‘Strong argument’ to retain strict mortgage borrowing rules

The Government has been told that there is a “strong argument” to retain strict rules on mortgage borrowing due to Irish borrowers’ capacity to take on “excessive levels of financial risk”.

The recommendation is contained in new research by the Department of Housing and Department of Finance, which found that a third of those currently in the rental market would be willing to spend more than 50 per cent of their future net income on mortgage repayments.

The research also found that a quarter of those surveyed would be willing to pay 40 per cent more than their rent in order to own a home. Some 86.5 per cent of those surveyed expressed a preference for home ownership despite what the report describes as “the volatility in the housing sector in recent decades”.

“The willingness of some individuals to expose themselves to what might be regarded as excessive levels of financial risk in order to attain home ownership is a strong argument for the continuation of measures such as the Central Bank’s macro prudential regime.”

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The paper found that respondents “demonstrated what appears to be a poor appreciation of the risks associated with excessive housing costs as a proportion of disposable income”.

‘Not sustainable’

Currently, the Central Bank’s rules stipulate that first-time borrowers, with limited exceptions, are restricted to mortgages of 3.5 times their household income, and must provide a deposit of 10 per cent.

Personal finance expert Eoin McGee of Prosperous Financial planning said that payments for housing of 50 per cent or more of net income are “not sustainable”.

“You might maintain it for a while, but what they’re doing is storing up problems for the future,” he said, adding that short-term borrowing from friends and family, as well as a reliance on credit cards, became a feature among those paying such a high proportion of their income on housing costs.

The research found that almost 31 per cent of prospective home buyers surveyed are living at home with their parents.

“This may be due to escalating rental costs and may also reflect efforts by respondents to maximise deposit savings. In any event it may be the case that housing market conditions are driving changes to habitation patterns,” the paper found.

The research, which was conducted on housing aspirations and preferences among renters for the Departments by the Irish Government Economic and Evaluation Service (IGEES), also found that renters were willing to tolerate longer commutes and that a strong preference exists for three and four bedroom houses. This, it warns, could drive urban sprawl.

“Housing markets, if unconstrained, may disproportionately lean toward development in urban peripheries.”

Further scheme funding

The authors also warn that there may be increased pressure on the Government to come up with new schemes and subsidies to support buyers.

The Department of Housing has already launched the help-to-buy scheme, which can be worth up to €20,000 in tax breaks to first-time buyers, and the low interest Rebuilding Ireland Home Loan, which is targeted at renters locked out of the traditional mortgage market.

The €200 million loan scheme requires a “further tranche of funding” in order to continue, it was reported this week.

Minister for Housing Eoghan Murphy later denied that the scheme had run out of funding and said it was not closed to new entrants.

According to the report, “demand for housing subsidies targeting first-time buyers may persist or strengthen”.

The report also found that the Irish preference for owning a home would not change unless there was a significant strengthening of tenants rights. The authors wrote that it was “unlikely that there will be wholesale changes in attitudes to homeownership and renting in the absence of a rebalancing of the property rights associated with different tenures”.

The most popular reasons respondents said they preferred to own a home related to security and life cycle events, such as having children and providing them with a good education, or having control over your living space.