Tuesday 20 August 2019

Marc Coleman: 'Why relaxing the 10pc deposit rule would be good for families'

A new Central Bank governor, and new president of the ECB, means the time is right to make a fresh start, writes Marc Coleman

'Young buyers on average incomes, reaching the Central Bank's 10pc deposit requirement will - in most counties - see them living in expensive, insecure rented accommodation into their early or mid-30s before they can muster a deposit' (stock photo)
'Young buyers on average incomes, reaching the Central Bank's 10pc deposit requirement will - in most counties - see them living in expensive, insecure rented accommodation into their early or mid-30s before they can muster a deposit' (stock photo)

Four centuries ago "To Hell or to Connacht" was all Oliver Cromwell had to offer the native Irish. In a timely analysis of the housing market, economic adviser EY DKM has suggested that today's housing market options are even narrower.

For first-time buyers, even Mayo, Galway and Roscommon are now out of bounds. For young buyers on average incomes, reaching the Central Bank's 10pc deposit requirement will - in most counties - see them living in expensive, insecure rented accommodation into their early or mid-30s before they can muster a deposit.

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Days after that report, Mark FitzGerald of Sherry FitzGerald and the Banking and Payments Federation of Ireland called for a debate on the rule. The deposit rule - but not the loan-to-income rule - is ripe for review. We must, however, avoid any implication that the Central Bank was the cause of our housing crisis. It can and must, however, be part of the solution. With a new governor and a new three-year strategy in train, a constructive and non-judgmental review of the deposit rule would now be well on time.

To see why, consider the dilemma faced by a woman starting her career in her mid-20s and contemplating buying a modestly priced house (€250,000). In those counties where the jobs are, she will spend a decade sinking dead money into rents higher than the mortgage - she will suffer dragging partner and children through the dislocation (schools/friends/neighbours) that renting entails, or emigrate, or defer childbirth until her mid-30s before she has saved the €25,000 needed for a deposit. By which time, prices may have risen further.

Until a secure family-friendly rental market exists in Ireland, these are the only options open to those without wealthy parents.

Now consider her choices with a 5pc rule. Yes, this would push up prices modestly. But provided the loan-to-income rule is unchanged, that once-off and modest increase can be spread over the 30 or 40 years of a mortgage term: basically few hundred extra euro a year on the mortgage. And with a deposit requirement in the mid-teen thousands rather than the 20-something thousands, the wait is a bearable five or six years, rather than a decade or more.

Oscar Wilde once alluded to economists not distinguishing between the price of something and its value. The ability to raise a family in your 20s and 30s in secure accommodation is much more than any modest annual price increment spread over the years of middle age and retirement. And far from violating macro prudential principles - if focused on mid-priced semi-Ds where prices are underpinned by sound economic fundamentals and liquidity is supported by strong demographics - a more conservative approach to riskier "trophy houses" can still apply.

When defending this rule, ex ECB supervisory board chair Danielle Nouy said such rules were the norm when she was growing up in France and she also made reference to the US sub-prime crisis. But Ireland now is not 1970s France. For a start, there is no security of rental tenure here as there is in France. So buying is a requirement, not a choice. Our population is also growing more quickly. Moreover, our crisis had little to do with sub-prime mortgages. Different countries. Different eras. Different solutions. With another Frenchwoman, Christine Lagarde (who understands us better), due to become ECB president, a fresh start is now possible.

Of course, the Central Bank wants to avoid repeating history. But, if anything, we would be reversing history not repeating it. Cromwell's arrival began 300 years of depopulation that left us in modern times as the world's only nation with fewer people than before the industrial revolution. Into this vacuum the now globalised economy is drawing people and capital at an astounding rate. Brexit could intensify this.

Changing deposit rules won't solve the housing crisis - only aforementioned supply-side changes can do that. But nor will changing that rule inflate the market. It would, however, release tens of thousands of young people from pain.

Instead of being frozen in fear by recent history, we should be inspired by history, and what we can achieve with dialogue, planning and foresight.

Marc Coleman is a consultant with Ibec and other organisations

Sunday Independent

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