Monday 23 July 2018

Data shows the power of new Central Bank rules

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Click to view full size graphic

Ronan Lyons

Earlier this week, the latest House Price report was released. It showed a continued split in house price trends, with sharp inflation outside Dublin - at 9.7pc year on year - and prices largely stable in the capital, rising by just 0.9pc in the year to March.

Nationwide, prices have now risen by 28pc, or nearly €46,000 on average, from their lowest point in 2012, but the average price nationally remains €160,000 below its peak of €370,000. The increase in prices is being driven not by asset factors, like loose credit, which mattered so much in the period from 2001 to 2007, but rather by underlying fundamentals.

In this case, the fundamentals are not complicated: Ireland enjoys a growing population but is not seeing enough new homes built to match that. Putting numbers on it, there are about 25,000 new households formed each year. On top of this, roughly an additional 15,000 homes are needed to replace properties that go obsolete and to account for the declining household size.

So for most of the past few years, Ireland has needed at least 30,000 and probably closer to 40,000 new homes built each year - but got less than half of that. In recent years, the level of completions is closer to 10,000.

That explains not only the rise in house prices since 2012, but also the rise in rents, the lack of choice facing first-time buyers and others active in the market, such as downsizers, and the worrying rise of the phenomenon of homeless working families.

But if this is the case, why is it that Dublin is not seeing bigger increases in housing prices right now? To see why, it is worth drilling down into the Dublin figures. The table, above right, shows the average value of a three-bed semi-detached house and the percentage change in the last year for each of 25 markets within Dublin, namely the 22 postcodes and then North, South and West County Dublin.

The overall trend is clear; the more expensive the market, the less values have risen since the new Central Bank rules came into force. Indeed, in five of the 10 most expensive markets - Dublin 2, 6, 16, 18 and South County Dublin - the average value of a three-bed home has fallen in the last year.

Meanwhile, the five cheapest markets in Dublin - namely Dublin 10, 11, 17, 22 and 24 - have seen prices for the same type of property rise by an average of 8pc in the same period.

If I worked in the Central Bank, I would take this as vindication of the mortgage caps introduced in early 2015. The whole purpose of the Central Bank rules is to safeguard the financial stability of the broader economy by preventing people from borrowing too much relative to their income and savings.

The parts of the country most likely to be affected by overpricing - almost by definition - are the most expensive markets and these are the only ones that have been affected by the rules brought in.

This is not to say that the new Central Bank rules have come without a cost. Clearly, those who had thought they would be able to borrow with an 8pc or 10pc deposit - but now face between 10pc and 20pc - have been caught in something of a trap.

Not only that, there are some perverse incentives contained in the Central Bank rules as they currently stand. A household earning €100,000 a year and wanting to borrow €350,000 to buy one home or €360,000 to buy another, more energy-efficient home is prevented from so doing. Likewise, the family that wants to buy closer to where they work and so save time and petrol costs.

Nonetheless, as the Central Bank prepares to review the impact of the first year of its mortgage rules, it will be largely satisfied that the risk of another bubble remains very slim.

As Marian Finnegan of Sherry FitzGerald said earlier in the week, the housing market remains dysfunctional, with too few homes changing hands.

However, supply and the high level of construction costs are where the problems facing the Irish housing sector lie.

The solution is not to relax the Central Bank rules, the one area of housing policy that we have largely got correct. The solution is to address those high costs.

Ronan Lyons is Assistant Professor of Economics at Trinity College Dublin and author of the reports.

Sunday Independent

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