This week the Central Bank of Ireland made what was, arguably, a long-overdue intervention in the property market. It proposed that banks be forbidden from offering mortgages to most would-be buyers unless those buyers come through the door with a deposit of at least 20 per cent in their pocket.
It also suggested that under new rules – which could be implemented from the start of next year – most buyers could borrow no more than three and a half times their income. And only one in 10 investors would be allowed to borrow more than 70 per cent of the purchase price. The banks would be permitted to use some discretion to decide which loans could exceed the limits.
First-time buyers would be the first to feel the pain if these new measures were introduced. According to Myhome.ie, the property website owned by The Irish Times, the average price of a home in Dublin is currently €263,000. First-timers looking to buy at this price in the capital would need €52,600 upfront. And that is without paying for a stick of furniture.
If someone could afford to put aside €500 a month and started from scratch today, it would take close to nine years to save the deposit for that average-priced home (assuming there were no price increases between now and 2023). Anyone who has already saved the 10 per cent deposit they had thought would be enough will now most likely need to postpone their next property viewing until 2019.
According to Stefan Gerlach, deputy governor of the Central Bank, who made the announcement on Tuesday, the new limits are intended to protect banks against another cataclysmic property crash and slow the rapid rises in house prices in large towns and cities.
Amid a public outcry at the proposals, a few people believe the Central Bank's proposed rules are necessary to protect the economy as a whole. One of those who support the Central Bank's view is Prof Alan Ahearne, the head of economics at NUI Galway. He describes the measures as sensible and suggests they will go a long way to reducing the impact of future bubbles on the wider economy.
“There is quite a bit of international evidence out there suggesting that measures such as these are effective in keeping a cap on excesses in the property sector,” he says, citing the example of Hong Kong, which had a property boom and bust in the 1990s. Loan-to-value caps in place there lessened the impact of the crash on broader economic activity.
“We are a country that does not control our interest rates, and we don’t have many of the fiscal controls that many policymakers would like to have, to prevent boom and bust, and macroprudential measures such as this are among the few that we do have,” says Ahearne.
He accepts that the measures would delay home purchasing for some people but says they wouldn’t prevent those people from eventually owning their own homes.
The plans are not yet set in stone. A public consultation process will run until December 8th, and although there is unlikely to be much public pushback against the loan-to-income plans (just 23 per cent of mortgages last year were above that three-and-a-half-times-income limit), the loan-to-value proposal will be much less popular.
Last year 44 per cent of home loans were for more than the 80 per cent loan-to-value ratio proposed by the Central Bank. The proposal would permit lenders to allow higher loan-to-value ratios in just 15 per cent of cases. Almost 30 per cent of last year’s buyers would have been excluded under the new rules.
Some ask why the Central Bank is acting now, when, unlike in the boom years, the State’s main banks have largely displayed self-regulated fiscal responsibility since the bust. Economists at Merrion Capital said this week that Bank of Ireland’s average loan-to-value ratio for the first half of this year was just 67 per cent. AIB’s was 72 per cent for 2013.
Keith Lowe of the Douglas Newman Good estate agency is unhappy. "I am not against some measures to control the market, but this is way too harsh and way too fast, and it will have a hugely negative impact," he says. "Someone looking to buy a house of €250,000 will need savings of €50,000. Where will they find that, particularly if they are renting?
“People will say I have a vested interest – and I do – but these proposals simply will not work. At the height of the boom banks were offering 100 per cent mortgages, on interest only, to home buyers, and that is what led to the problems. These measures are taking a sledgehammer to a market which is still broken. We will see transactions of around 1.5 per cent this year. In a normal functioning market that should be around 4 per cent.”
Although much of the attention has been on first-time buyers this week, they represent only a part of the picture. Lowe points out that a knock-on effect of the proposals “will see rents going through the roof, because people will be handcuffed to the rental market. The rental market is going to absolutely explode, and if [this] puts more pressure on the rental market as a whole, that will have an impact on the social-housing market.”
Seán Healy of Social Justice Ireland agrees, at least in part. He cautiously welcomes the proposals but recognises the harm they could do if implemented in full. “I think limits are welcome, because people will not overstretch, but there are 90,000 households on waiting lists for local-authority homes, which means the Government is depending on the private rental sector.
“By increasing the requirement for a deposit to 20 per cent it will mean fewer people will be buying their own homes, so the rental sector will come under pressure and rents will rise dramatically. This will not only put a strain on individuals but also the Government.”
Angela Keegan of Myhome.ie also expresses concern for renters. "There are 25,000 households formed each year, and that won't change no matter what the Central Bank does. People will still want to start out on their own, either as individuals or as couples. If fewer people can buy, the only alternative is renting, and with a limited number of rental properties available that market will spiral and push more people on to social-housing lists," she says.
Alan Ahearne does not buy the line that the rules would do lasting damage to the rental sector. “These sorts of restrictions will put downward pressure on house prices, and ultimately rents are linked to house prices,” he says.
“In cities such as London, where rents are very high, so too are property prices, and in countries where rents are low, property prices are low. There is always a relationship between yields and house prices, and I don’t think that the Central Bank proposals will lead to ever-increasing rents.”
Then there are those who own their own homes and want to trade up – or, in the case of empty-nesters, trade down. Angela Keegan says that although the loan-to-income proposals are prudent, the loan-to-value element is “very tough and very surprising and will be a very hard pill for many people to swallow. In the short term we will probably see a flurry in the market, as first-time buyers rush to secure homes, but the number of transactions next year will be impacted.”
She agrees with Healy, and believes the moves will push people on to social-housing lists, but she does not see “those who want to trade up as being too affected in the early stages at least, because if they are trading up they will, presumably, have equity in the home they are selling, so the impact won’t be as big. But what we need to work out in the long term is the percentage of transactions a move like this will take out of the market.”
The same applies to those looking to downsize, she says. Keegan also suggests that a blanket approach makes little sense when what the Central Bank appears to be trying to tackle is a price issue concentrated in the capital. “Maybe what is starting here is a debate, and that would be most welcome, but anything that damages a market which is still broken and only now recovering would be most unwelcome.”
Rachel Doyle of the Professional Insurance Brokers’ Association is also critical. “Adding an additional crude and high barrier at a time when lending is already restricted, and property prices, particularly throughout the country, are still dramatically lower than they were in 2007, will serve to exclude many first-time buyers and those trading up from accessing mortgage finance,” she says.
“Lending is nowhere near where it needs to be. Mortgage lending this year is projected to come in around €3 billion to €3.5 billion; in a normal market it would be a multiple of these levels.” She says the restrictions “will create an even lower level of lending and will be especially detrimental” to first-time buyers.
Juliet Tennent, an economist at Goodbody Stockbrokers, reminds us that the proposals may yet alter. “The measures themselves are not a bad thing from an economic perspective,” she says, “but the Central Bank is moving fast and being blunt. This is only a consultation at the moment, though. The Central Bank is setting out its stall. The final shape of the measures can still change.”
HOUSE HUNTERS: "THIS HAS BEEN A REAL KICK IN THE TEETH"
Aoife Clarke, who works in public relations with a large retail chain based in Naas, Co Kildare, has been saving for more than two years with a view to buying her first home. The 29-year-old has just managed to get her 10 per cent deposit together and is anxious to buy – ideally in the Rathfarnham or Dundrum areas of Dublin. She has approval in principal to borrow €370,000 but is looking in the €340,000 range to protect herself against any downturn.
“I am now just at the point where I have the deposit, and my plan was to start looking now with a view to maybe buying in the new year. But this has been a real kick in the teeth, and I am wondering now should I just panic-buy something,” she says.
She accepts that there is a need to control the market but says that changing the rules on deposits almost overnight will put many buyers back years. “I think to go from 10 per cent to 20 per cent in one jump is a real killer.”
She feels the pressure but at least has time on her hands. If she were to get her loan approval nailed down by Christmas she will then have six months to go ahead with the mortgage.
Ronan Quinn is a garda in his late 30s. Just before the bubble burst EBS offered him a mortgage of €325,000 on a property worth €350,000. He decided not to buy then, and within weeks the economy collapsed. He is now dipping his toe in the water again, but this week he was told that the most he could borrow was €153,000 on any property worth more than €170,000.
“I’m based in Dublin, and there is not a whole lot I would be able to buy for that,” he says. “I could probably put away €500 a month if I lived on beans on toast, but even if I do that it will take me five years to save the €30,000 I would need for a deposit on a €300,000 house.
“I’d love to own my own home. Renting is fine, but you can’t hang a shelf or buy a cat without permission. This move might help the wider economy in the longer term, but it will do absolutely nothing for individuals like me.”