COULD A CHANGE TO RULES PUSH UP HOUSE PRICES?
The Central Bank's lending rules – which prevent first-time buyers from borrowing more than three-and-a-half times their income – apart from some exceptions – play a key role in “keeping a lid on house prices”, according to John Fitzgerald, adjunct professor with Trinity College Dublin and research affiliate with the ESRI .
“The lending rules will moderate house prices and prevent them from getting out of hand – as people can't borrow if their incomes don't allow it,” said Fitzgerald.
The Central Bank is conducting a major review of its lending rules. “The Central Bank shouldn't loosen the rules too much,” said Fitzgerald. “I'd anticipate that the loan-to-income (LTI) limits [which limit the size of a mortgage relative to a borrower’s income] will remain close to what they currently are. I wouldn't see a justification for a major change in the limits. Interest rates may well increase in the future so the Central Bank needs to be prudential.”
HOW COULD THE RULES BE CHANGED?
Some believe that the current lending rules – coupled with the current high house prices – prevent, or delay, many of those who could afford a mortgage from getting onto the property ladder.
“Rather than looking at a blunt multiple of salary, the rules should look at net disposable income [NDI – typically the amount of income an individual has to spend each month after covering household and other expenses] when calculating the mortgage that a borrower should be allowed,” said Michael Dowling, managing director of the mortgage brokers, Dowling Financial.
“Traditionally the concern [around allowing people to borrow more] was about the impact on borrowers if interest rates go up. But you have two banks [Avant Money and Finance Ireland] now offering long-term fixed rates of at least 20 years – that to me is a gamechanger in giving the Central Bank room to consider revising the LTI ratio rules.”
A single applicant on a salary of €50,000 could borrow up to €210,000 over 30 years if a 35pc NDI rule was introduced – assuming up to 90pc of the value of the home is being borrowed – as opposed to the €175,000 the individual can typically borrow under the current rules, according to Dowling. So taking NDI into account could increase the purchasing power of first-time buyers by tens of thousands – and potentially be the difference between them being able to buy a home, and not.
“I don't think it [a 35pc NDI rule] would cause overheating of the market – it will allow people to borrow more money in a secure fashion,” said Dowling. “In 2008 when we had the crash, [mortgage] interest rates went up – and this added to the numbers that were in difficulty. But now you have two banks offering long-term fixed rates.”
Many of those who can’t get the mortgage they need to buy a home have been forced to rent. However, tenants are paying on average 36pc of their disposable income on rent, according to the Residential Tenancies Board.