Thursday 27 October 2016

Even stricter Central Bank rules could make buying a home tougher

'Property ladder' era over as more than €800m spent upgrading houses

Donal O'Donovan and Paul Melia

Published 02/04/2016 | 02:30

Strict mortgage lending rules could be tightened even further, a top Central Bank official warned yesterday.

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That's despite the loan limits brought in last year being repeatedly blamed for locking ordinary families out of the housing market.

A review of the rules is currently under way and due to end in November. But it won't look at the scrapping the new regime, Central Bank chief economist Gabriel Fagan said.

"The rules are a permanent feature of the market," he said.

Details of how they operate could be changed, however.

He made the comments after the latest figures showed the Irish mortgage market declined by €327m - roughly equivalent to around 1,200 new €250,000 home loans - in February.

Any move to make the tough rules even tougher would prove highly controversial and could be politically difficult for any new government to bring in.

The latest data from the Central Bank shows lending to Irish households fell in February, including a €327m decline in the overall size of the mortgage market.

Regulations introduced last year cap most home loans at 80pc of the value of a property and three-and-a-half times the borrower's salary.

The review is to see how well those rules are meeting their original purpose, Mr Fagan said.

"The evidence threshold for changes is high. There may be no changes, there may be tightening of the rules," he added.

The Central Bank's own figures show this week that any post-crash recovery in mortgage lending has been sapped over the past year by the lack of new housing supply and the lending caps.

While 2015 had been touted as a likely year of recovery for lenders, that trend was disrupted - including by lending restrictions introduced by the Central Bank.

The latest figures from the Central Bank show that total mortgage loans declined at a rate of 2.4pc in the 12 months to February.

With new lending still running at a trickle almost a decade after the market peaked in 2006, households repaid €1.9bn more than they borrowed in the period.

The figures show the overall Irish banking market remains in decline. Loans for house purchases make up by far the biggest share of retail lending within Ireland - at 84pc. Merrion Capital economist Alan McQuaid said the figures are a worry for the economy.

Meanwhile tens of thousands of families are extending and upgrading their homes as the shortage of properties coming on to the market limits their ability to move.

New figures show that more than €800m has been spent under a lucrative tax break designed to bolster the construction sector, with a massive increase in spending in the last six months.

It signals an end to the traditional 'property ladder' - where families simply moved to a bigger house if they needed more space.

Figures from the Revenue Commissioners also show that the bulk of spending under the Home Renovation Incentive scheme is in areas where demand for new homes is highest, but where housing output is not keeping pace with demand.

Almost 80pc of the total spend has been in Dublin and the surrounding commuter counties of Kildare, Wicklow and Meath, along with Cork and Galway.

Since last September, some €235m has been spent by 15,000 households under the Home Renovation Incentive. This compares with €566m between October 2013, when it was introduced, and September 2015.

The figures suggest that by the end of this year, when the incentive will end, more than €1bn will have been invested.

The Construction Industry Federation said it was concerned that a possible VAT reduction on new builds could be funded by ending the Home Renovation Incentive.

"We're finding a lot of people are using it because the cost of moving to a new house is exorbitant or there are no properties available," it added.

The Home Renovation Incentive allows for an income tax credit of 13.5pc of qualifying expenditure on repair, renovation or improvement works carried out on a home or rental property.

Revenue data shows that to date, some 35,753 properties have been upgraded.

The total value of works is put at €801m, and some 7,307 contractors have been used. Extensions make up 35pc of the total spend, or €280m, followed by 'general repairs and renovations' (€190m), window replacement (€91m) and kitchen renovations (€82m). The remainder of the spend relates to bathroom improvements.

The average spend per project is €15,568, with spending in Dublin accounting for 54pc of the total.

Irish Independent

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