Friday 22 September 2017

Damien Kiberd: Central Bank's mortgage rules are shutting people out of housing market

Patrick Honohan
Patrick Honohan

Central Bank governor Patrick Honohan, interviewed recently on national radio, was asked what effect his new lending rules would have on people afflicted by negative equity.

His response was one of masterly ambiguity.

To the listener it seemed as if he was saying the not many people fall into this category.

Sadly for the Professor, this is not true.

The best estimates, and nobody can be certain, put the number of households currently in negative equity at about 350,000.

What I think Professor Honohan meant to say was that not many people who are suffering from negative equity will take up the new mortgage products designed for them by the banks.

That is indeed true, but beside the point.

The Central Bank’s official line is that those in negative equity are ‘outside the scope’ of the new lending rules. Hazy suggestions in the banking sector suggest that negative equity holders who want to move home will henceforth crystallise the difference between the value of their existing home and the mortgage debt, add that sum to the price of their new home and stump up 20pc of the resultant sum total as a deposit.

Achieving this goal, given our onerous tax system, would be about as easy as scaling the north face of the Eiger with a sack of bricks on your back.

Those who will be particularly hard hit include mortgage holders under 35 years who, according to the latest CSO numbers have median loan to value ratios of 116.8pc.

Single parent families have a median LTV ration of 102.3pc and will also find it difficult to move.

The response to the new Central Bank rules has been bafflingly respectful, even fawning. But are the Bank’s experts not applying a solution which should have been used during the bling period (2005 to 2007) to a set of circumstances where the ‘new remedy’ is now entirely inappropriate.

Are they not in danger of creating a supply problem in the construction sector especially in the capital?

Dublin is the nexus of the problem.

It is afflicted by a massive shortage of housing, especially family homes. It also suffers from a dysfunctional and very crowded rental market. House prices rose by circa 20pc and rents by 15pc in Dublin last year.

The rapidly emerging crisis in Dublin has now provoked a reflex type response from the Central Bank boffins. They seem to think their task is to ‘cool down’ the Dublin market.

That is why their new maximum LTV (loan to value) rate of 90pc will apply on the first €220k of the purchase price. It’ll be 80pc on anything above this value.

There are under 400 homes for sale in Dublin with a price tag south of €220k and many of these are not suited to the needs of family units.

Effectively the €220k ceiling is a direct attack on Dubliners with ordinary jobs and modest housing aspirations. Dubliners already carry a disproportionately high share of the Local Property Tax burden.

Is the Bank telling these people that it wants to shut them out of the housing market forever?

Like its counterpart the European Central Bank (of which Honohan is a director), the Central Bank of Ireland must be aware that its policy changes serve different classes in very different ways.

The new 20pc deposit will not pose a problem for those from wealthy families who will simply subsidise their children.

The Central Bank has also allowed the commercial banks to ‘exercise discretion’ or to make exceptions to the new rules in a small part of their mortgage loan book (from 10pc to 15pc).

The banks will assuredly allocate the benefits of this residual flexibility to the ‘best risks’-that is to those from wealthy families who are taking up jobs that pay well (solicitors, accountants, doctors, dentists etcetera).

So why is the media kowtowing to the Central Bank?

The biggest net losers as a result of the lending rule changes will be young, urban workers.

Owning a home will become a pipedream for people who choose to stay single and for those who don’t want to form conventional nuclear families.

The 3.5 times income ceiling on new loans will wipe them out as players in a crowded market.

The very substantial numbers already in negative equally will also be severely disadvantaged in the same highly competitive marketplace, as they are by definition not first time buyers.

Swathes of people are effectively being shut out of the housing market for the foreseeable future.

This may not bother the Central Bank which is more concerned with issues of bank solvency, and the possible recurrence of the nightmare of 2008 when major banks were put on life support by the state (as a prelude to liquidation in some cases).

But the jury is still out concerning how the new rules will affect the banks and their profits. The banks need the wider economy to work properly, and to absorb surplus labour, if they are to make good profits.

The new rules will discourage excessive lending of the type seen in 2006. The savage rent increases being engineered in Dublin and the commuter belt will restore the viability of some BTL (buy to let) lending. The rules will protect the banks from themselves.

But does anybody seriously think that the economy can make a full recovery unless the building sector gets to the point where it can produce more than 30,000 new housing units per year at a profit? And has the Central Bank reached the conclusion that the lenders who remain in the marketplace will never be able to manage risk. If so, we have reached a sorry pass.

Independent.ie Guide to House Prices in Ireland

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