Friday 15 December 2017

Richard Curran: Noonan is playing for high stakes with help-to-buy plan

Finance Minister Michael Noonan looks poised to subsidise first-time buyers in the Budget
Finance Minister Michael Noonan looks poised to subsidise first-time buyers in the Budget
Richard Curran

Richard Curran

The Government is playing high-stakes poker with the Central Bank over mortgage lending rules. As Budget day approaches, Finance Minister Michael Noonan is expected to include some kind of top-up scheme for first-time buyers to help them find the deposit to meet Central Bank rules and get a mortgage.

Such a move would be a definite "raising of the stakes" by Government.

The state dig out could be as much as €20,000. Dubbed a help-to-buy scheme, it might as well be called the help-to-build scheme. It will lead to an increase in house prices, which will, in turn, ultimately be passed on to the developer.

It is a roundabout incentive to make building profitable or more profitable - depending on whom you believe.

For example, let's say that for any one house, there are 50 interested buyers. Half of them have the cash to buy the property, the other half have saved the deposit to get a mortgage.

The new scheme will allow, at taxpayer expense, for another 25 potential first-time buyers to bid for the same property, because they can now get a mortgage. It increases demand, which will increase the price.

Almost in a counter offensive, the Central Bank put out its own survey during the week, suggesting that for many first-time buyers, it mightn't take them all that long to save up for a deposit.

The figures didn't specify what type of bread first-time buyers could enjoy in the bread-and-water diet they would have to live on to achieve this. It suggested that a couple in Connacht on €55,000 per year could save €8,300 deposit in seven months.

"Let them eat cake!", appears to be Mr Noonan's mantra as he looks poised to subsidise first-time buyers. Instead of you relying on family and friends to speed-bridge the gap, the Exchequer will be your new family and friend.

One positive thing in this equation that could emerge is if the additional price achieved encouraged more developers to build. This in turn, in theory, should increase supply and eventually stabilise prices.

For every budget measure there is an estimate included as to how much the Department of Finance believes it will cost the Exchequer. It will very interesting to see what that figure is. Either it will be enormous and very expensive, or the scheme will have so many caveats built into it, that the figure will be quite modest.

The most bizarre thing about this type of measure, is how it is unashamedly using exchequer funds to help people get around Central Bank guidelines. This may make it unique as a budget instrument, especially when the Central Bank mortgage-lending rules are aimed at protecting bank solvency and preventing another housing boom/bust.

Property price surveys show that house prices in Ireland continue to rise, despite the existence of the mortgage-lending caps. What would the market be like if the rules weren't in place? We may be about to find out.

Ulster Bank's shotgun wedding with KBC Ireland won't happen just yet

Can we hear the sound of wedding bells between Ulster Bank and KBC Ireland? A marriage, shotgun or otherwise, might be welcome in providing stronger competition to AIB and Bank of Ireland. But it would also see the removal of another player in the banking and mortgage market.

Royal Bank of Scotland chief executive Ross McEwan told the Irish Independent during the week he was sticking with Ulster Bank. He said it was a core franchise, which appears to end any speculation that it might be sold off.

McEwan said he was committed to growing the business and hinted at possible acquisitions in the Irish market. But before Michael Noonan gets too excited about flogging off the remainder of Permanent TSB, McEwan did insert a caveat.

He was only interested in buying performing assets. This would, in theory, rule out both PTSB and KBC Ireland, according to Goodbody Stockbrokers. Impaired loans, as a percentage of core gross loans, were 28pc at PTSB and around 45pc at KBC in June, the broker noted.

Both banks are in a race to try to clean up this legacy mess and have made solid strides. KBC is reviewing its future in the Irish market, and plans to make a decision early in 2017. Reviews like that should be done regularly and privately by any company. But publicly saying you are doing it is usually tantamount to putting a "for sale" sign out.

KBC has cut costs, refocussed its business and grown profits. Although, it did say in February of this year it had a 14pc share of the Irish mortgage market, but referred in June to having 10pc. It also offers motor, life and home insurance but through other underwriters, so it is unlikely to become a significant bank assurance play.

Ulster Bank has around 18pc of new mortgage lending, and KBC would appear to be a good fit. The problem is Ulster isn't ready yet and neither is KBC.

According to McEwan, Ulster's cost base is still too high and one wonders if he is planning some radical cost cutting at the RBS subsidiary.

KBC is growing profitability but it is still working through legacy impaired loans. Ulster Bank and KBC may well end up tying the knot - just not yet.

Brexit negotiations could do with a bit of Bertie

They are calling it a "hard" Brexit but in truth it is proving to be hardest of all for the Irish Government to handle. Once British Prime Minister Theresa May opted for full control of immigration and hope for the best on the single market, the Irish Government's Brexit nightmare began to take hold.

It poses a huge economic and business problem trying to work out the machinations of what will happen to goods and services moving across the border - there will be no exceptions on the single market made for Ireland and the UK.

But it also presents Enda Kenny's Government with a huge headache working out how people from the south will be able to travel and work both in Newry and Derry, never mind Newcastle and Durham.

Privately, government officials will tell you that the widening gap between Sinn Fein and the DUP in the North is a huge obstacle to even working out what negotiating position Dublin is seeking on this issue.

The new all-island Brexit dialogue, without the DUP participating, is just to buy some time.

It now looks like the common travel area between Ireland and the UK, with all of its accompanying rights to work and access to public and social welfare services, etc, will disappear.

Dublin can argue in Brussels that the North is a special case and southerners and northerners should have full travel and work permit rights, on both sides of the border.

But that means restrictions for anyone else who wants to travel or work north and south. Equally, such an arrangement kind of signals that the border lies somewhere in the middle of the Irish Sea and not just beyond Dundalk.

Special arrangements that apply on an All-Ireland basis won't play well with the DUP. So, Enda Kenny's government has to construct a negotiating position for Ireland that is amenable to Sinn Fein and the DUP.

With Sinn Fein backing a Brexit legal challenge in Belfast and the DUP throwing a champagne reception at the Tory conference in Birmingham this week to celebrate Brexit, Enda is left scratching his head.

With Tony Blair not ruling out a political comeback, where's Bertie Ahern when you need him?

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