortgage deposit if they want to trade up or down.
This is an impossible target for the 15% of homeowners in negative equity, while being equally insurmountable for many more whose existing homes are worth little more than their mortgages.
The typical profile of a second-time buyer is a growing family in need of extra space whose capacity for saving is constrained by the cost of childcare and other outlays associated with parenting.
Unless they can unlock all of the required deposit from the sale of their current homes, they will have to put their plans on hold.
“They’re the forgotten victims of the Central Bank’s rules,” according to Dowling.
Yet second-time buyers should be in a better position to qualify for exemptions under the new rules. They will allow up to 20% of lending to this segment of the market to go to borrowers unable to come up with the prescribed deposit. While exemptions are also possible under the current regime, it does not distinguish between first-time and subsequent buyers. This meant banks could ring-fence all of the available exemptions for first-time buyers, the most politically sensitive end of the market, leaving no allowances for those struggling to move up or down the property ladder.
In many ways, last week’s rule changes can be seen as little more than a tidying-up exercise. By removing outdated boundaries — such as a random threshold of €220,000 after which first-time buyers need a 20% deposit — the Central Bank hopes the new regime will be more durable.
Lane put his audience on notice, however, that another summons to Dame Street for more changes was entirely possible before too long. “If we see there’s a perverse, unwelcome interaction between excessively rapid lending and excessively rapid increases in house prices, then we can intervene.”
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