House prices should drop to match new lending rules
It's not often, where property is concerned, that the hard road is chosen. It is normally the populist, short-term, interest-pandering, vote-garnering, easiest route that is taken. Not this time though.
In implementing its proposed lending caps with just the tiniest bit of a fudge, the Central Bank has done what it is supposed to do in attempting to safeguard a stable and secure economic future for the broader interests of society.
It has not acceded to the (understandable enough) pleas of potential home-buyers, nor those of house sellers, estate agents, mortgage brokers, politicians and the myriad other decriers of tightening the reins on lending for house purchase. It has faced down politicians whose constituencies are full of people saving to buy a house or apartment, these people also being potential voters.
It has done the right thing.
What the Central Bank has implemented is pretty much the norm in most of our European neighbours. My colleagues here from Malta, Spain and other countries shrug their shoulders at the idea of having to put down a 20pc deposit, and wonder what the fuss is. The Central Bank has taken a look at the bigger picture. It is predicating its proposals on the idea that as there will now be a gap between what people can afford based on these new borrowing limits and the asking prices for property, that as one cannot move (the borrowed amount), the other will have to. Instead of 10 to 15pc house price rises, as we saw in 2014, we should see price stabilisation and reductions.
It is often forgotten that rising house prices and large mortgages benefit a very small section of society, but negatively impact a large proportion. In a relatively short timeframe, this will ultimately mean that, based on average house price and wage figures, house prices will have to fall about €50,000 in order to meet the levels of affordability of potential purchasers. Indeed, Daft's first report of 2015 records the average house price already falling by 1pc, most likely in anticipation of these new proposals.
As economist Ronan Lyons put it: "Restricting the amount lent to each household is a necessary first step to ensuring a stable housing market." Ensuring stability is a main function of the Central Bank. In the interim, there is a degree of pain as people are pushed into the rental market, already overheating from huge demand and limited supply. This is a key problem here.
In a developed country where a balanced housing policy was the norm and implemented to the maximum benefit of the greatest number of people, a rigorous rental market would exist to cope with non-home-owners, whether by choice or not. In Ireland, government policy has always been geared towards promoting home ownership. The Government is still addicted to the drug of ownership, with even its own housing and Construction 2020 policies contradicting each other on the nature of equity across tenures. As a result, other forms of tenure such as renting have been left to the mercies of the market. The Residential Tenancies Act 2004 addressed some of the issues but left many gaps.
The rental market has always been for students, immigrants, separated fathers and the socially marginalised and as it stands is not suitable for the thousands of professionals, of families, of foreign contract workers, of owners-in-waiting who now occupy it.
The concentration on ownership has also meant Ireland has never developed other forms of living, such as intermediate ownership whereby a property is purchased upfront for a specified number of years (for example, €80,000 might buy 25 years).
The Catalan government, in Spain, in particular sees this form of ownership as providing a need for people who want to own but who are in some way priced out of the market by measures such as the Central Bank's. These forms of tenure are worthy of exploration for Ireland, and the Central Bank, in restricting lending and essentially redefining the housing market, may yet find itself the instigator of more affordable, sustainable, and fiscally stable ways of living.
However, there's no getting away from the fact that these new measures will leave many people troubled, unable to save a 25pc deposit, unable to leave rented accommodation, at the mercy of a runaway market and despairing of how and when they will have a place they can call their own.
If the Central Bank's proposals go to plan, and already data from the last quarter of 2014 - when the proposals were initially announced - shows they are having a calming effect on the housing market, then house prices should drop sharply to match affordability levels at these new lending rates.
Dr Lorcan Sirr is currently Professor Associat at the Faculty of Legal Sciences, University of Rovira I Virgili, Tarragona in Spain