We're killing the dream and right to own your own home
In February this year, the Central Bank introduced Macro Prudential policy measures which are preventing many first-time buyers from realising their desire and right to buy their own home. Equally, the impact on those wishing to trade up is significant.
Borrowers in negative equity while exempt in terms of the new lending criteria will find it very difficult to borrow as the negative equity mortgage product is so restrictive in terms of income requirements there were only 300 negative equity mortgages completed in 2015.
In advance of these measures being introduced over 100 submissions were made to the Central Bank with the main observations being that:
1. This was the wrong time to introduce the measures.
2. The market was correcting itself anyway.
3. There should have been a phased introduction of the measures
4. There was no recognition for the "Dublin" factor in terms of the measures introduced.
As companies increasingly choose to locate in or near cities, and people follow jobs most of Ireland's housing needs will be in the greater Dublin area. In 2015 about half the population lives on just 20pc of Ireland's surface area, but by 2030 nearly half the nation will be living on just 10pc of the land. Figures vary but the Dublin area will need 8,000-10,000 housing units per year.
I disagree with the views recently expressed by Stefan Garlach from the Central Bank as I'm concerned that a generation of potential buyers will not be able to buy a home.
In expressing my views that the Central Bank rules must be amended, I am not advocating a return to the reckless days when banks, not brokers, in their desire to capture market share offered 100pc finance and six to seven times income multiples.
The Central Bank introduced two significant changes at the same time last February:
1. Reduction in Loan to Value (LTV) available and
2. Reduction in Loan to Income (LTI)
No market introduced two significant changes the way we did in February this year, namely a reduction in LTV (loan to value) AND a reduction in LTI (loan to income). In the UK, facing similar problems to ours, they introduced a LTV reduction but left LTI at 4.5 times (it is 3.5 times) in Ireland.
It is important to recognise that prior to the amendments introduced, there were very rigid rules in place which remain in place following the additional new Central Bank lending guidelines.
1. All mortgage repayments were and are stress tested at 2pc above the SVR (Standard Variable Rate), 6.25pc/6.5pc currently.
2. All borrowers had to and have to show "proven repayment capacity" for a minimum of six months and in some cases, 12 months prior to making a mortgage application. Borrowers had to save or pay rent equivalent to the stressed mortgage repayments.
3. All borrowers have to have a minimum net income after the stressed mortgage repayments, namely a single person needs a net income of €1,100/€1,300 per month a couple needed €2,000 per month and a couple with two children needed €2,500 a month, ie €250 per month additional net income per child.
The additional new Central Bank rules are as follows:
1. LTI (loan to income) is restricted to 3.5 times income.
2. For first-time buyers, max loan to value up to €220,000 is 90pc and 80pc of the difference thereafter.
3. 80pc max loan to value for second-time buyers.
First-time buyers buying a new home in Dublin for €325,000 will need a deposit of €48,000 as 87pc LTV is the maximum that they can borrow. Equally, to qualify for a mortgage of €284,000, a couple will need a combined salary of €81,100.
The average industrial wage is €36,000. A single applicant will need a salary of €81,100.
The stressed repayments at 6.25pc on a mortgage of €284,000 are €1,749 per month, the actual repayments are €1,291 per month but to rent this property would cost €1,400 per month.
The new Central Bank rules have exemptions and allow banks lend 15pc of their loan book at 90pc LTV and 20pc of their loan book at greater than 3.5 times income. However, borrowers cannot qualify for both exemptions but by November this year, all banks had used their exemptions. In fact, banks are offering cash incentives to borrowers not to complete in 2015 and wait until 2016.
This clearly indicates that the rules are not reflective of the demand in the market. It creates a very difficult problem in 2016 when we have a full year of the new rules and if this trend continues, the exemptions will run out a lot earlier in 2016.
Stefan Garlach expresses the view that the limited early evidence suggests the measures are functioning, I disagree. I agree macro-prudential tools need to be a permanent feature of the financial landscape but they need to be assessed more vigorously and quickly. We cannot wait until mid-2016 for the analysis to be considered.
On the ground, builders will not build and house buyers, first time or trade up customers are left in limbo. Rents are rising at a much greater rate than house prices and are back at 2006 levels.
Many buyers are paying more in rent than those having an 85/90pc mortgage.
Gary Gannon of Gannon Homes, one of the largest builders, recently said house sales fell by 50pc in 2015 because of the Central Bank measures. This trend will confirm with the other developers in the Dublin market.
We need an immediate review of the new lending rules and I would propose the following changes
1. 90pc finance be allowed on properties up to €300,000 for first-time buyers (Dublin factor)
2. 85pc finance be allowed for second-time Buyers.
3. The exemption levels on LTI (Loan to Income) should be increased to 30pc.
4. The exemptions levels on LTV (Loan to Value) should be increased to 20pc.
I have heard views expressed by some in the industry that buying a home will not be an option for a significant portion of new buyers, I disagree.
It is not fair and socially divisive if those who earn well in excess of the average industrial wage can buy with wealthy parents assisting with a deposit.
We must cater for all who want to buy based on their ability to pay, reflective of providing suitably priced housing, comparable with average incomes.
Michael Dowling is the chairman of the IBA mortgage committee