Tuesday 27 September 2016

When second-time buyers cannot trade up, it causes a logjam at entry-level too

Phillip Farrell

Published 05/08/2015 | 02:30

The house market has been affected by the Central Bank deposit requirements
The house market has been affected by the Central Bank deposit requirements

The second-time buyer is potentially being excluded from the housing market as a consequence of the recently introduced Central Bank deposit requirements.

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I believe that it is time for the Government and the Central Bank to reassess the effects that these new deposit requirements are having on the property market both in Dublin and beyond.

While there may be some relief on the way with the mooted freezing of Residential Property Charges, the real issue for families looking to move is their inability to raise 20pc of the purchase price.

We are seeing evidence that this is having a marked effect on properties valued at above €300,000, and that rather than turning heat down in the market, it has cut off the flame for people wishing to trade up.

To understand their effect on the market, it is important to look at how these new borrowing requirements are structured.

First-time buyers can still borrow 90pc of the purchase price of a house up to a maximum of €220,000. Anything above this figure only qualifies for 80pc funding.

This cooling measure is having the desired effect amongst first-time buyers.

However, second-time buyers can only borrow 80pc of the entire purchase price.

What is becoming clear is that in particular parts of Dublin, this is a bridge too far for second-time buyers.

The primary reason for the introduction of the increased deposit requirements was to take some of the heat out of sectors of the residential markets which had seen noticeable increases over the previous 15 months.

The Central Bank intervention in February 2015 was well intentioned.

It is now evident that while property values throughout most of the country are now static or experiencing minimal increases, values are now falling in parts of the capital as highlighted in the recent REA Average House Price survey where Dublin prices were down 5pc in Q2.

Our recent survey showed that the average price of a house in Dublin is now over €362,000.

A typical couple who bought a small house during the boom may have a mortgage of €330,000, and, hopefully, no negative equity.

Let us say they identify a larger home that they would like to purchase for €440,000.

Under the previous structure they would need a combined gross annual income of approximately €80,000 and would need to provide 8pc of the purchase price of the property which would total €35,200.

But under the new borrowing restrictions they can only borrow up to 3.5 times their combined annual gross salary which would need to be above €100,000

However, where the real challenge comes in is the deposit requirement, which has gone up to €88,000 - €52,800 more than before.

This is putting the next move on the property ladder beyond the means of most average families.

We are seeing that this restriction is starting to have a profound effect on the property values above the €300,000 mark.

Many people who had intended to sell or look for something larger will now simply stay put and others may postpone moving plans for a couple of years.

While values outside the capital are much lower, the effect of these restrictions will still be felt, but to a much lesser degree.

I believe the Government should address this anomaly in the market and Real Estate Alliance will be making a pre-Budget submission on it.

There was real merit in the Central Bank's initial intervention.

However, this needs to be reassessed as it is now alienating the second-time buyers and will continue to exclude them from the market - not alone in Dublin but potentially throughout the rest of the country.

We are proposing that the Central Bank would retain the current price ceiling of €220,000 but bring second-time buyers into the net.

If this was the case, the deposit required for our sample couple would drop from €88,000 to €66,000, a saving of €22,000.

However, if the current regime is retained it will act as a significant barrier to those looking to move up the property ladder - and prevent the freeing-up of homes in the vital entry sector.

Philip Farrell is CEO of Real Estate Alliance

Irish Independent

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