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Central Bank's new rules fuel property bubble


Central Bank's Patrick Honohan

Central Bank's Patrick Honohan

Central Bank's Patrick Honohan

The Governor of the Central Bank, Patrick Honohan, has said the new restrictions on home loans (20pc deposit and 3.5 times loan-to-income) could be delayed, because they are not ready. But even if they're not rolled out in January, they're coming soon.

These new rules will hit first-time buyers hard, and they're expected to believe it's for their own good. The announcement appears to have already inflated the bubble it's intended to avoid. Property prices jumped in October when the rules were announced. It shows just how little the Central Bank knows about the problem. It should protect the customer, but all it has done is save a rotten banking system.

Banks were the problem, and that is what they continue to be. Honohan has voiced his concern at the outrageously high interest rates charged to borrowers. Banks could drop 2pc off the rate they charge if they didn't engage in reckless lending as they do. That would save a typical borrower about €3,000 a year. They can lend at interest rates of less than 1pc on tracker mortgages, even though they claim that their funds cost much more than that. Whose fault is that, and who picks up the tab? Their variable rate customers do.

I remember when Irish interest rates were in double digits before we aligned them with those in Europe. The Germans and French typically paid 3pc or 4pc and bank margins were as low as 1pc. Reported margins in Irish banks were double that, at 2pc and more. Now the figure is closer to 4pc and much more on personal overdrafts and loans. Like solicitors and estate agents, their profits soared with rising property prices. They could have taken a lower margin, but didn't.

The banks screwed their customers for everything they could get, when they should have eased up. Mortgage repayments would have been easier to manage and borrowers would have had more left to spend and save. It would have gone back into the banking system anyway, increasing the money supply, and our economic growth would have been even better. Through mismanagement and a lack of regulation, the system created a bubble that inevitably burst, and we are on the way there again.

In a recent report, it has been said that as banks get more cautious, they are refusing mortgages to borrowers over 40 if it will bring their mortgage beyond their normal retirement age of 65 - even though that is already heading for 68 and probably higher.

If that's what we have to look forward to, they should apply it to the past as well by writing off the negative equity they helped create and which can't be paid back by pensioners who should never have been given the loans that are now dragging them down.

In the years up to the crisis, 100pc loans financed properties that were grossly overvalued. Not only were the banks to blame, but they hoodwinked their loyal customers into taking 100pc loans to buy properties that are now being repossessed. And if that isn't bad enough, they will pursue the arrears to the grave if negative equity leaves a shortfall. Honohan is also concerned about the very high number of cases being taken to court by the banks, many of them totally unnecessary and unfair. But it continues still.

Words are cheap; nobody has done anything about it. With all the people employed by the Central Bank, you'd think they could get the banks to treat their customers fairly in dealing with arrears, particularly those over 720 days, restructuring loans that could be made viable, sharing the losses for negative equity and charging fair interest rates.

The average rate of interest on a standard variable rate mortgage peaked at nearly 6pc before the financial crisis. When interest rates of 2pc to 3pc were paid on bank deposits - one of the main sources of funds for mortgages - banks commanded margins of 2pc to 3pc. Their profits soared and they paid themselves outrageous bonuses. When the financial crisis struck, they didn't have the reserves to support their share price. Small savers and investors were burned as their savings and pensions were wiped out.

Today, you'd be lucky to get interest of 1pc on a typical bank deposit and less in many cases, but the standard variable rate of interest on a mortgage is 4.5pc. Their margins are 3pc to 4pc and they are screwing their customers again. That's what the Central Bank should be focused on, and not how to stop ordinary citizens from buying a home.

Soon only public servants will be able to meet the mortgage criteria as their jobs are guaranteed and, with few exceptions, their income can only rise. Private sector workers will be kept on low income to maintain the cost competitiveness of our exports and will have to resign themselves to a life of renting their homes. So long as bureaucrats make the rules, the system can only get worse for the rest.

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The Central Bank, which played no small part in driving the economy on to the rocks, is already planning to build its new, luxurious HQ in the IFSC. Such an organisation is so far removed from the plight of ordinary people and businesses that they can't possibly know what's best for us. They have been propped up by the sacrifices made by the rest, and just as it seemed we had turned a corner, they'll spend on themselves what should be ploughed into the productive private sector, where the real jobs are created.

If citizens could be assured of reasonable rents for residential accommodation that would not rise through the roof over time, it would dampen demand for residential property - but it would take time. The Central Bank has been like a bull in a china shop as it attempts to retain the banking system intact, when we all know that what it needs is reform.

Developers need to change their profit expectations and make property affordable for those who need it. Unlike other parts of Europe, there is no shortage of land in this country and there is no reason why most people cannot own their own homes and have the security that this brings.

Until the employment situation improves, more people may have to rent, and that makes it easier for them to move around too. They need to know that property prices will remain stable as they save deposits that should make property purchase possible. But the market is too volatile and the tax system favours investors.

James Fitzsimons is an independent financial adviser specialising in tax and financial planning

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