How the first-time buyer is ruled out of the market
Published 26/04/2015 | 02:30
The property market in Dublin and other sought-after areas has ground to a halt because first-time buyers (FTBs) can't get mortgages to buy properties there under the new Central Bank rules, according to mortgage brokers.
Typical working couples are getting approved for €100,000 less in mortgage borrowings under those rules. This is forcing FTBs to either rent or to buy further afield, say brokers, who also believe the recently mooted first-time buyer grant, if re-introduced, will be of little, if any, help to house hunters. The State grant, which would likely be between €3,000 and €5,000, was discussed at a Labour Party parliamentary meeting earlier this month.
"A €5,000 grant won't help first-time buyers buy a property," said Michael Dowling, managing director of Abacus Finance mortgage brokers. "Their main problem today is getting a mortgage. A couple earning €75,000 between them, which is around the average wage each, could have borrowed between €340,000 and €360,000 before the rules kicked in on February 9 - as long as they could prove they were saving or paying rent equivalent to the mortgage repayments on that mortgage for at least six months. That couple could today borrow €262,000 - that's a massive drop."
Under the Central Bank rules, most FTBs buying a home worth more than €220,000 must now have a larger deposit than was previously the case. Those rules also restrict house hunters from borrowing more than three-and-a-half times their salary. Previously, lenders were offering mortgages of up to almost five times' salary.
"First-time buyers are surprised at how little they can borrow compared to before," said Mr Dowling. "Previously, it was possible to borrow more because it was largely your disposable income - rather than a multiple of your salary - which determined how much you could get. Anyone who got approval for a mortgage before the rules kicked in, and who is now going back to their lender for an extension of that approval, will be shocked at what they qualify for now."
FTBs on average salaries who are looking to buy property in or near Dublin have been hammered by the new rules, according to Ken Murray of the Association of Expert Mortgage Advisers, which represents mortgage brokers.
"The average first-time buyer will find it harder to get a deposit together so they can buy in Dublin," said Mr Murray. "Even Lucan or Celbridge may be beyond their reach. So they have been driven to look to commuter belt areas like Enfield, Kilcock, Portlaoise and Drogheda. Many first-time buyers who may have bought before the rules simply can't buy now - and they're back renting."
Desperate to get onto the property ladder, many FTBs are asking brokers and lenders if they qualify for an exemption from the Central Bank rules. Under those exemptions, a fraction of the home loans on a bank's book are allowed to fall outside the rules. "Banks normally allow you to exceed either one or the other - the limit on the loan-to-income ratio or the loan-to-value ratio (the percentage of the property price borrowed) limit," said Mr Murray.
However, FTBs usually need to be at an advanced stage of buying a home before a bank will let them know if they qualify for an exemption or not.
"Unless you've a property identified and have either paid a booking deposit or are at sale agreed, banks won't consider your application for an exemption," said Dowling.
The rules have led to uncertainty in the market.
"When any changes are brought in it causes uncertainty. And with uncertainty, people sit on the fence," said Mr Dowling.
It's not just the FTBs who cannot get the mortgage they want that are sitting on the fence - so too are those who managed to secure a mortgage before the Central Bank rules kicked in.
As you typically have six months to use up your mortgage approval before it lapses, these people are running out of time - but, despite this, many are waiting to see if prices will fall further. "There is a perception that property prices aren't going to rise any more, so first-time buyers are sitting on the fence," said Mr Murray. "They feel that if they are aggressive and patient, they may get a better price."
This stalemate has in turn scuppered the plans of many of those looking to sell their home - including the tens of thousands who have only recently emerged from negative equity.
For those homeowners, the uplift in the market last year may have been their first chance in a long time to sell their property without making a loss. The current stalemate may well have taken that chance from them - because in many areas, particularly in Dublin, buyers are simply not coming out to play.
"Within our group, there's a perception that things have stalled," said Mr Murray. "New enquiries for mortgages have definitely tapered off. Anyone who's in a position to buy is saying 'I may as well hold on, as prices might continue to fall'."
In many parts of Dublin and other popular house-hunting grounds, sellers of properties which would have been snapped up within weeks this time last year are struggling to get people to come for a second viewing - never mind securing an offer or 'Sale Agreed'. This is in marked contrast to last spring, when properties often reached the 'Sale Agreed' stage within two weeks.
The take from estate agents is more upbeat - though estate agents have never been in the business of talking down the market. Keith Lowe, CEO of Douglas Newman Good, said he has not seen "any material let up in first-time activity in Dublin" for properties at the entry level. However, "sales have understandably moderated somewhat since the last three months of 2014 - when they were exceptionally strong", added Mr Lowe.
Still, in its latest report, Sherry FitzGerald said there was a "noticeable change" in the performance of the housing market in the opening months of 2015.
"There is no doubt that the Dublin market is cooler than at this time last year, with price growth in the first quarter of 0.9pc compared to 6.5pc in the same period last year," said Marian Finnegan, economist with Sherry FitzGerald. In the second-hand market, the pace of house price growth across the country "slowed notably" in the first few months of this year, stated the Sherry FitzGerald report.
"There may be a myriad of reasons for this, however, there is also every reason to believe that the Central Bank intervention in the market in January 2015 had a role to play in the market's performance in the intervening period," it stated.
When asked to respond to criticisms of its new rules, a Central Bank spokeswoman said: "The key objective of these regulations is to increase the resilience of the banking and household sectors to the property market and to reduce the risk of bank credit and house price spirals from developing in the future. The Central Bank does not wish to regulate or directly control housing prices."
What a pity these rules weren't introduced about 12 years ago when they were really needed - rather than in the early stages of a property recovery, which now appears to have stalled.
Sunday Indo Business