This country is one big gamble on rising property prices
Published 14/05/2014 | 02:30
Yesterday this paper carried front page news about the Government's plans to introduce a 95pc mortgage that would come with a state guarantee attached to ensure there was adequate credit available to first-time buyers of new houses.
This is because it would apparently be a grave error to have a situation where people cannot leverage up their entire future to borrow as much as humanly possible, and support the upward momentum of property prices that the future of this nation seems to hinge upon.
The cheerleaders were out of the blocks almost instantly, and I can see why; Irish Mortgage Brokers will be a beneficiary of such a plan, but we are unable to ethically endorse it because it is misguided and fails to resolve the foundational issues.
First, there is already an ability for banks to lend money to first-time buyers and have 'insurance' for it. It is called an 'indemnity bond' or sometimes an 'MIG' (mortgage indemnity guarantee) and it typically protects the bank for lending more than 75pc of the purchase price.
So does the Government need to do that job for them? No, it doesn't.
A second issue is that this may well become another market-fixing solution that becomes its own brand of failure. Do you remember 'Home Choice Loan' the state-backed lender that people could apply to if banks said 'no'? It didn't work, it failed in its own remit and it cost the taxpayer millions.
The real game at play here is as follows: about 40pc of the price of a new property goes to local or central government in the form of taxes. When property is moving it's a breadwinner for the coffers – among the best there is.
But rather than lower that cost by cutting out some of the unnecessary red tape, removing upfront contributions (which Local Property Tax should be replacing anyway) and looking at things such as lower VAT rates, Government wants to keep the maximum amount possible.
Solution? Make it easier for people to borrow more by offering a guarantee for more money upfront at a lower rate, which means gross lending goes up due to a lower stress test on the loan. Remember, the Central Bank seeks a '2pc over variable' stress test, so if rates drop, the amount you can borrow goes up.
This whole country is a giant gamble on increasing property prices, it serves too many constituencies to be an avoidable outcome. NAMA will be pleased with this, it increases the odds of getting the long-term economic value back.
Banks can release loss provisions on specific non-performing loans, and generally because one of the macroeconomic indicators used is 'property prices', so prices move up and the insurance set aside for 'if things go bang' goes down.
Making it easier to get into debt is a dangerous thing, in particular for a younger generation who may not be well versed in the risks, debt is moving future consumption to the here and now.
Telling a person you only need to put down 5pc to buy a home does several things. It makes new homes more attractive as you can borrow more for them, it brings out more buyers because all of the people who can get 5pc, but not the current requirement of 8-10pc, suddenly become viable purchasers.
The net effect is it raises property prices because it doesn't resolve the supply-of-property issue – rather it exasperates it, and the only upside is that it will make unviable projects become viable by virtue of justifying the higher price tag.
Who wins there? Certainly not the buyer who takes on greater debt.
When will the day arrive where we cut the connection between banks and the breast of the taxpayer? We don't need to guarantee them further, the lending figures for the first quarter already show a significant increase in mortgage lending. Do we need to fan those flames just as they ignite?
The service of self-interest is ever tempting; as a vested interest I struggle with decrying something that will be of financial benefit to me and my sector, but it doesn't change the facts at hand. Any government plan to ramp up lending and seek higher loans-to-value while committing themselves, even in the sense of being a contingent liability, is merely a replication of prior errors being repackaged as the 'new' old way of doing things.
Things such as taxes on banking land, offering rezoning more readily, reducing taxes and giving planners the power to make sense of the impossible job they are tasked with are the direction for getting ahead of the next crisis, but we can't do that, because as always, the players at the table control the game.
I'm convinced there is a room full of perpetual policy makers who crank out these ridiculous ideas irrespective of what administration is in charge or they wouldn't resurface again and again. The asylum is ticking over nicely for now, but make no mistake, the lunatics are in charge and it will end badly.
Karl Deeter is compliance manager with Irish Mortgage Brokers in Dublin 2 mortgagebrokers.ie