Central Bank cools market ...as it freezes out families
Published 06/07/2015 | 02:30
Designed to cool down the Dublin property market, the Central Bank's restrictions on mortgage lending that were introduced at the start of this year were always going to impact most on demand for average city family homes.
Not enough homes were being built for the family market and something had to be done to halt rampant city inflation, which had reached six times the European average late last year.
The Bank's tactic was to introduce lending restrictions - including mandatory deposits of 20pc - which would simply prevent people buying homes in the first place.
Today, through the Irish Independent/REA Average Home Index, we can see for the first time the evidence of just how effective that measure has been.
The lending restrictions impacted gradually as those issued with a six-month mortgage approval in the latter half of last year (under the previous more lenient lending regime) either bought a home in the first six months of this year or let those approvals expire.
Now, as we pass the half-way mark of 2015, all of last year's approvals have expired and the true extent of the bank measures are becoming apparent.
Prices for Dublin family homes have fallen by 5pc on average but have dropped up to 7pc in areas where homes had edged up to €400,000. In this case, a couple would require a deposit saving of €80,000, which for most buyers is just not attainable.
We can now see just how effectively the lending restriction measures have achieved their objective. At the same time, in the absence of supply, these measures are also enabling other dangerous distortions to take place by artificially cutting the prices of some types of homes and inflating the prices of others (cheaper city properties and commuter homes). All of this is pouring petrol on the already heated Dublin rental market.
The lending measures have been discriminatory in that they have least affected the well off and the adult children of the wealthy who, through their parents, have access to this kind of cash down-payment.
They have also impacted less on first-time buyers who qualify for paying a 10pc deposit.
The big losers are average Dublin families who are attempting to trade up from an apartment or a small terrace home.
With most still in negative equity, they might have managed to purchase a standard three-bedroom home last year but are now condemned to renting.
It is ironic that given fast-rising rental prices, couples will end up forking out much more in rent than they would have paid out each month for the mortgage they are now blocked off from.
Many are being forced to become reluctant landlords as they move into a larger rented home and lease out their smaller one.
The social cost is the increasing numbers of city families who are now constantly on the move in the absence of security of tenure for more than one year.
We also see evidence of an artificially created surge in demand for cheaper homes in affordable commuter counties as couples are regulated out of the city.
But perhaps the biggest artificial impact of the restrictions is how the measures have been adding to the inflationary effect on an already surging rental market.
Cutting more family buyers out of the purchase market increases demand on existing rental stock and in turn makes properties even more attractive to investors.
In the absence of any worthwhile increase in supply, we are simply pushing families into another type of overpriced accommodation, but this time they will never own it.