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.