Central Bank likely to stick to its guns on mortgage caps

On his first day in office, Central Bank governor Philip Lane promised staff he would ensure continuity from Patrick Honohan, who had guided the institution through much of the crisis.

“Not all of the decisions we make will be popular or easily understood,” he said. “But I know we will act in the public interest in safeguarding stability and protecting consumers.”

A year to the month since his appointment, Lane is preparing to make his toughest call yet – the completion of a review of the deeply divisive mortgage-limit rules brought in by his predecessor early last year.

It is understood the governor will reveal on Tuesday a date in the second half of this month when the findings will be published. Those expecting a massive backtrack weren’t listening to Lane’s first utterances from the seventh floor in Dame Street.

"When the rules were brought in, it was a sharp shock," said Owen Callan, an analyst with Investec in Dublin. "It would have been better if the limits were introduced gradually, but we don't expect too much of a change to be announced this month. Don't expect political pressure to have any impact on them."

Under current rules, first-time buyers of homes with a purchase price of up to €220,000 must have a 10 per cent deposit, and 20 per cent for anything above that level. Second-time buyers need to accumulate a 20 per cent downpayment. However, banks can breach the loan-to-value caps for up to 15 per cent of their annual mortgage lending.

In addition, banks are restricted to making loans of in excess of 3.5 times borrowers’ income to no more than 20 per cent of all mortgage lending in a given year.

Rental snag

The Department of Finance made a submission to the Central Bank in September urging the regulator to allow banks to take into account high rents being paid by would-be first-time buyers to establish capacity to repay home loans.

A Central Bank paper published last month found that it now takes renters up to four years to come up with a deposit for a house in south Co Dublin. The saving time has doubled in the space of two years as prospective buyers struggle with the twin forces of soaring rents and house prices.

Rents in Dublin were rising at an annual rate of as much as 12.5 per cent in the second quarter, according to property website Daft. In some rural areas, it takes less than a year to accumulate a downpayment.

However, Minister for Housing Simon Coveney and Minister for Finance Michael Noonan's recently-announced help-to-buy plan for first-time buyers of new homes has all but put paid to any notion that Lane will relax lending rules for aspirant homeowners, according to Conall Mac Coille, an economist with Davy.

Under the scheme, first-time buyers will get a tax rebate worth up to 5 per cent of the price of a home up to a value of €400,000, allowing for a maximum rebate of €20,000. Buyers of homes valued at up to €500,000 will qualify. Crucially, the Central Bank will allow this grant to count towards the minimum deposit required under its rules.

The Government argues that the scheme will help boost house completions, which totalled 12,666 last year, or 14 per cent of the 2006 market peak, and address a chronic shortage of supply that is contributing to rising prices. Still, Investec estimates it will be 2020 before home completions reach 25,000 a year, the number the Economic and Social Research Institute estimates Ireland needs to keep pace with demand.

Price rises

With residential property prices rising at an annual rate of more than 7 per cent as of August, Mac Coille sees tight supply and the new help-to-buy plan fuelling values over the next few years. He has raised his projections in the last few weeks and now estimates home prices will rise by 7 per cent next year, 6 per cent in 2018 and 5 per cent thereafter.

Still, price inflation has slowed down significantly in Dublin, compared to the rest of Ireland, since the mortgage caps were introduced.

A decade after the amount of home loans dished out by banks peaked at €40 billion, gross mortgages are set to amount to €5.5 billion-€5.6 billion this year, according to Investec, before rising to €6.5 billion in 2017 and €7.5 billion the following year.

“It’ll be 2019 before we’re into the zone of normalisation, between €8 billion and €10 billion,” according to Callan. “Still, we’re a good bit off low point, when loans amounted to €2.4 billion in 2011.”

While the mortgage restrictions are hampering banks as they seek to rebuild their loan books, profitability and capital reserves after the financial crisis, Lane and his colleagues have made it clear that the caps are here to stay.

“There may be some tinkering around the edges this month,” said Callan. “But that’ll be it.”