Business Irish

Thursday 19 April 2018

Central Bank makes the Help-to-Buy scheme redundant

Central Bank Governor Philip Lane has tweaked one of the levers of mortgage lending. Photo: Gareth Chaney / Collins
Central Bank Governor Philip Lane has tweaked one of the levers of mortgage lending. Photo: Gareth Chaney / Collins
Richard Curran

Richard Curran

Central Bank Governor Philip Lane has decided to tweak one of the levers on mortgage lending but, thankfully, he is keeping a firm grip on the others.

By freeing up more first-time buyers to borrow up to 90pc of the cost of their new home, he has allowed more potential customers into the housing market. This should be good for banks, good for first-time buyers, and good for the construction sector.

The only reason it is good for the builders is because prices are likely to rise as a result. Therefore, those same first-time buyers will end up borrowing more money.

And this is where Lane's other levers remain very important. By insisting that borrowers can still borrow only 3.5 times their annual income, he hopes to prevent excessive borrowing and excessive lending in the mortgage market.

Just in case that income cap doesn't work, Lane has promised to intervene again in the future if there are signs of excessive lending or excessive house price rises.

Given that house prices were rising at 16pc per year before the lending caps were introduced, you would have to say they have really done their job. However, they have made it very difficult for some first-time buyers to get a mortgage.

But everything is not exactly rosy in the first-time buyers' garden. Despite the cautious canniness behind the Central Bank's tweaks, figures show three-quarters of first-time buyers had more than the minimum deposit required in the first place.

This means, as prices rise, they will be tempted to bid higher because they have the financial cushion to do so. They will end up taking on more debt.

Where is the Government's controversial Buy-to-Let scheme in all of this? Housing Minister Simon Coveney was on the radio last week defending the scheme and said the Central Bank's change of heart showed how right he was to address this very real problem for first-time buyers.

That may be true, but is there any need for this free money scheme at all? Given that three-quarters of first-time buyers have more than the required minimum deposit, the scheme is simply throwing free money at some people who simply don't need it. But that is the general idea. By throwing free money at them, they will throw it at the house price and it will encourage developers to build more homes.

A couple who can raise 10pc of the purchase price of a new home can get 5pc back for free from the taxpayer. Just because they have to raise only 5pc of the house doesn't necessarily mean the 95pc mortgage is back, because the other 5pc is coming from you and I.

The Central Bank has played the mortgage lending cap situation very well. It is committed to the caps, has said it will intervene again if it needs to, yet it has relented on one aspect of the rules. As long as it isn't the beginning of a serious dilution of its stance, this initiative might not do much harm.

Government policy is to ensure more houses get built. Reducing the cost of building would be a far better way of implementing that policy than raising the price of houses.

The worrying phrase "getting on the property ladder" was used again last week. It implies property is a one-way bet.

So who is going to build all of these new houses? Tom Parlon, of the Construction Industry Federation, said that many developers were putting up 20 houses on sites that could take 200.

He suggested this was because there weren't enough customers for the 200 houses. Yet big firms such as Cairn Homes, which has been listed as a big winner from all of these policy changes, is building large housing developments.

If it isn't profitable to build 20 homes, economies of scale can ensure it is more profitable to build 200 - if you have the money. The real problem behind the shortage of building is the balance sheets of many Irish developers, which don't have the equity to secure the funding and don't want to sell out to large partners who have.

House prices are going up. If the Government plan works, they will eventually taper off and possibly fall after all of this supply comes on stream. If the plan doesn't work, which seems a lot more likely, prices will keep rising until the Central Bank puts its foot on the brakes again and everybody complains about it.

We really haven't learned much about housing at all.

All talk and no action on motor insurance rip-off

The Oireachtas committee report on the motor insurance industry didn't pull any punches last week. It made 71 recommendations and it really threw the book at insurance companies.

The sector was accused of hiding key information from public view and engaging in cartel-like behaviour. Lawyers got away lightly with just a handful of recommendations made in that area around legal costs and claim costs.

The report is full of excellent and long-overdue ideas for reform such as proper disclosure of claims records and making those available to everyone - competitors, customers and regulators alike.

It also wants greater transparency in how premiums are calculated. Premium costs all sound very scientific until you actually go to renew your insurance. There is no indication as to how the figure was plucked out of thin air and, when things are going well, insurance companies are happy to knock a few quid off it - just like that. When thing are going badly, it is non-negotiable and you can clear off to someone else if you think you will get a better deal.

Unfortunately, the insurance area is littered with reports and recommendations but not much really changes. The sector is too much of a closed shop. It said it is conducting a "scoping exercise" on how to make claims data available. Firms don't need to scope anything - just do it.

The Motor Insurance Advisory Board made 67 recommendations in 2002 and the Competition Authority made 47 in 2005.

It is interesting that back in 2002 the top four motor insurers had 66pc of the premium income in the market. The top seven had 90pc. In 2014, the top four had 64pc market share and the top seven had 92.9pc. Some of the names and positions changed but not that much in the structure of the market.

It is time the industry was forced into greater transparency and information disclosure. Unfortunately, the early "emerging recommendations" from the Department of Finance insurance working group, due to be finalised next month, don't look nearly as hard-hitting as this week's Oireachtas report.

Credit Unions suffer from mistakes of the few

The debacle around the collapse of Rush Credit Union has done enormous damage to the credit union sector as a whole. Missing cars draws that may or may not have happened, a safe stuffed with cash, and other bizarre goings on, have left the finger of blame pointed at the regulator for not spotting it, and it has undermined confidence in the way credit unions in general are run.

This is tragic because it simply does not reflect the way most credit unions do their business. The regulator is being blamed in some quarters for not spotting what appears to have been fraudulent behaviour.

It isn't necessarily the regulator's job to do that.

It falls to the board, the corporate governance systems and the auditors to ask the initial questions that may identify fraud. Rush Credit Union had solvency and operational problems, separate to its corporate governance and possible fraudulent behaviour of individuals.

It would be a shame if the Wild West approach taken by some individuals in one credit union resulted in over-regulation of the entire sector, prohibiting it from serving its customers.

Credit Union staff are terrified of the regulator right now and, if anything, credit unions have become risk-averse and even browbeaten.

Bear in mind the bailout of the entire sector from the crash has cost just €50m so far. Rush will cost more than €2.6m.

Yet the fraudulent behaviour of some ex-Anglo Irish Bank executives cost more than €350m on the Maple 10 deal alone.

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