Brendan Burgess
Founder
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Ronan Lyons made an excellent presentation to the Oireachtas Finance Committee in support of the minimum deposit of 20% proposed by the Central Bank. I have transcribed it here.
It starts at 10 on this CR3_20141127-14.30.wmv
Families in Ireland should have access to abundant and affordable good quality homes Everything else is detail.
The state should be neutral between private, social and cooperative ownership.
The state should be neutral between renting and ownership – that is not for the state to decide
There are three groups
Affordability – This is about linking incomes to prices or rents on the one hand and to the cost of building on the other. This is a competitiveness argument. If you are trying to attract the likes of Google you must have good quality affordable housing.
Availability - The simple maths is that we have a growing population but not a growing housing stock. We have reached the limit of where rents can go in Dublin, so people are commuting from places like Laois and Cavan on a daily basis. This sprawl is not sustainable
There are two sets of factors:
One set: Income supply and demographics which affects prices and rents
There is a second set of factors which affects the relationships between them: Expectations and credit
The effect of credit rationing is that it keeps the link between house prices and incomes. There should be some sort of stable relationship and also to keep prices in line with rents.
The side effect of credit rationing is that we prevent the cost of building from getting out of control. In a sense, we are too late on that because the cost of building a home went out of control in the decade to 2007 and because prices were going up, no one really cared. There was basically free profit because credit was so easy.
The effect of new supply is to keep prices and rents down.
But you might argue that there was plenty of supply from 2001 to 2007. When you look at income and supply, they had no impact on prices. The only thing which drove prices up was excess credit.
We are seeing the impact of all that excess building – keeping prices and rents low.
There was very little building on a per capita basis in the Greater Dublin area even during the bubble.
My concern is that the new [building] regulations have kicked in the high cost basis. These regulations are anti-poor. Those on the average wage cannot afford to buy a minimum spec home in the Greater Dublin area because of the local authority regulations. Ironically the new regulations mean that there are greater profits to be made for those who get to build. But few get to build because the numbers don’t stack up.
The direct effect of mortgage insurance is going to be to increase prices relative to rents and relative to incomes and I don’t think that that is in debate.
If you give people more credit the first thing that will happen is that prices will go up relative to rents and to incomes. Unless this is sustainable, it’s a bad thing.
What is the purpose of insurance? It might remove some risk to the bank, but it does break the link between people’s incomes and the cost of people’s homes.
Credit rationing is good. What the Central Bank is trying to do is good.
There are clearly some transitional issues. There are clearly some issues about the cost of building a home.
If you bring in mortgage insurance, you are undoing that good work that the Central Bank is doing. You are leaving us open to the prospect of another bubble.
The one caveat to that… If we don’t have a social housing strategy, then mortgage insurance might fulfill a role. If you think of renting as an age thing, once you get to family stage, you have people who are in the private sector and people who are in the social sector. What percentage are in the social sector? Your minimum deposit determines that boundary. If you have no social housing, clearly you want the lowest minimum deposit possible because the private sector provides housing for everyone and everyone must have access to credit. If you have a social housing strategy, you don’t need such a low minimum deposit. You can have a much higher and much safer minimum deposit. The worry is that the mortgage insurance scheme is a substitute for a full social housing scheme.
Additional points made in response to questions
While I support the 20% minimum deposit, it should be phased in from 10% to 20% over 10 years.
If we increase the minimum deposit by 5%, house prices will fall by 10%.
It starts at 10 on this CR3_20141127-14.30.wmv
Families in Ireland should have access to abundant and affordable good quality homes Everything else is detail.
The state should be neutral between private, social and cooperative ownership.
The state should be neutral between renting and ownership – that is not for the state to decide
There are three groups
- Private owners
- Private renters
- Social renters
Affordability – This is about linking incomes to prices or rents on the one hand and to the cost of building on the other. This is a competitiveness argument. If you are trying to attract the likes of Google you must have good quality affordable housing.
Availability - The simple maths is that we have a growing population but not a growing housing stock. We have reached the limit of where rents can go in Dublin, so people are commuting from places like Laois and Cavan on a daily basis. This sprawl is not sustainable
There are two sets of factors:
One set: Income supply and demographics which affects prices and rents
There is a second set of factors which affects the relationships between them: Expectations and credit
The effect of credit rationing is that it keeps the link between house prices and incomes. There should be some sort of stable relationship and also to keep prices in line with rents.
The side effect of credit rationing is that we prevent the cost of building from getting out of control. In a sense, we are too late on that because the cost of building a home went out of control in the decade to 2007 and because prices were going up, no one really cared. There was basically free profit because credit was so easy.
The effect of new supply is to keep prices and rents down.
But you might argue that there was plenty of supply from 2001 to 2007. When you look at income and supply, they had no impact on prices. The only thing which drove prices up was excess credit.
We are seeing the impact of all that excess building – keeping prices and rents low.
There was very little building on a per capita basis in the Greater Dublin area even during the bubble.
My concern is that the new [building] regulations have kicked in the high cost basis. These regulations are anti-poor. Those on the average wage cannot afford to buy a minimum spec home in the Greater Dublin area because of the local authority regulations. Ironically the new regulations mean that there are greater profits to be made for those who get to build. But few get to build because the numbers don’t stack up.
The direct effect of mortgage insurance is going to be to increase prices relative to rents and relative to incomes and I don’t think that that is in debate.
If you give people more credit the first thing that will happen is that prices will go up relative to rents and to incomes. Unless this is sustainable, it’s a bad thing.
What is the purpose of insurance? It might remove some risk to the bank, but it does break the link between people’s incomes and the cost of people’s homes.
Credit rationing is good. What the Central Bank is trying to do is good.
There are clearly some transitional issues. There are clearly some issues about the cost of building a home.
If you bring in mortgage insurance, you are undoing that good work that the Central Bank is doing. You are leaving us open to the prospect of another bubble.
The one caveat to that… If we don’t have a social housing strategy, then mortgage insurance might fulfill a role. If you think of renting as an age thing, once you get to family stage, you have people who are in the private sector and people who are in the social sector. What percentage are in the social sector? Your minimum deposit determines that boundary. If you have no social housing, clearly you want the lowest minimum deposit possible because the private sector provides housing for everyone and everyone must have access to credit. If you have a social housing strategy, you don’t need such a low minimum deposit. You can have a much higher and much safer minimum deposit. The worry is that the mortgage insurance scheme is a substitute for a full social housing scheme.
Additional points made in response to questions
While I support the 20% minimum deposit, it should be phased in from 10% to 20% over 10 years.
If we increase the minimum deposit by 5%, house prices will fall by 10%.
