Tuesday 25 July 2017

Sinead Ryan: Things are looking up for first-time buyers - but policies and interest rates need a big review

Big difference between approvals and drawdowns on the mortgage front

Sinead Ryan

Sinead Ryan

What will 2016 be remembered for? Was it to be the year, a century after our independence, when we finally said goodbye to homelessness? Not by a long shot. Was it to be the year that prices stabilised, leaving the opportunity for home-ownership realistic and achievable? Not that either.

Or would it mark the beginning of the time that the state's meddling in the property market (perish the thought) finally did some good.

As we head into 2017 there is much that is still wrong and dysfunctional in Irish property, but some steps were taken, which will make inroads into this peculiarly Irish problem.

As far as mortgages were concerned there was much upheaval, with plans made to start chucking money at unsuspecting first-time buyers, grumbling by those caught in mover traps and no incentives for empty nesters to flee their coops. Banks, clearing down bad asset books were in better form, although their rhetoric around lending didn't quite match the reality.

Overview

The Central Bank's latest report shows non-performing bank loans (not all of which are mortgages) dropping yet again, by a substantial €15.6bn to a still hefty €37bn. This is good for the economy. It is mainly due to the re-structuring and modification of existing loans, the sell off of bad assets on bank books, and a more aggressive stance on repossessions.

It does not mean that everyone is suddenly paying back bank loans they previously reneged upon.

However, because lenders' books 'look' better, in the mysterious world of finance, they are. Banks only make money from selling it, so this has spurred them to do so, which at least provides a credit line missing over the past number of years. Now, if only there was property to buy with it.

The upward pressure on house prices was muted in Dublin, which had an overhang of enthusiastic early sales, up 5.4pc year-on-year. Elsewhere, the provinces are playing a little catch-up, showing 11.4pc increases, which will level off early this year.

Both are still way off meeting demand, so any prices must be viewed with a wry eye as buyers, almost 40pc of whom are still paying in cash, struggle to find affordable homes with a mortgage.

Banks, for their part, have eased off on some of the lending controls. They're prepared to punt out on one-bed apartments now, but are still wary of 'projects' - doer-uppers that may not turn a buck. In other words, they're holding all the levers.

This is despite Michael Noonan's Help to Buy announcement in the Budget, with a €20,000 tax rebate for new buyers; the Central Bank had a momentary grumble over the details before pulling the rug from under him by un-capping the deposit limits for the same group.

The first timers, who must have been sighing at yet another year's saving ahead of them before October, now head into 2017 in a position to buy immediately, thanks to the double header played into their hands.

But maybe 2017 will provide a little introspection from the rest of us taxpayers wondering if it's entirely right that one small group should get this fillip while some of us struggle to move from tiny apartments into family homes - with far fewer financial footstools.

Housing policy

The Government still insists on conflating housing with home ownership. They are completely separate, both idealistically and economically. We need to get to grips with this in 2017 and decide what we want society's housing stock to look like.

Is it okay, for instance, to thrust young people into putting a mortgage millstone around their necks? Is it right that the Irish state acts like an Irish mammy, constantly throwing incentives at them to buy, buy, buy?

Housing policy must move toward far more social and far less private. Renting must become not only possible, but preferable to lots of people. We need to build to rent, rather than build to sell; we need to build up the family silver, stop councils selling off state-owned property, and build more of it on State-owned land.

Only with a functional, vibrant mix can we hope to address everybody's needs.

Mortgages: The State of Play

While CBI Governor Philip Lane got a pasting from Oireachtas members over the tracker mortgage scandal, with a now estimated 15,000 of them needing redress, even getting hold of reliable statistics from lenders remains difficult.

The Banking Payments Federation (BPFI) issues regular statements on mortgage 'approvals'. These show a happy, shiny result that everything is going swimmingly.

For instance, in the third quarter they were up 28.9pc year on year. Over 10,000 'approvals' were granted, almost half of them to first time buyers, as per Government policy. It amounted to €1.5bn by volume. This is great. Or it would be, if 'approvals' were the same as 'drawdowns', which they're not. In fact, more than 20pc don't get used to actually purchase homes. In Q3 just 8,133 were actually drawn down.

This is because mortgage applicants may indeed get approved, only for the drawdown of actual funds to be stymied because there's no house to buy, or the buyer is out-bid by a cash-rich competitor, or something falls at the final hurdle of finances.

The interesting statistic isn't the number, it's the percentage growth. 'Approvals' are up 23.2pc, but 'drawdowns' just 13.7pc over the previous year.

Goodbody expects mortgage lending to top €6.7bn in 2017, which will be exacerbated by Government interventions.

But without adequate supply, the figures are frustrating both buyer and lender and the gap is widening.

It's entirely disheartening for a hard-pressed saver, who has been living on pot noodles in their mother's house for four years, to finally get approval for a home loan without any prospect of actually finding an affordable home. Around 10,000 units will have been completed in 2016; the figure needed for 2017 is nearer 25,000. Don't hold your breath.

Interest rates

There was some easing in 2016 which hopefully will continue. However, borrowers can still only seethe in envy at their European counterparts paying 2pc pa, still a hefty profit on the zero rates the money is being provided at to banks, while they're paying double that. As the tracker redress plays out, it will be, once again, the variable rate mortgagees who will stump up for it.

Gimmicky incentives like cash back schemes have been hugely successful, with Bank of Ireland hoovering up most of the clientele - despite having the highest interest rates. It proves you can still fool some of the people some of the time. EBS and PTSB jumped on the bandwagon while others offered cut-price insurance or free banking as enticements.

First-time buyers

It will be a good year for FTBs. With so much help to get on the property ladder, many will be spending their weekends tramping about housing estates this year. However, is there anything to see? Dublin developers have been busy building plenty of luxury homes with Neff kitchens and granite island units at the €700,000 mark. Not so much activity at the €350,000 level, however.

Eamon O'Flaherty, Kildare estate agent and former president of IPAV, says there's precious little supply coming on in 2017 in his neck of the woods.

"There's a huge infrastructure deficit leading to planning refusals. Roads, sewerage, water have all been neglected. There's pent up demand for first-time buyers and the economy is improving, but builders aren't building for them. We're inundated with demand around the €300,000 mark but they can't profit at that price."

He says his views may be unpopular, but "investors need to be incentivised. They're leaving the market too. VAT needs to be addressed; so much of the price of a new house goes back to Government, it's defeatist. Planning and profit - they're the issues for 2017."

Moving on up

Trader-uppers got a raw deal in 2016. The 20pc deposit requirement left many stuck in the same rut, but with bigger families. The hope for this year is that the rising tide will increase their equity to the extent that they can move. It's not a great plan. For those moving up substantially however, it's a good year, with many 'posh' developments coming on stream - lovely homes in good locations - as long as you have the money.

Investing

Ireland is peculiar, in that 70pc of its landlords are amateurs. This is not to say they're not any good (although with 20pc of BTL mortgages in dogged arrears, you'd have to wonder) but the legacy of people who bought the house next door as an alternative pension will take many more years to filter through.

The answer in 2016 was for the Government to flog to the highest bidder, in many cases a so-called vulture fund. Quite why so much surprise was then expressed when they went on to do their job (which is to extract maximum rent, turf out recalcitrants and sell the lot on), is anyone's guess.

The market remains fraught for the investor. Price rises have narrowed profit margins, and a lot of the bargain basement stuff is off the state's books now plus expat money has dried up.

Added burdens on rent controls and capping of increases will cause everyone but the most successful to die away. This is, in the long run, a good thing.

Other European capitals with developed, secure rental markets, see professional landlords (pension funds, REITs, local authorities) running the show. They're happy to extract 5pc pa profit over 30 years; tenants have strong long-term rights and local authorities have a big say. This is the market to emulate, where it works.

Irish Independent


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