Mortgage lending rules raise bar high for first-time buyers

Who would be a first-time buyer today? Under new mortgage rules outlined by the Central Bank yesterday the bar has suddenly been raised a whole lot higher for many young couples competing for the

small supply of homes currently on the market across the State.

Under the new rules, housebuyers will need a 20 per cent deposit when applying for a home loan – or at least they will from January 1st. This means that most first-time buyers looking to purchase a home worth €300,000 will need to have built up savings of €60,000 before they can even walk through the door of their local bank. Right now they might get away with having saved no more than €28,000 of the deposit if they go to the right bank.

The news gets worse for first-time buyers. The bank has also decided that just a fifth of new mortgages should be issued above a level of 3½ times’ income. A couple with a dual income of €70,000 will be able to borrow a maximum of €245,000.

Dublin market

Assuming they have managed to save the required 20 per cent – no mean feat on that combined salary – the most they will be able to spend on a home is a smidgen over €300,000. That will not get people a whole lot in many parts of Dublin.

For a three-bedroom semidetached house, average asking prices in Dublin range from €256,000 in north county Dublin to €467,000 in south county Dublin.

Outside Dublin, people will fare better. Similar properties in Galway city are on the market for €146,000 and in Cork for €158,000. In Waterford city, buyers seek on average just €95,000 for a three-bed semidetached house.

Central Bank deputy governor Stefan Gerlach said the measures would help avoid another property crash in the Republic and dampen the current rate of price rises in the market. He is almost certainly correct.

It is unlikely the current state of the Irish economy is giving Central Bank governor Patrick Honohan too many sleepless nights – he has seen much worse, after all – but if anything was to trouble him it seems likely it would be the state of the property market, particularly in Dublin.

Prices rise 20 per cent

House prices in the capital have jumped by well over 20 per cent over the last year as desperate buyers have queued up to buy the precious few properties to be had. According to one set of figures published recently, owners of average homes in Dublin saw the value of their properties increase by € 220 every day between March and June.

The cause of the spike in prices is easy to identify. There is a chronic shortage of new properties, particularly in the Dublin area. Last year 8,300 new houses were built in the State when three times that number would ordinarily be built to meet demand.

Putting the brakes on rising prices will be unpopular and restricting the banks’ lending practices will mean some people will struggle to buy their first home. Nevertheless the Central Bank must do something.

Increased credit will lead to a bubble and the one thing Honohan will be anxious to avoid is the future accusation that the Central Bank under his stewardship sat on its hands and watched as another bubble inflated. The bank made that mistake once before and we will be paying for it for more than a generation.