Mortgage lending is stalling. Having grown very strongly over the past couple of years, the latest figures show that growth in new loan approvals has now slowed sharply. Why is this happening? And what does it mean for the market? It seems a number of factors are in play including the impact of bank lending rules, the state of the market and affordability for buyers. The key issue is whether we are seeing a temporary slowing in mortgage borrowing or something more fundamental.
What do the figures show?
The latest data from the Banking and Payments Federation of Ireland (BPFI) is quite striking. A straight comparison between September of this year and September of last year shows a 4.3 per cent rise in the number of mortgage approvals. But you have to dig down a bit for the real story.
There were 1,782 first-time buyer mortgages in the month, down 3.4 per cent on the same month the previous year and down 10 per cent on August. For mover-purchasers the annual figures were 1.5 per cent ahead but again there was a 10 per cent monthly drop. The overall rise in the annual approval figures is being driven entirely by people who are re-mortgaging or switching.
Now let’s look at the value of loans approved. Some €385 million in lending was approved for first-time buyers in September, down 1.7 per cent on September last year and 11.7 per cent below the previous month. For mover purchasers the total was €271 million, up 2 per cent year-on-year but down 12.4 per cent on the previous month. Re-mortgaging and switching was sharply higher.
The pattern is now becoming clear, Lending volumes shot up through late 2016 and early 2016 from low levels and have now topped out.
The BPFI calculates that the annualised volume of mortgage approvals reached 44,805 in the twelve months ending September 2018, marginally (0.3 per cent) higher than the twelve months ending August 2018. The annualised value of approvals also rose by 0.3 per cent to more than €9.9 billion.
Actual mortgage drawdowns remain strong, with the total value of cash given to borrowers in the third quarter of this year up 17.5 per cent on the same period last year. But the trend in approvals is likely to be reflected here in the months ahead.
Looking back May may have marked the peak growth in the mortgage lending market with over €1 billion in mortgages approved that month. The total September figure was €822 million. Interestingly, the average value of loans being extended has also eased back from a peak of €226,000 in May to €215,000 last month. And of course we have also seen a sharp slowdown in the rate of house price increase in recent months.
Why is this happening?
One obvious reason is that more people are finding house prices unaffordable and cannot get a big enough loan based on the Central Bank rules, which limit lending to three and a half times income. House price inflation has slowed to around 8.5 per cent nationally, but this means prices are still rising faster than average wages. Fundamental to this is the much-discussed issue of the lack of housing supply – new completions are rising, but are still well below what is needed and so prices keep rising.
And prices in many areas have now reached or exceeded affordability for large numbers of people on average or above average earnings who are relying on a mortgage to fund the bulk of their purchase. A €360,000 mortgage, for example, to purchase a €400,000 property would require an income of over €100,000, out of reach for most single buyers and a stretch for many dual income couples. A €600,000 property – a typical price in the richer suburbs of South Dublin – would require a joint income of €150,000 for a €540,000 mortgage.
This affordability issue is now having an impact in parts of the market, leading to asking prices being cut in some areas and rumours of uncertainty among developers about pricing and the phasing of new builds. Prices outside of Dublin and the centres of Galway and Cork as clearly more affordable on average earnings. This explains why prices outside Dublin are, according to the latest CSO figures, rising by 11.4 per cent year-on-year, while in Dublin the average is just over 6 per cent.
"The Central Bank's macroprudential rules are working," said Eamonn Hughes, analyst at Goodbody stockbrokers. He expects house price growth to slow to 6 per cent next year.
There is another factor, too, in the mix. The banks are allowed a certain number of exemptions to the lending rules – which in some cases allows people to have a smaller deposit or, even more importantly, take out a loan of up to 4.5 times their income. A total of 20 per cent of the value of loans for first-time buyers can exceed the income limit, for example, and 10 per cent for those moving house.
However, Central Bank research showed that by the middle of the year banks were running well ahead of the limits at that stage. As the rules operate on an annual basis, most of the exemptions are now used up by the banks for 2018 – though some institutions say they have some leeway left. With many buyers already stretching to buy, this is clearly a factor in the market.
Analysts expect that heading into next year , banks will be able to increase approvals again, taking advantage of their 2019 exemptions. The extent to which this happens will be a key marker of underlying demand in the market. There are calls on the Central Bank to reset the way the rules apply to ensure this annual running into limits does not distort the market. These cause difficulties for the banks as it is hard to estimate how many approvals will turn into drawdowns and how quickly this will happen.
Banks are also generally under pressure from new capital rules and ECB oversight in terms of their risk assets and balance sheets. Analysts do not believe this is directly hitting mortgage lending at the moment, but it is clearly a factor in general lending policy.
What does this tell us about the market?
There is some debate about the outlook. Clearly wider economic uncertainty about a possible hard Brexit is an important factor here. Were the UK to crash out without a deal next March, the economy will get a shock and this will affect property. The unpredictability of all this is now a factor in consumer confidence.
Assuming that is avoided, what do we see? Well the rapid growth in the number of transactions is clearly slowing. Marian Finnegan, chief economist at Sherry FitzGerald says that "rather than expanding it looks like overall transactions will be similar to last year with some contraction in second hand market." Price growth has also slowed. Having moved into double digit annual increases in the middle of last year, annual house price growth peaked at over 13 per cent in April and slowed since then. This is certainly good news, even if it has created some uncertainty about what comes next.
Of course we are all used to the boom and bust cycle and it is necessary to keep some perspective. Conall Mac Coille, economist at Davy, points out that the latest data from the Property Services Regulatory Authority shows 40,545 residential transactions so far this year worth €12.3 billion. He calculates that this shows a rise of some 21 per cent in value and an increase of around 5 per cent in the number of transactions.
“Despite the slowdown in house price inflation, activity levels in Ireland’s housing market are clearly continuing to expand,” he said, with the number of homes listed for sale continuing to rise. He believes too much attention should not be paid to the approval data, which could bounce back next year.
Of course not everyone relies on a mortgage for the vast bulk of the purchase prices. Those trading up have an asset to sell. And some first-time buyers benefit from help from parents and family. "If you have parental help you'll still get a mortgage because the Central Bank rules won't come into play," said Karl Deeter of Irish Mortgage Brokers. This means those with above average incomes and better-off families are often the ones who can afford new homes. Some things will never change.
The outlook in the short term now seems tied to an uncertain economic outlook and particularly Brexit. If forecasts of 4 per cent plus growth and rising employment and wages are realised for 2019, then this should underpin the market, though affordability will continue to hold back prices. If there is a no deal Brexit, then all bets are off.
Smart Money is an online subscriber-only column looking at the big economic trends and what they mean for you. It is published on Thursdays
