Don’t bet your house on Central Bank mortgage rules going ahead

Now that we know for sure where the Department of Finance stands on the Central Bank of Ireland’s proposed limits to mortgage lending, it will be very interesting to see the regulator’s final determination on the matter.

The submission from Ann Nolan, second secretary general of the Department of Finance, might be just one of 157 received by the financial regulator but it unquestionably carries the most weight.

The Central Bank is independent of government, for good reason, but that’s not to say that it can simply ignore its views.

And the department isn’t enamoured with the new rules being proposed by Dame Street.

The department isn’t the only party to call for the proposals to be watered down.

Most of the banks would like to see some amendments but, based on his recent appearance in front of the Oireachtas finance committee, we can take it that governor Patrick Honohan doesn't put too much store in what they have to say.

To recap, the Central Bank is proposing that borrowers should have a minimum of 20 per cent deposit in place before being approved for a home loan.

Exceptions could be made in 15 per cent of cases, at the discretion of the lender.

Traditionally, a 10 per cent deposit has been required although even that loose rule went out the window in the bubble years as mortgages of up to 100 per cent were offered to customers.

The Central Bank also wants lenders to cap the size of mortgages at 3.5 times income. The changes were announced in October, with December 8th set as the closing date for its consultation process. It wanted the limits introduced on January 1st, but Honohan has said there will be slippage in this timetable.

The short timeframe involved has pulled the rug from under a number of first-time buyers who were busily accumulating their 10 per cent deposit in anticipation of venturing into the property market next year.

The cliff they will now have to climb, particularly in Dublin, has become steeper.

First-time buyers

The department argues that the sudden changes being proposed in the deposit requirement would “reduce the flow of first-time buyers” to the market and have an unwanted ripple effect in the rental market and other areas of the housing sector.

The rules being proposed by the Central Bank might result in prudent lending but they really aren’t sufficiently nuanced to take account of the reality in the marketplace.

This is referenced in the department’s submission when it said a graduation of the measures would “facilitate an evaluation and consideration of the impacts of this new initiative on the economy and wider society and also allow the measures to be fine-tuned as necessary in the light of actual developments”.

You’d have a choice of houses in Leitrim for €100,000, yet having €20,000 saved for a deposit would be a stretch for most first-time buyers.

You can multiply that challenge by about three in Dublin, where young couples are also having their capacity to save hampered by paying through the nose for rent.

According to the department, there is a “strong case” for a graduated introduction of the new macro-prudential rules.

It argues that, in cases where borrowers can demonstrate an ability to meet the income ratios proposed by the Central Bank, they should be allowed to avail of mortgage finance up to 90 per cent of the value of the property.

Exemption threshold

It also argues for a lower deposit requirement for first-time buyers in general and says a higher threshold of exemptions at 25 per cent could be applied.

The department is no doubt worried about the potential impact of these new rules on the Government’s Construction 2020 plan, which is aimed at stimulating building work to meet the pent-up demand for new housing, particularly in Dublin, and thus generate employment and economic activity.

If first-time buyers can’t raise the cash to buy the homes, then developers won’t build them.

It will be a vicious circle.

A fall in house prices wouldn’t be helpful either, given the implications of negative equity and mortgage arrears.

And this already unpopular government can’t afford to alienate any more voters.

The Central Bank has a team sifting through the submissions it has received.

Will it push ahead with its original proposals?

Or bend in the face of opposition from Government (and others)? My money is on the latter.

We should have our answer in mid-January. Twitter: @CiaranHancock1