Monday 23 October 2017

Central Bank feeds our young to the vultures

It seems as if the Central Bank has taken it upon itself to change Ireland's culture of home-ownership

House-hunting: Making it difficult for people, young people especially, to get enough of a deposit to buy a house will force them to keep renting Photo: Tim Ireland/PA Wire
House-hunting: Making it difficult for people, young people especially, to get enough of a deposit to buy a house will force them to keep renting Photo: Tim Ireland/PA Wire
Brendan O'Connor

Brendan O'Connor

If you are concerned about the absence of a government you can relax, because it would seem that the Central Bank is taking up the slack in running the country, and even in outlining a vision for the kind of society we should have here.

Lars Frisell is an advisor to the Governor of the Central Bank. Mr Frisell delivered a paper in Sweden earlier in the week and said that the mortgage deposit rules, which require those attempting to buy a house to have a deposit of up to 20pc, "should contribute to a shift in both housing demand and supply towards rental accommodation." In other words, making it difficult for people, young people especially, to get enough of a deposit to buy a house it will force them to keep renting, and it will also encourage those who own property to rent it out, presumably because rents will rise due to increased demand from people who cannot get a deposit together.

Indeed, Frisell accepts that the rules will cause more rental rises in the short term - "Before supply adjusts", he says, "one can expect rents to increase relative to prices, a development already evident in the Dublin area." So that's okay then. You know economists. It's all about supply and demand. So the demand will rise, causing rents to rise, but this will then lead to an increase in property for rent. And we will get the shift to renting that the Central Bank seems to think is desirable.

Or does the Central Bank think it's desirable? And why has the Central Bank taken it upon itself to decide that Irish people should move to renting property rather than buying their own house? Mortgage broker Karl Deeter has suggested the Central Bank is indulging in social engineering. What other shifts in how we live would the Central Bank like to introduce you wonder. Perhaps a one-child policy?

The Irish Independent asked the Central Bank on Wednesday if their policies around lending caps and higher deposits were intended to favour rental. The Central Bank would not state whether they were. So maybe the shift to rental is just a happy side effect.

While it is a fashionable view that the Irish really need to get over their obsession with home- owning and learn to be more like the Germans and rent for life, you would imagine it is up to the Irish people to decide this, or even for a government to explicitly decide that it wishes to encourage a move to rental, and state it as a policy. But the notion that some unelected economists in the Central Bank have taken it upon themselves to decide how we should all live, and that they are enforcing it through their own policies, is a slightly disturbing one.

And look at what the Central Bank is essentially saying. It is saying that these rules may cause people in the short-term to have to stay renting and pay higher rents, but that this is no harm. Which is fine if you are an economist. But not so fine for the people who would like the security of owning their own home and who are getting further and further from that aspiration all the time as they eat into their savings in some cases, often paying far more in rent than they would be on a mortgage.

It's important to remember too that the new mortgage rules are instrumental in creating another huge inequality among young homebuyers. According to Friday's Examiner, research by Savills suggest that 15pc of cash sales of houses are now to first-time buyers, up from practically zero two years ago. Savills Director of research John McCartney said, "Certainly what I can say is that my agency people on the ground are reporting back to me that a lot of these buyers that are buying entirely with cash are doing so with family money and what they're also saying... [is] the first-time buyers that are buying with mortgages - apparently the norm now is to have fairly substantial family assistance there as well which enables them to overcome the macro-prudential limits."

So in other words, 100 years after we apparently threw off the yoke of oppression, we have put in its place a new kind of British-style hereditary system whereby opportunity in life is passed down through families. You can buy a house if your parents can afford to help you circumvent the rules. Of course that's life, and richer parents have always been able to give their kids better opportunities, but it does raise the question that one-size-fits-all mortgage caps may be a rather crude instrument with some undesirable unintended consequences, like, in this case, the perpetuation of inequality down through generations.

Obviously you can understand the stated purpose of these lending rules are to enforce prudence and prevent people from getting too heavily into debt. And the Central Bank feels that neither the borrowers nor the banks can be trusted to be prudent on their own, so it needs to be forced on them.

Putting aside for a moment that the Central Bank itself was massively at fault in everything that happened here, you have to wonder if, in their haste to close the stable door after the horse has bolted they are being slightly overzealous.

90pc mortgages were the norm in this country for many years, and they never caused chaos. Our recent bout of chaos was contributed to by many factors, one of which was mortgages that were 100pc and often more in reality, with people sometimes borrowing more in order to pay massive stamp duty into state coffers for the privilege of buying a house. No one is suggesting that we return to 100pc mortgages, but is preventing people from buying houses really the most effective way we can find to encourage prudence? Is it not a bit crude to essentially say that buying houses turned out badly at one point so let's prevent people from doing it?

And is it not an enormous leap from that to also decide that people should actually be discouraged from ever buying houses by instruments of policy, policy that the elected government seems to disagree with? It is really prudent to encourage people to rent all their lives? And then do we shove them into old folks homes to die once they can no longer afford rent?

The European rental model is all very well, but a home for an Irish person is not just a place to live. It is a store of wealth too, security in their old age when the mortgage is paid off and they get to stay there for free. A home is also increasingly an asset to pay for end-of-life care. Homeowning has always been a central aspiration of the Irish middle classes, who, while they might see a mortgage as a prison, see owning their own home as the ultimate freedom and independence.

It is not up to the Central Bank to decide that we should change. Much as they may wish it were so, their job is not to change the national character. While the Central Bank may want to force the banks not to make the mistakes the Central Bank and the banks made in the past, it is not right that we should all suffer for that. But it would be wrong to deliver our young into the unmerciful hands of a rental sector increasingly dominated by vulture funds and fat cats.

Sunday Independent

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