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Central Bank rules won't have effect on house prices

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Estate agent signs in Dublin

Estate agent signs in Dublin

Estate agent signs in Dublin

The Central Bank's new mortgage rules have created anxiety and uncertainty among house buyers, and the majority of commentators think that loan-to-value (LTV) limits of 80pc (90pc in the case of first-time buyers purchasing properties below €220,000) will freeze people out of the market.

In turn, they say this will reduce the demand for housing, leading to weaker house price growth and falling construction activity.

The impact of policy changes on the housing market is notoriously difficult to predict and this consensus view might well prove to be correct. However, we believe there are equally strong arguments to suggest that the new LTV limits will make no difference, or might even have a positive impact on house price inflation.

Firstly, the Central Bank's rules don't prohibit all mortgages that exceed the new LTV caps. Instead, financial institutions have the discretion to set their own LTV limits on 15pc of all new lending.

It's expected this will mainly be used to facilitate first-time buyers who need high LTVs because they haven't had time to accumulate larger savings or housing equity.

So far, the median LTV for first- time buyers is 87.5pc, compared with 74pc for people moving house - but the average first-time buyer loan is much lower than those of movers, at €167,000 compared with €220,000.

As a result, the 15pc allowance - which is based on the value of new lending and not on the number of loans - should be able to accommodate a disproportionate number of first-time buyers who want above-the-limit loans. This may mean the LTV rules could have a negligible impact. On one hand, most movers within the market will be immune as they are already borrowing at LTVs which are below the 80pc threshold.

On the other hand, many of the first-time buyers who need higher LTVs can probably be accommodated under the 15pc discretionary allowance, which will be a sizable sum due to large non-first-time buyer loans at low LTVs being part of the mix.

This argument raises doubts about whether the new rules will freeze anybody out of the market.

However, even if we allow for the possibility that some first-time buyers do get excluded, a further question is whether this would have any negative impact on house prices.

We think not. Just because people are frozen out of owner occupation it's a fallacy to think they "disappear" from housing demand.

They still need to be housed somewhere and most will end up in rented accommodation. Given current low vacancy rates, this influx will drive up rents. In turn, higher rents will attract cash-rich investors to hoover up the properties that would otherwise have been bought by the displaced first-time buyers.

The net result will be a change in the ownership mix - we will be left with more investors and fewer first-time buyers. Ultimately, however, the supply and demand fundamentals would be unchanged and therefore there would be no impact on the trajectory of price growth.

While these arguments make it difficult to envisage the LTV limits having any negative impact on house prices other than on paper, it's also possible that the new lending rules might actually drive up house price inflation.

The Central Bank first floated its new rules in a public consultation paper in October 2014. This document was a clear statement of their intention to make mortgage lending more restrictive.

At the same time, a clause within the paper said that any formal loan offers entered into before the rule changes became law would be honoured under the old lending regime.

Unsurprisingly, this carrot-and-stick approach led to a stampede of buyers piling in to secure loan offers - mortgage approvals increased by 52pc in November, followed by year-on-year increases of 56pc and 55pc in December and January.

As these mortgage approvals typically last for six months, the upshot is that there is now a sizable cohort of determined housebuyers who are motivated to get deals done quickly.

Consequently, owner-occupier demand is being artificially concentrated into the first half of the year. According to residential agents this is generating lots of activity and, in the face of fixed housing supply, it must surely be contributing to stronger price growth than would have been the case if the Central Bank had done nothing.

Maybe these widely lauded mortgage rules will work, empirically their record is mixed, but for now our analysis is that, after an initial period of uncertainty, the new LTV restrictions are unlikely to materially affect house prices.

John McCartney is director of research at Savills. Karl Deeter is compliance manager at Irish Mortgage Brokers

Sunday Indo Business