Friday 24 March 2017

Banks can’t fix house crisis, ESRI warns

New sources of cash may be needed as numbers increase

Wilbur Ross: backs US lender providing cash to developers Picture: Bloomberg
Wilbur Ross: backs US lender providing cash to developers Picture: Bloomberg
Gavin McLoughlin

Gavin McLoughlin

Irish banks won't be able to lend enough money to solve the housing crisis, a leading think-tank has warned.

A new report says the demand for housing is likely to increase by almost a third over the next eight years, and that the banks may not have enough deposits to provide the money required to fund that.

One of the report's authors told the Irish Independent that the shortfall would apply both for providing mortgages to homebuyers, and providing construction funding to builders.

"The results of our analysis suggest that in the future the traditional deposit base will be unable to fund the level of credit required to meet the housing demands of the economy.

"This will require significant changes in the domestic financial sector," the report says.

It says demand for housing is set to rise to 30,000 units a year by 2024, compared with a current rate of 23,000.

"The increased credit levels associated with providing 30,000 units is likely to pose challenges for the domestic banking sector. It is likely to result in a significant increase in the difference between credit levels and domestic deposits, which is commonly referred to as the 'funding gap'," it says.

The report, to be published today, was written by the Economic and Social Research Institute (ESRI).

It calls for the Central Bank to routinely tweak its mortgage lending restrictions in line with changing circumstances in the Irish housing market, and acknowledges that significantly expanding the ability of Irish banks to lend could fuel fears of another credit bubble. The report indicates a likely opportunity for new banks to reap success in the Irish market, as well as non-bank providers such as Pepper Mortgages and the WLR Cardinal Mezzanine Fund, an entity backed by the American billionaire Wilbur Ross which provides finance to developers.

The report comes shortly after news emerged that the number of people approved for a mortgage rose sharply in October.

Market expectation is that lending will probably pick up further on foot of changes to the Central Bank rules. An average of 3,100 people have been approved for a mortgage each month since the summer.

Half of these were first-time buyers, according to new figures from the Irish Banking and Payments Federation.

The figures show the value of mortgage approvals in October rose by 29pc compared with the same month a year ago. But this was a slowdown on the even stronger approval rises in August and September.

First-time buyers accounted for the biggest share of approvals, at close to 47pc.

However, approvals for movers are now growing at a faster pace than those for new buyers.

Those moving house accounted for a third of people being approved for a home loan.

Read More: Analysis: Will there be enough credit and where will it come from?

David McNamara, an economist with Davy Stockbrokers, said the figures showed mortgage approvals softening in October. "New loans worth €621m were approved in the month compared with €663m in September and a peak of €692m in July. This might be in part due to seasonality as the housing market winds down toward the year-end," he added.

Alan McQuaid, of Merrion Stockbrokers, said that with the Central Bank easing its lending restrictions for first-time buyers, mortgage approvals should pick up in the coming months.

"That will likely keep upward pressure on house prices in the short term until the supply issue is sorted out," he said.

Goodbody's Dermot O'Leary said the Government's buyer-support scheme and the easing of lending rules would boost demand.

"Both of these policy developments will support mortgage demand," he added.

Irish Independent

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