New mortgage rules 'madness' says developer
House prices could now fall, warns Kavanagh
Greg Kavanagh, the 29-year -old Arklow man behind the biggest residential play on the property market recovery, has warned that excessive Central Bank moves to curtail mortgage lending are "madness" - and could lead to temporary fall in house prices unless they are reversed.
He believes that the Central Bank has blundered badly by introducing such extreme mortgage lending restrictions and suggests that if the central bank introduced the OECD standard on mortgage lending, the housing market would stablise at current levels.
Kavanagh's house building firm New Generation, which is reportedly backed by Starwood Capital, UK financier Sir John Beckwith and Irish software tycoon Pat McDonagh, is rumoured to have spent over €300m on development land around Dublin since the end of 2010. This is the biggest single investment in residential housing development since the market crashed in 2008.
New Generation is thought to have bought "several hundred" sites around Dublin, according to industry insiders, but the company has never confirmed this. Kavanagh and his New Generation group are currently sitting on massive profits as land and property prices have bounced back strongly in the last three years.
The Sunday Independent approached Kavanagh outside the Dublin offices of his solicitors William J Brennan last week, as the Central Bank moved ahead with plans to impose lending limits at the banks. Revelations in this newspaper that banks were lending mortgages equivalent to over five times earnings saw the Central Bank bring in new guidelines to increase the deposit required and reduce the earnings multiple to almost 3.5 times earnings.
"They'll drive a wedge into the engine of the economy for the next two years," said Kavanagh. "The market will stop working until they row back on this."
He said that lending in "a proper functioning market should be 4.5 times gross salary with a 10pc contract deposit", which he noted was recommended by the OECD. The lower levels of lending may have "dire consequences" particularly for the apartment market, he said.
A one bed apartment costs a developer €200,000 excluding VAT to build in Dublin, excluding site costs and cost of funding. It needs to sell for €270,000 for the economics to stack up for a developer. Based on the new Central Bank guidelines, a city centre worker earning €45,000 per year will only be able to borrow €157,500. Topped up with a 20pc contract deposit, the potential buyer will only be able to spend €211,500 under the new rules.
Kavanagh added that this means that an average worker would have to save as much as €112,500 to even get close to being able to afford a one-bed apartment in Dublin. "This move has killed the ability of developers to deliver apartments and dense housing schemes to the city," he said.
The new Central Bank rules will also have the unforeseen effect of driving up rents, which he believes could jump as much as "an extra 30pc to 50pc, due to the lack of available housing stock."
This increased cost will prevent potential house-buyers from being able to save for a deposit and also suck money out of the domestic economy, which is beginning to recover.
"It's clear to me that the Central bank has a lack of understanding on how a proper functioning property market should work.
"They didn't understand it during the boom and they don't understand it now."
Civil servants interfering in markets have had unforeseen consequences before. When legislation was being framed to boost a specialist financing sector, it is understood that it initially contained a clause that would have hugely damaged the industry before the potential error was rectified.
Sunday Indo Business