Saturday 22 October 2016

Mortgage caps are the new normal: get used to it

Published 14/02/2016 | 02:30

John McCartney of Savills linked social inequality to mortgage caps, but it’s more than just that
John McCartney of Savills linked social inequality to mortgage caps, but it’s more than just that

The Central Bank's mortgage lending caps have taken a barrage of criticism from the property industry for quite some time. When the new caps were announced, but not even introduced, critics said they would not really curb house price growth.

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A year ago, John McCartney, economist with Savills estate agents, said "the new measures will do nothing to soften house price growth by curtailing demand".

He wasn't the only one suggesting that the rules would fail to hold back house prices. Other critics said the new rules would drag house prices down and prices would begin to fall again, which reminded people of the nightmare they faced in 2008 and 2009.

Those who didn't like the caps still don't like them. They have just come up with different objections.

In 2014, the year before the rules were introduced, house prices grew by more than 16pc. Last year, the growth was around 6.6pc. In Dublin, where the biggest problems were arising, house prices were growing at a rate of more than 16pc a year in 2014, but in 2015 they grew by around 2.6pc on average.

Some estate agents are predicting that house price growth in Dublin will average around 0.3pc this year.

The Central Bank couldn't have got it more right, in terms of what it wanted to achieve.

The mortgage lending caps have not solved the housing problem in Ireland. They were never meant to. They were simply designed to take some of the heat and risk, relatively early on, out of house price growth in Dublin, which was driving the market.

The problem is that critics, especially from within the property industry, are blaming the caps for everything that is wrong with the housing market.

During the week, McCartney was concerned about social inequality, which he linked to the mortgage caps. He said the rules have "led to increased inequality as first-time buyers with access to family wealth have been handed a distinct advantage".

He may be right about the advantage of wealth, but that isn't caused by the Central Bank. It is due to a whole load of factors on which economists have speculated for centuries.

Savills even linked the rules with a return to a commuter culture, as prices rise in counties around the capital.

There was always going to be a spike in house prices in Kildare, Wicklow and parts of Meath once the economy got back on its feet. There aren't enough houses in the Dublin area, yet that is where an increasing percentage of the jobs are going. That has not been caused by the mortgage caps.

How come asking prices for houses in Cork city - not exactly a strong commuter belt for Dublin - are up 20pc? In Galway they are up 19.7pc. It is simply because those cities are seeing more job creation and more people wanting to go there to live and there aren't enough houses.

Investors who drove up house price growth in Dublin are looking elsewhere.

If the mortgage caps were driving up house prices in Leinster commuter counties, how come estate agents expect house prices to grow this year in many non-commuter places such as Monaghan (10pc), Roscommon (10pc), Donegal (10pc) and Leitrim (11pc)?

Two things are happening. The economy is recovering and there aren't enough houses in key cities, but mainly Dublin. This is driving up rents. That is not the Central Bank's problem to fix.

But there is a worrying head of steam building up in political circles about mortgage lending caps. New Central Bank governor Philip Lane has decided to review them in July, but felt the need to announce the review seven months in advance.

Many interest groups, including political parties, have the caps in their sights. They simply need to get more houses built as quickly as possible in the Dublin area. It will probably mean taking on property interests instead of bending over to them. The rental controls were too little too late, but at least are something to curtail rip-offs.

Solving a housing shortage should not involve introducing a raft of new taxpayer subsidies for first-time buyers. That fuels more money into the system for everybody, but increases risk in the long term. The Government should squeeze those sitting on land banks to use it or lose it.

The mortgage caps are the new normal and, in fact, kind of resemble the old normal before the madness came along.

Bank stock rout will be a pain for next government

This is only February, but 2016 doesn't look like a particularly good year to re-float AIB on the stock market. International investor turmoil has spread from Asia to Wall Street and on to Europe and banking shares. European bank stock fell by 6.3pc on Thursday alone, which brought their falls so far this year to 28pc.

AIB may have a good story to tell investors about the size of the bank in the fastest-growing economy in Europe, but if investors are bailing out of bank stocks they won't be listening.

The rough start to 2016 on the stock market has already hit the State's coffers, with sizeable falls in the value of its shareholdings in Permanent TSB and Bank of Ireland.

The state's 75pc shareholding in PTSB has shed around €620m in value since the start of the year, while its 14pc of Bank of Ireland is worth €620m less than it was in 2014.

The actual erosion in the valuation of AIB is harder to judge, given that its shares are only nominally traded on the stock market. However, if Bank of Ireland's shares are down 23pc since New Year's Day, then a similar fall for AIB would see the value of the bank fall by around €2.6bn.

Put together, that is a fall of around €3.5bn in the value of the State's shareholding in the three banks.

The pain goes on.

Tullow Oil's Aidan Heavey faces another tough year

Aidan Heavey is into Tullow Oil's second big annus horribilis, having reported losses of $1bn for last year.

Heavey was quick to cut costs, re-negotiate banking arrangements and re-calibrate the business for a lower oil price once it started to tank in 2014. The problem was oil prices had hit $50 a barrel. Now they are under $30.

This year will be crucial for the future direction of the company. Heavey hinted during the week that Tullow could sell some of its prize assets in the future to generate a return for shareholders.

Yet at the same time he emphasised how smaller international oil players such as Tullow would be in a very strong position when the upturn in price comes. They are slightly contradictory things. If he sells assets, he will have less on the balance sheet when oil does recover.

Should he sell something in the short term at a terrible price, but which would relieve some pressure, or hang on to as much as possible for the upturn?

Ultimately, that depends on when oil turns upward. Heavey suggested it could reach over $60 a barrel by the end of this year. It might - but it might not.

Tullow Oil shares have fallen by around 90pc since their peak three years ago, which has seen Heavey's own shareholding fall in value from £480m in 2012 to around £48m.

If he is right about the oil price doubling by year end, Tullow won't sell off much. But equally, that would still make it an attractive takeover target.

This will be a big year for Tullow.

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