Friday 15 November 2019

Home truths: Ease mortgage lending limits? Relax.. don't do it

Getting the balance right: Should second-hand house prices in Dublin be let fall some more for the sake of affordability and the overall economy?
Getting the balance right: Should second-hand house prices in Dublin be let fall some more for the sake of affordability and the overall economy?
Mark Keenan

Mark Keenan

It was always going to happen at some point in time. It was just a matter of when. So last weekend AIB chief executive Colin Hunt went first and stated that the Central Bank's mortgage lending rules have served their purpose and opined that they should now be adjusted to reflect the market.

Speaking to the Sunday Independent in his first interview since taking the top job at AIB, Mr Hunt pointed out that house price inflation was now zero and, according to some measures, falling in Dublin. Indeed while the CSO has recently revealed that prices have been slacking in Dublin, other barometers flagged this some time ago.

Data from the DNG estate agency suggests Dublin prices have been static for a year now and the Irish Independent/REA Average House Price Index recently revealed prices of average houses are falling in the capital at the rate of more than €1,500 a month since June.

Over at AIB Mr Hunt added that it was "hitting confidence". The rules were never intended to be permanent, he said. "We've been big supporters. We believe they were necessary, we believe they have achieved their objectives but they shouldn't be set in stone," he told the Sunday Independent.

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"They should adjust to and reflect a changed pricing environment and a changed economic environment," AIB's man urged.

His sentiments echoed previous comments by An Taoiseach in July also urging the Central Bank to loosen the restrictions.

The banker's argument for "flexibility," apparently on behalf of buyers, can really be translated as "cut us banks some slack". They've been busy ditching their bad loans to various vulture funds and now they're ready to get right back in the saddle and start flogging new mortgages. Their problem is that the rate at which they can do this is being heartily restricted by the lending regime.

However, with prices sliding in Dublin, wouldn't it be better to let second-hand prices fall further? The recent extension of the Help To Buy scheme should in fact shore up the values of new builds somewhat. Combined with the big A rated BER benefits and savings, affordable new homes are unlikely to lose value for some time; unless, that is, they have been poorly priced in the first place. Second-hand properties, though, are a different prospect entirely.

So the opposing argument is this: second-hand house prices in Dublin are still too high, are damaging to families and to the economy overall; so they should be allowed to fall some more before we even think of relaxing the lending regime.

If we've succeeded in cooling house prices, which were rising for some years at a rate that was considered impractical and undesirable, then why indeed not let them fall that bit further? Knowing we can release the handbrake in the future is still an option we can deploy.

It really depends on where prices in Dublin should be at. Has anyone asked that question thus far? Where do we want them at? We need to discuss it.

We do know that relaxing the limits on lending when there's still a limited supply of homes (as Mr Hunt correctly points out) will simply cause bidders to raise offers and send prices rising again. It will certainly stop them falling.

So exactly how affordable are Dublin prices by international standards? Well let's ask an independent global authority rather than a local mortgage lending boss. The annual international Demographia survey of global housing affordability (it's now in its 14th year) is always a good reference on this one.

The Demographia survey is produced in New York to show the impact of affordability on global economies overall. And this year it has given Dublin an affordability index of 4.8.

So how does that compare with other cities around the world? Well 'affordable' cities by Demographia's estimates are those which have an index which stands at 3 or below. These include cities such as Oklahoma (2.7) and Detroit (3). Those cities which produce an affordability index of between 3.1 and 4 are deemed to be "moderately unaffordable". But its 2019 score of 4.8 places Dublin in the higher echelons of the 4.1 to 5 bracket. Cities in this band are deemed to be "seriously unaffordable".

And if Dublin prices rose even slightly, as a relaxing of the lending rules might entail, then its score would likely end up at just over 5, or in the "severely unaffordable" band alongside cities such as Hong Kong, London and Toronto, which are all deemed to be at "greatest bubble risk" and the cities Demographia named this year as most at risk of having a property crash event.

Demographia's 2019 report should perhaps be read by Irish bankers who are finished getting shut of the crash's bad loans at the expense of the taxpayer (loans which they originally approved) and are now champing at the bit for some fresh mortgage lending action.

But if Irish banking isn't concerned about the housing problems currently encountered by poorer Dubliners, the homeless and small businesses (because punters are spending it all on housing) then consider what else this year's Demographia report had to say: "We know that unaffordable housing causes a lot of hardship for households that do not yet own their home, in particular, the youngest ones. But abnormally inflated housing prices also have a negative impact on the entire economy, including on the households who already own their home and who might rejoice that their real estate assets are increasing much faster than general inflation.

"High housing prices misallocate resources toward real estate at the expense of the rest of the economy.

"This misallocation could eventually significantly slow down economic growth and cause a housing bubble to burst, freezing investments in the entire economy."

Just hit by a typhoon, Japan still hasn't recovered from its devastating 1980s property asset bubble. And from that decade someone called Frankie pleaded: "Relax...

Don't do it..."

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