Monday 23 October 2017

No bubble yet, but we are already heading that way

Investors are being enticed to borrow on the prospect of strong rental returns and rising house prices
Investors are being enticed to borrow on the prospect of strong rental returns and rising house prices

Donal Buckley

Paddy was more than surprised. He had just been offered a loan. "I felt like the pushers were back on the street offering me a fix." His succinct reaction sums up why we are not currently in a property bubble but also how the current momentum might ultimately create a new bubble.

It wasn't a back street money lender he was talking about but one of the main banks. This was a bank which had put him through torture for the last six years.

He felt like he had been through the equivalent of property rehab and now the drug dealer was trying to entice him to get hooked on debt again.

When the crash happened he had six houses and apartments in Dublin and owed the banks €1.6 million.

"The houses were generating rent but the bank wasn't satisfied with that income. My business continued to operate and pay wages for myself and two other fellows.

"However the nice account manager who I had been dealing with in the bank changed his tone. Instead of calling me Paddy he started calling me Mr Murphy. Then he was replaced and I found myself dealing with a rottweiler. He put me under pressure to sell. Part of the reason was that all of my loans were on tracker mortgages.

"I resisted at first because I didn't want to sell when the market was on the floor so I was trying to hold them off. They then threatened to take my own home even though I hadn't taken out a mortgage on it and it was valued at €2m.

"The rottweiler says to me: 'Surely with only yourself and the wife in the house that house is too big for the two of you and you could trade down'."

"But eventually I sold three of the houses and flats and paid off €1.3m over a few years.

"I still owed them money which I was paying off but they agreed to stop pressurising me about my home.

"Then last year I went to buy a car and applied for a car loan of €10,000 through the car dealer. I was surprised when the car dealer was slow to come back to me. So I rang him.

'Paddy,' the car dealer said. 'I'm afraid you have a bit of a problem. Your credit record isn't good.'

"So here I was even though my house is worth €2 million and is debt free, I'm no longer in negative equity, yet I have this credit problem all because the bank at one stage gave me a black mark on my credit record," Paddy says.

So imagine Paddy's surprise last month when the bank which had put him through the ringer offered him a loan.

"I felt like the pushers were back on the street offering me a fix. But I was clean and I didn't want to get hooked again," he says.

His reaction illustrates some of the latest trends in investor mortgages. Central Bank data shows that in the first quarter of this year buy to let (BTL) mortgages fell by €288 million. Furthermore BTL mortgages recorded a year-on-year decrease of €1.3 billion, or 9 per cent, at the end of March.

This prompted Dermot O'Leary, economist with Goodbody stockbrokers, to finger buy to let investors causing an "ongoing drag" on the overall level of mortgage lending figures.

These falls were especially noticeable for investors with floating-rate loans, tracker loans and variable rate loans. However there are some investors who, unlike Paddy, are being enticed to borrow not alone by the prospect of strong rental returns and rising house prices but also by the opportunism offered by fixed rate mortgages. Those types of mortgages enable BTL investors to avail of current low interest costs and fix their mortgages going forward for a number of years.

During the quarter, BTL fixed-rate mortgages increased by €9 million or 5.7pc. However considering the relatively low short-term risk of interest rates rising it seems strange that there was an increase of only €1.7 million in fixed rate mortgages for periods of over three years.

But even those figures show that relatively few investors are being enticed back into the mortgage market and even then they are trying to protect themselves from high mortgage rates.

Nevertheless there has been an increase in the numbers of BTL loans being drawn down. In the 12 months to the end of March 1,321 loans were drawn down. That is miniscule compared to the boom when 28,140 mortgages were drawn down in the peak year of 2005. Reflecting the gathering momentum, those March 2017 figures are about double the level of investor borrowing activity compared to 2011.

Investors are also being relatively cautious about the amounts they are borrowing. In 2007 the average amount borrowed by investors was as high as €326,287. Now it's almost one third of that at €128,754. Furthermore investors are borrowing less than other home buyers. For instance first time buyers' loans averaged €194,052 in the first quarter of this year when mover purchasers borrowed an average of €239,599.

Nevertheless the amounts borrowed by investors is also increasing as it is up more than €9,200 from €118,027 in the first quarter of 2016.

But the level of investor activity is much higher than is reflected in those figures as investors are also borrowing from non-bank lenders. There are also cash buyers who account for the majority of buy to let investments but most of them don't have to worry about the bank manager.

But it's the cheek of the banks that annoys Paddy. His advice to those who were treated like him is to say: "The next time your local bank manager encourages you to keep the recovery going be sure to ask 'Have you been in rehab?'"

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