Home truths: Rock and a hard place for officials
Published 09/09/2016 | 02:30
Put upon officials at the Central Bank are currently engaged in the task of re-examining the range of lending restrictions they imposed on Irish borrowers almost a two years ago - with regard to announcing regime changes promised this coming November.
Given the massive controversy these restrictions have caused it will be a thankless task.
There is no doubt that the restrictions - which insist on 20pc deposits and tough income to value ratios of 3.5 times income - have priced out a huge number of potential home owners in our cities and that they are now paying more in rent than they would in mortgage repayments. In turn this has put pressure on the rental sector and caused rents to rocket. This column has made these points on numerous occasions since January 2015.
So there has been a clamour, in particular from the vested property sector, to highlight the Central Bank restrictions as draconian and the core reason behind why so many thousands of Irish city dwellers have been cheated of home ownership at first in Dublin, but more recently in Galway and Cork, as house prices have pushed above the magic €220,000 limit after which the measures kick in.
The claims that the Central Bank regime has created a distorted market in which cash purchases are increasing and only the rich can benefit from home ownership are wholly founded.
That said, no one seems prepared to look at what real alternatives Central Bank bosses had back in January 2015 to introducing the by now notorious restrictions. For example we easily forget that house prices in Dublin were rising at an implausible rate of 20pc per annum and those in Cork and Galway were beginning to follow suit.
This was happening because of a decade long artificially created shortage of new housing in which central government and local authorities have been complicit through the introduction of restrictive regulations which have increased building costs and through the maintenance of unrealistic taxes and financial penalties on the sector which have rendered the construction of affordable new homes implausible in too many areas.
If the Central Bank failed to introduce its restrictions when it did, mounting inflation would have continued to unrealistic levels and lenders, emerging from state ownership and newly invigorated by the economic upturn, would have started falling over themselves to hand out easy credit again.
The resulting boom would have been wholly artificial and undoubtedly would have ended in another disastrous crash. The Central Bank must thus be given full credit as the only arm of the state to move in, weigh up the pros and cons and make a courageous decision which certainly headed off such a crash, despite the unfair consequences.
Soon after these lending restrictions were imposed, the Central Bank issued a statement pointedly indicating that the Bank is not responsible for formulating housing policy. Its bosses were making the point that the Central Bank's job is to prevent an easy credit led crash and that the real solution: an urgently needed improvement supply, was up to Government to engineer.
The second thing the Central Bank achieved almost two years ago was to buy Government a breathing space in which to get the finger out and formulate policy (albeit temporary "emergency" policy) to sort out the supply side of the equation fast.
It can now be argued that Government failed to realise the urgency of the situation and while it has recently reacted with Simon Coveney's Housing Plan, it is arguably too late in the day to deal with the new problems that the Central Bank's restrictions have created.
In the absence of a notable increase in supply (it hasn't happened in that two years), the lifting of the restrictions can only prove inflationary.
The restrictions themselves have caused a pent up demand to be stored up. Two years worth of buyers who could ordinarily have qualified for mortgages and home purchases, have been stuck on the shelf. For every year that the supply issue remains unaddressed, thousands of more potential buyers will join them waiting for the rules to relax. Releasing all of these pent up buyers to market all at once amidst the continued supply problem, can again only provide housing inflation.
Meantime, the continued increase in rents that has resulting from a stacking up of postponed buyers in the rental sector is also helping to push up home values.
In the two year period, certain types of city properties - houses at the cheaper end of the scale - have become artificially inflated in value and any relaxation of lending restrictions might just cause them to lose value as the reason for their relative upsurge evaporates.
At the same time, the regulations might artificially have held back the values of homes at the upper middle and top ends of the spectrum in our cities by creating log jams in the house purchasing chain. Those who would normally have traded up, cannot do so because no one can get a mortgage to buy their existing home.
With Government failing to utilise the two year window given to them, it means Central Bank officials once again find themselves between a rock and a hard place in deciding what to do. But baddies they are not.