Sunday 20 October 2019

Richard Curran: 'Home loan approvals fall as market becomes more dysfunctional'

Not enough people qualify for mortgages under lending caps enforced by the Central Bank. Stock picture
Not enough people qualify for mortgages under lending caps enforced by the Central Bank. Stock picture
Richard Curran

Richard Curran

The housing market has gone truly mad. Not good mad or even bad mad. Just a bit crazy. There is huge demand for housing. Homes are in short supply as they cannot be built quickly enough.

So surely this should be good news for any developers building homes and for banks lending mortgages to all these punters looking to buy?

Yet figures from the Irish Banking and Payments Federation show the number of buyers approved for a mortgage in January was down 3.2pc on the previous year.

This is because not enough people are qualifying for mortgages, due to the very restrictive lending cap rules enforced by the Central Bank. The rules are there for a good reason - to stop the banks from lending recklessly again. Developers like Michael O'Flynn are now starting to say the market is totally dysfunctional because not enough people can get a mortgage. They question whether the rules are too restrictive.

This leaves the market wide open for cash buyers or what are known as institutional or non-household buyers. These include private equity funds and state-backed housing charities trying to house people.

AIB and Bank of Ireland have a lot riding on the future of the mortgage market. For them it is a big part of their growth strategy in an economy which is growing at a rapid clip with falling unemployment.

AIB's share price fell by 7pc last Thursday while Bank of Ireland's was down 4.6pc as many Irish stocks took a pounding. Cairn Homes, which reported a very strong set of profit figures on Thursday, saw its share price tank by over 3pc.

Lots of things just don't add up. There are buyers for homes being built, but they are not the traditional ones. Even the number of standard cash buyers has fallen as the demand from private equity investors and the likes of housing bodies grows. Many people with a lump of cash to invest have already bought.

Cairn reported a huge boost in pre-tax profit to €37.6m, compared to €6m in 2017. This was expected as the group has been ramping up its delivery on development sites.

Last year it closed 804 sales at an average price of €366,000, compared to 418 sales in 2017 at an average price of €315,000.

Housing demand is good for developers like Cairn, but weakening mortgage demand is bad for banks.

The real issue is a wider picture of a shift away from home ownership which is taking place. Market conditions, mortgage caps, housing shortages and a more conservative lending environment are making it tougher for first-time buyers to purchase a home.

If Irish society is being funnelled into long-term renting, on a model similar to continental Europe, then tenants should be able to enjoy the kind of rights they have as tenants in those countries.

They should also have access to the kind of housing which is suitable for long-term family renting. Neither of these things are happening.

Not enough houses are being built and Cairn and developer Glenveagh say they do not see supply catching up with demand for several years to come. But that is only good news for them as long as the institutional and non-household purchases keep coming.

In theory, if more houses are built then prices will stop rising. But the cost of building houses is getting higher and the capacity of the industry to build at a fast enough pace poses another challenge.

It is extraordinary to think that state-funded housing charities are back in the market buying houses at current prices when the value of homes has gone up by around 83pc in Dublin since the bottom of the market.

Surely, there has been a monumental waste of public money by not seeing the problem sooner and buying (or building) at cheaper prices. Equally, rent supplement has had to go up rapidly to support more families because rents were allowed to go so high.

There is no quick fix, they say, to the housing crisis. One wonders if it is being fixed at all.

The mistakes are somewhat different this time round compared to the early noughties, but the value to society and the economy of having a relatively affordable roof over your head has still not been grasped.

ICG will want to leave 'challenging year' in its wake

ICG chairman John McGuckian described 2018 as a "challenging year operationally". For this, read "annus horribilis". The scale of the operational challenges was revealed fully in its 2018 financial statements published during last week.

Adjusted earnings per share fell by more than 31pc to 30.4c, while operating profits slumped by 32.6pc to €60m from €89m in the previous year.

Its woes have been well documented with technical difficulties on its Ulysses ferry and the late delivery of its new WB Yeats ferry. The WB Yeats was due to start sailing last summer but only entered service in January of this year.

While these issues grabbed the headlines, higher fuel costs were also a key factor. Fuel costs increased by 19.6pc to €48.2m.

Operationally, revenues at the ferries division fell by 7.5pc to €196m as operating profits there fell by 38.4pc.

However, taken in the round, a couple of things emerge. All the problems that made up this perfect storm were beyond management control. What they could control, they did well.

The underlying fundamentals of the business remain solid and it is now in a position to benefit from the big investments it has made.

The big unknown is Brexit. Having put the operational challenges behind it, a softer Brexit or a non-crash out Brexit will definitely be good news for ICG. Uncertainty still reigns but, if anything, the chances of the UK crashing out without a deal have receded.

The market took some comfort from Brexit developments ahead of next week's votes in the House of Commons (including a vote to prevent a no-deal exit) and the fact all of ICG's bad news was already out there. Its shares dipped only 5c (less than 1pc) on Thursday, on a day when lots of stocks took a beating.

Rich Ricci's short-term bets

Former corporate banker turned race horse owner turned online betting investor Rich Ricci shipped some criticism from angry punters after he closed the book on his Dublin-based BetBright online operation.

The business was essentially bought by 888.com for a reported €17m but the deal did not include the customer betting book. Ricci said he had to close down the book and simply refunded betted stakes to punters.

But some customers had longer-term bets which they believed were about to come good. The Guardian newspaper reported one example in which a punter had a potential payout of around £26,000 (€30,000) for a total stake of £400 (€467) on a bet involving four football teams. Three head their division while the other is a close second.

Ricci, the former head of Barclays corporate bank, who is reputed to be worth around €100m, defended the decision, more or less saying that there wasn't anything he could do as the buyers did not purchase the book.

Ricci's stake in the company is not known. It was owned by an Irish company called Dedcert (Ireland) Ltd, which in turn was owned by a company in the British Virgin Islands. Accounts for the operation show that it grew revenue to €35.2m in 2017 but after staff and other operating costs it made an operating loss of €357,000.

This was much better than the €6m losses in 2016.

BetBright appeared to be spending a lot on marketing and advertising to grow revenues, and it was paying off, but it requires patience, a solid nerve and deep pockets. The sector is dominated by big players.

At the end of 2017 it had a shareholders deficit of €18m and was supported by group loans. Interestingly, income in Ireland was only €305,000. The UK accounted for €19.5m and the British Virgin Islands chipped in €15.2m. Despite most of the reported €17m price tag for its technology, the company's accounts valued its tangible and intangible assets at the end of 2017 at only €251,000.

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