Property
Irish Government and vested interests lobby for easing of Central Bank's mortgage rules
By Michael Hennigan, Finfacts founder and editor
Dec 10, 2014 - 2:01 PM

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Capsule living Tokyo image: New York Times

After one of the world's biggest property busts the Irish residential property market remains dysfunctional and the Irish Government is unwilling to address factors that make housing expensive, in particular in Dublin, where the population density is much lower than in London. So it has made common cause with vested interests in opposing planned Central Bank rules on deposits and income limits for mortgages.

The price of agricultural land is among the highest in the world while the rezoning system makes landowners near towns very wealthy in a country that is 4% urbanised - the tax on windfall profits was reduced this year to 33%.

Michael Noonan, finance minister, did the traditional thing in the last Budget by returning land rezoning to being a bonanza for farmers and a stealth tax for everyone else – why work if you have land adjacent to a town with a tax of 33%? They earned 23% or €4.5bn for the national road building budget alone during the bubble.

Greater London with an area of 1,600 square kilometres had a population of 8.2m in 2011, up from 7.3m in 2001 while Greater Dublin (county) with an area of 950 square kilometres had a population of 1.27m in 2011 and 1.12m in 2002 – while the area of County Dublin comprises 92,200 hectares, 40,200 hectares are farmed. So the urban density is higher than the 1,336 persons per sq. km suggested by the data. This compares with London’s density of 5,125 persons.

Still despite the low density the attitude is to provide Tokyo-style rabbit hutches – the quality of apartments built in Dublin during the bubble was poor apart from energy insulation, storage space was limited and regulations on area in the late 1990s reduced the minimum size.

Land is scarce!

The Central Bank proposed last October to restrict lending above 80% of the value of a house to no more than 15% of the aggregate value of all housing loans, while also limiting lending in excess of three and a half times a borrower's gross income.

The Bank said on Tuesday that it had received 110 individual submissions and 47 responses from industry groups and financial institutions to its consultation paper on the proposed changes.

The Department of Finance on behalf of the Government said the loan-to-value (LTV) limit would be unduly restrictive and would also impact the distribution of home ownership.

It said first-time buyers especially would find it more difficult or "even impossible" to save a deposit while also paying high rents.

The Central Bank of Ireland today published a new Economic Letter “Do First Time Buyers Default Less? Implications for Macro-prudential Policy".

The Economic Letter examines whether time buyers (FTB) have a lower default rate compared to second and subsequent buyers (SSB) in the residential property market

The research finds that 15% of second and subsequent buyers are currently in default.  This rate is 30% lower for first time buyers.

The main findings are:

  • Macro-prudential regulations aimed at capping loan-to-value (LTV) and loan-to-income (LTI) ratios have a greater impact on FTB’s than SSB’s.
  • For recently defaulted loans, FTB borrowers have lower default rate for loans originating since the late 1990’s. Controlling for personal characteristics such age and location and type and size of loan, this differential remains.
  • Comparing default rates across originating loan to value levels, the gap between the two groups begin to close for LTV ratios above 85 per cent
  • This research is consistent with differential regulatory treatment of first time buyers with default risk remaining comparable to the remainder of mortgage lending.

Seven out of ten people believe that new 20% deposit rules for house buyers would be too restrictive for them personally if they were to buy a property according to a new poll by a property industry group.

The Central Bank is expected to introduce the new deposit rules for home buyers early in the New Year, although the Government in a submission to the Bank is reported to have described them as “unduly restrictive” and asked it to introduce a transition period for the changes.

Eighty per cent of people agree that the new rules will favour the better off or cash buyers according to the survey which was carried out by RED C on behalf of the Society of Chartered Surveyors Ireland.

Over half of the 1,000 people surveyed said they would be likely to source some of the 20% deposit through other lending, a finding which the SCSI described as extremely worrying.

Simon Stokes, the chair of the Residential Agency Group of the SCSI said the findings showed in stark terms the limiting effect the 20% rule would have on the property market.

“The survey indicates that half of the population would be able to source a 5% deposit while 38% would be able to afford a 10% deposit. However only 15% say they would be able to source a 20% deposit.

“Therefore it’s clear that while sourcing a 10% deposit – the normal deposit sought by banks - is already a real challenge for most people, sourcing a 20% deposit is likely to be very difficult for most prospective buyers. This would be particularly true of Dublin and some other urban areas where prices and rents have risen rapidly over the last two years. We now have a multi-tiered property market and a one size fits all approach won’t support the development of a more sustainable property market over the long term,” Stokes said.

As part of the new rules prospective buyers will only be able to borrow 3.5 times their income. According to the survey only when suggested with 4.5 times their income was there an increase in likelihood to achieve a mortgage.

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