The Central Bank has gone back to the future, dredging the 1970s for 21st century solutions to the dysfunctional housing market.
It has capped the amount of money that can be borrowed for a house to three times the household income and has stipulated that 80pc loan-to-value will now be the norm.
This is a move in the right direction, because it will help blow some froth off the housing market. It won’t reverse the price rises of the recent months, but it should slow them down.
However, like all policy moves, it will affect different people differently.
Raising deposits will help first-time buyers with rich parents. Young people who have relatively well-off parents will be able to get their hands on the deposit.
In contrast, lots of punters whose parents can’t afford a deposit will either not be able to compete, or might go elsewhere for term-loans.
With interest rates at 0pc, there will be other sources of money in the country, believe me.
Where there is competition between first-time buyers and cash buyers, this move will help the “cash buyer” who doesn’t need a deposit and will further incentivise the ‘one-off” landlord.
The “one-off’ landlord phenomenon is a bit like our “one-off” housing phenomenon. The one-off landlord is typically a landlord, for whom being a landlord is not his main source of income. It’s his nixer – a nixer for people with decent bank balances. They are the part-timers, buying property for their pension. Normally, the one-off landlord is in competition with the first-time buyer. The one-off landlord hopes to price the first-time buyer out and in so doing, make the first-time buyer his reluctant tenant.
By increasing the deposit needed, the scales will tip towards the one-off landlord.
As interest rates are likely to be very low for a very long time, there will be no return for money deposited in the banks and it would be quite reasonable to suggest that money will flow out of deposits into the housing market, swelling the ranks of one-off landlords.
One more factor that will attract the one-off landlord will be the fact that the latest move will probably cause rents to rise, because the first-time buyers who wanted to buy, will now have to revert to the rental market.
This will make the income/profit from property more attractive as higher rents will make the investment decision for landlords more compelling – at least in the short term.
However, while these are all the unintended consequences of the Central Bank’s move to limit credit, the alternative – a runaway housing bubble – where increased prices beget more increased prices, is unconscionable after what we’ve been through.
All policy should be looked at in terms of the alternative. There wasn’t much alternative open to the Central Bank. Indeed, this may be the beginning of a series of measures.
There can have been little doubt that, in the case of the Irish housing market – particularly the Dublin market – a bubble was emerging. Anything that seeks to break the link between credit extension and house-price increases has to be a good thing for everyone.
If banks are only permitted to lend three times a combined household income, then a dual-income house earning the average industrial wage would only be able to borrow €210,000 – which would price them out of most parts of Dublin.
While yesterday’s moves may alter demand, what about supply?
Houses prices tend to be self-reinforcing and are a function of the credit extended to them. If you limit the amount of a loan to 80pc rather than 100pc of the value, you, by definition, cool things down.
The Central Bank is also imposing an income cap on the amount of cash that can be lent. You can now only borrow three times the combined household income to buy a house.
So what does all this mean in practice?
The first thing that has to be recognised is Irish property buyers, in the main, want to live in a three-bed semi-detached house, even if public policy seems to want to push them into apartment living to contain the urban sprawl of the Dublin suburbs.
The new rules mean that the would-be borrower will need savings of €60,000 to buy a €300,000 home. According to the latest Daft.ie report from the ever-dependable Ronan Lyons, the average asking price in Dublin for a three-bedroomed family home – the residence most aspire to – is above €300,000; €60,000 is a lot of money for any first-time buyer to have saved.
There appears to be massive over-regulation in the Irish housing market right now.
Rocked by stories of maverick developers and “cowboy’ builders increasing prices overnight at the height of the last boom, the authorities have reacted to the crash by replacing not enough regulation, with too much regulation.
This is pushing up prices. For example, there now have to be lifts for every two flats in Dublin and basements with enough space for car parks. Also, apparently, builders aren’t allowed to build north-facing apartments anymore.
These are excessive regulations, which are pushing up the cost of building.
In addition, according to contractors, wages are almost double in Dublin what they are in Belfast and wages are close to half the total costs on a site.
Maybe this can help explain why Dublin has added 65,000 families to the population since 2008, but built just 25,000 units.
The Central Bank’s moves yesterday won’t solve supply, but at least it did something – which is far better than nothing.
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Multiple analysis of housing markets historically show beyond doubt that average house prices are solely determined by the amount of credit available. If this proposed 3.5xincome cap comes into effect then average house prices in Ireland will be priced accordingly. Daft.ie are calculating the price to be 200k for an average salary couple.
I approve of the new lending restrictions, but giving almost 3 months advance notice of the change silly. It’s going to produce 3 months of panic buying, which will cause a spike in prices. Then, the lending changes will arrive, at exactly the same time as the CGT tax-break ends. An artificial price spike followed by 2 big changes that will exert downward pressure on prices!! Are they deliberately trying to cause another crash? Or this another one of those “own-goals” that we are so good at?
I don’t agree that the changes will drive up rents. Rents are ultimately determined by wages, and have already reached a level where they are unaffordable for many people. A lack of housing supply won’t induce renters to pay more than they can afford, it will induce them to move somewhere cheaper, either commuting further to work or looking for a new job in a more affordable location.
I am still waiting for David to write an article on what will happen to all those empty houses. I see the Dublin mini-bubble as the resultant of both supply (or lack thereof) and demand (driven by ECB releveraging of the European economy – releveraging – if I am not mistaken, advocated by David for years in his Keynesian paradigm, the foreign vulture hedge funds being only the tip of the iceberg).
Did we not hear only 2 years ago that it will take us 43 years to fill all empty houses?:
http://www.independent.ie/business/irish/itll-take-us-43-years-to-fill-all-empty-houses-26863864.html
In the previous article GF brought up a very valid point. The dilemma between buying or renting. GF said: “But I need a home for my family. The lack of security I have renting keeps me awake at night.” This touches the subject to the core. While one half of the population is looking for a family home the other half is looking to make money out of the whole shambolic situation. My own children are now in their late twenties and mid-thirties and they are all starting their own families. I have no debts but I was made redundant… Read more »
“The one-off landlord hopes to price the first-time buyer out and in so doing, make the first-time buyer his reluctant tenant.” Get real David. This is a totally biased unsubstantiated statement and akin to agitating class warfare. It is totally irresponsible. By the time the first time buyer gets a taste of the responsibility of home ownership they may be happy to revert to renting. Why they would have to unblock their own toilets and change the tap washers and paint and scrape and clean for themselves. a lot will have trouble paying for professional fees for the foregoing and… Read more »
Sorta related, but slightly off topic. We went sale agreed on a property last May. An elderly couple looking to down size. We thought things were going well, we got the surveyor out, it all looked good so we requested contracts. Then silence, for 2 months. Then they start looking for a move in date in December. We didn’t like it, but we eventually agreed to it. OK, 1st of December, we didn’t hear any thing until they decided to look for more money, nearly 5% more. We didn’t want to, but we said we’d maybe negotiate on price if… Read more »
http://blog.milesfranklin.com/just-50-million-of-silver-left-thats-it Central banks have literally been handed a blank cheque. They are responsible to no one for their actions. They invest money out of thin air and charge interest on this imaginary currency. That interest has not been and never is created. So anyone paying interest to any one including the banks and central banks must get the currency from some one else’s loan. As interest is paid to a bank the currency used to pay the interest is removed from circulation thereby reducing the money in circulation. To compensate for this more loans must be made to others to… Read more »
I just came across a report, prepared by the National Institute for Regional and Spatial awareness (NIRSA) in 2012, that contains the following line in the conclusions:
“The priority should be to tighten supply and demand to the
point where households are competing for property – starting
to build before this will flatline the market”.
In other words: don’t build houses, we want a shortage, to get prices rising.
So, the current situation was not due to the government ignoring the growing housing shortage, THEY DELIBERATLY CREATED THE SHORTAGE!!!
http://www.ucd.ie/geary/static/podcasts/ieconf/presentations/RobKitchin.pdf
“Wages are almost double in Dublin what they are in Belfast”. Considering that people in the North are covered by the British National Health Service (no 50 Euro fee for a doctor, 180 Euro for a consultant and relatively minor prescription charges) that’s a major cost saving for employees and therefore a cost that employers in the North don’t have to factor into wages. Couple that with capital costs for a car at 65% of costs in the South, low car tax and NO toll roads and subtract that from the costs when calculating pay rates. Factor in extremely competitive… Read more »
At the crux of the matter is the issue of supply and demand of housing. Of course it is a mess, for the market participants. That is an outcome, of priority being given to other objectives. And the objective, since the time that the banks went to the wall, was to rebuild bank balance sheets. Society is not a priority. The banks come first. What is required now is “window dressing” to make it look as if society is a concern. This is where the noise about a “social housing” program comes in. To create a pretence that the entire… Read more »