# Ireland needs cheaper homes not bigger mortgages



## Brendan Burgess (27 Sep 2021)

Here is the text of an article I had in yesterday's Sunday Times. (This is the version as submitted. They made minor edits to the text.)



The Central Bank is conducting its annual review of the mortgage lending limits which restrict mortgages for most first-time buyers to 90% of the price of the house and to 3 ½ times their income. In last week’s Sunday Times, Ross Maguire, an investor in residential property, called on the Central Bank to allow lenders to give First Time Buyers 100% mortgages and to give borrowers more than 3 ½ times their income. He argued that repayments on such mortgages would be lower than the cost of renting similar properties.

He also made the somewhat surprising argument that handing out 100% mortgages and bigger multiples of a person’s income would not lead to house price inflation.

We do have a serious problem with high house prices throughout the country. And it is very frustrating for a couple to be paying rent every month because they can’t afford to get on the housing ladder. And Ross is absolutely right, that, in the current market, it is cheaper to repay a mortgage than to pay rent. So, if an individual could borrow 100% of the cost of a house, it would make sense for them to do so instead of paying rent. But if the lenders give everyone 100% mortgages and 5 times their income, then house prices will soar and first-time buyers will be no better off. In fact, they will be far worse off. Higher house prices will mean that it will still be very difficult to get on the housing ladder. But worst of all, those who do manage to buy a house will be saddled with much bigger mortgages and bigger repayments over 35 years.

When people take out mortgages, they assume that their current positive financial situation will persist. But life has a nasty habit of interfering. They have children and childcare expenses. They take time off work. Couples split up. They lose their jobs. They get sick. A couple earning €50k each can borrow €350k between them. That is 3 ½ times their income. But if one of them loses their job, they then are trying to service a €350k mortgage from a salary of €50k.

The human cost of reckless lending is enormous. After the last crash, over 20% of people went into mortgage arrears. That represents about 150,000 families. Even today, over ten years after the crash, we still have about 30,000 families in arrears over 90 days. These were people who should have been enjoying their life together as a couple bring up their children and planning for the future. Instead, they faced mortgage arrears and negative equity, harassing phone calls from their lenders and the ever-present threat of repossession and homelessness. We do not want a repeat of this.

A mortgage equal to 3 ½ times a couple’s income and 90% of the value of a house is too high. It should be gradually reduced to 3 times income and 80% of the house value.

Instead of attempting to solve the affordability problem by handing out ever bigger mortgages, we should solve it by bringing down the cost of building starter homes so that people on moderate incomes can afford to buy starter homes with modest mortgages. We need to make it more attractive for developers to build starter homes instead of upmarket homes.




Government policies have made housing unaffordable for people on moderate incomes. Reversing these policies can make them affordable again.

The government charges first-time buyers 13.5% VAT on their new home. It’s crazy that during a housing crisis, that a house which would otherwise cost €250,000 is pushed up to €283,000 by the imposition of VAT. VAT should be set at zero for starter homes as it is in the U.K.

Developers of new housing estates must allocate part of the land for social housing. This pushes up the price of the houses. So, not only are first-time buyers paying for their own homes, but they are also funding their neighbours in local authority homes. Developers of starter homes should be exempt from the requirement to provide social housing.

Developers must also pay development levies. These should be scrapped for starter homes.

Well intentioned governments have implemented housing standards which result in every new home being a Rolls Royce. These standards may be appropriate for upmarket homes, but we need less exacting standards for starter homes. Most buyers of starter homes would settle for a Mini and trade up to a Rolls Royce later.

We also need to bring down the costs of buying land for housing. The state needs to acquire large tracts of land by compulsory purchase at their current use value – which would usually be the agricultural value. The local authority should put in the infrastructure such as roads and water and schools and then sell off the ready to go sites to builders on condition that they build starter homes.

If the government reversed all the policies which have made housing unaffordable, they could also scrap the artificial interventions such as Help to Buy, Shared Equity and Affordable Homes. Homes should be naturally affordable and not made artificially so to compensate for the government’s action in other areas.

The policies of successive governments have pushed up the cost of building houses. It is up to the government to reverse these policies. Relaxing the mortgage rules would exacerbate the problem, not solve it.

Brendan Burgess is the founder of the consumer forum Askaboutmoney.com


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## NoRegretsCoyote (27 Sep 2021)

Brendan - I agree with most of this. But there are two things I have to disagree on:

The Central Bank sets *macro*-prudential rules, not *micro*-prudential rules. They are not designed to safeguard any individual borrower or any individual bank. They are designed* to safeguard the financial system*. Rules can be very strict or very loose and you will still have people who will get in mortgage distress. Obviously less mortgage arrears is better, but there is no loan without risk and for 140 out of the last 150 years Irish bankers managed to lend sustainably. The rules are there to stop banks pursuing "beggar my neighbour" policies of course, but at a certain point we have to accept that bankers can assess risk better than supervisors.

The second big issue is that *house prices don't matter per se*. Obviously the post-2007 crash makes everyone think that "high is bad" but the level is irrelevant. What matters is how sustainable they are as a ratio of average earnings, or rents, or interest rates. And on all of those metrics Ireland doesn't have unsustainable prices compared to either Ireland or the past or indeed peer countries.


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## Brendan Burgess (27 Sep 2021)

Hi Coyote

I  agree with you that the Central Bank's rules are to protect the financial system. But Ross had written an article calling for them to be relaxed so that more people could buy homes.  My argument is that it wouldn't work and it's not the job of the Central Bank to allow risky lending to compensate for failures in government policy.

Brendan


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## Brendan Burgess (27 Sep 2021)

NoRegretsCoyote said:


> The second big issue is that *house prices don't matter per se*.



I just can't agree with that.  

Housing is a cost. I want to see that cost brought down so that ordinary citizens can buy a home and repay the mortgage within a reasonable time-scale. 

Is your argument that, assuming we hand out 100% mortgages, 

A €300k mortgage at 5% over 20 years is the same as a €450k mortgage at 3% over 30 years as the repayments are the same. So the housing costs are the same. 

Brendan


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## NoRegretsCoyote (27 Sep 2021)

@Brendan Burgess - we agree! Housing costs are the issue, not house prices. The market value of the dwelling you live in is a complete abstraction! What matters is the mortgage cost or rental cost you pay every month.

100% mortgages are fine in certain circumstances. Like when you have a strong income and need to buy property after a marital separation, or negative equity.



Brendan Burgess said:


> My argument is that it wouldn't work and it's not the job of the Central Bank to allow risky lending to compensate for failures in government policy.



But housing supply is not completely inelastic. At some point higher prices will push up supply, even a little bit. Yes, there are lots of policy objectives, sometimes in conflict. Policy needs to work to bring down costs. But if new 3-bed semis retailed for €1m you would in fact see more of them.


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## Gordon Gekko (27 Sep 2021)

Hi Brendan,

Those of us with houses are on tricky ground when we’re arguing for the multiple to reduce to ‘3’ and the maximum LTV to reduce to 80%.

I know that’s not where you’re coming from, but for a young couple at the coalface right now, it reeks of “I’m alright Jack”.

Tricky.

Gordon


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## sonandheir (27 Sep 2021)

I think it is unrealistic to think we can keep house prices down. With the macro environment of low rates and QE there is huge money flowing into equities, commodities and assets in general. Those are all going up. 

If we tried to depress house prices in that context there would be extraordinary pressure from all that money looking for a return trying to flow in. 

I think Brendan your point on the Rolls Royce is interesting, that is something we could do with different tiers of housing standards. Not sure how that would play politically with climate change, but it is interesting.


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## Brendan Burgess (27 Sep 2021)

NoRegretsCoyote said:


> @Brendan Burgess - we agree! Housing costs are the issue, not house prices. The market value of the dwelling you live in is a complete abstraction! What matters is the mortgage cost or rental cost you pay every month.



No we don't agree at all. I was asking you if that was your argument so that I can understand it.  

The price you pay for your house is not an abstraction at all. 

I want to see low house prices and low mortgage rates and low repayments. 

Many people pay off their mortgage early. It takes them longer to buy a €400k house than a €300k house.


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## Brendan Burgess (27 Sep 2021)

Brendan Burgess said:


> It should be gradually reduced to 3 times income and 80% of the house value.





Gordon Gekko said:


> Those of us with houses are on tricky ground when we’re arguing for the multiple to reduce to ‘3’ and the maximum LTV to reduce to 80%.



Hi Gordon

We can't do that now, but our objective should be that first time buyers should be able to afford a house with a mortgage of no more than three times their salary. 

I want to see house prices reduced.   So it's the opposite of "I'm alright Jack".  As a home owner, I feel wealthier with high house prices. But as a citizen, I want to see lower prices so that my fellow citizens can afford to buy houses.


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## Brendan Burgess (27 Sep 2021)

sonandheir said:


> I think it is unrealistic to think we can keep house prices down. With the macro environment of low rates and QE there is huge money flowing into equities, commodities and assets in general. Those are all going up.



We could ban investors from buying residential property.  Of course, that creates its own problems. 

In the first draft of the article, I did have a piece on the impact on house prices of investors buying houses with cash.


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## Brendan Burgess (27 Sep 2021)

sonandheir said:


> I think Brendan your point on the Rolls Royce is interesting, that is something we could do with different tiers of housing standards. Not sure how that would play politically with climate change, but it is interesting.



Don't I get a grant for retrofitting my old house or installing energy efficient controls?  Why give grants to people who already have homes? Divert the money to starter homes to make them cheaper. 

I think that there is more than just energy regulations. I don't know enough about them, but I did see a presentation some years ago at the Dublin Economics Workshop about how the difference in regulation between here and the UK increased the costs of building houses. 

Brendan


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## NoRegretsCoyote (27 Sep 2021)

Brendan Burgess said:


> The price you pay for your house is not an abstraction at all.


It is an abstraction.

I re-valued my house for LPT purposes last week. I picked a value but it is really not relevant to me. I have no plans to move in the next ten years. My house is still worth 70% of the house over the back wall that I'd prefer, same ratio as when I bought it. I can't spend its value, nor does it make the slightest difference to what I owe the bank.

What matters is the monthly mortgage payment to provide shelter for me and my family. The policy discussion should focus on _affordability_, not prices.


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## shweeney (27 Sep 2021)

Brendan Burgess said:


> Well intentioned governments have implemented housing standards which result in every new home being a Rolls Royce. These standards may be appropriate for upmarket homes, but we need less exacting standards for starter homes. Most buyers of starter homes would settle for a Mini and trade up to a Rolls Royce later.



on this paragraph - which standards do you want to see reduced/discarded?


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## odyssey06 (27 Sep 2021)

shweeney said:


> on this paragraph - which standards do you want to see reduced/discarded?


Are councils still insisting on 50% dual aspect apartments?
That should go if it hasn't already.


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## skrooge (27 Sep 2021)

I like the mini/rolls Royce analogy. I'd go a step further and say we probably all started off with a second-hand car. Eventually people traded up to better second-hand cars and some even went on to buy new cars. 

However, we have a skewed view that new property should be bought by FTB's. When you look at the numbers we give large grants to the less wealthy to buy the most expensive of houses. We are trying to bypass the property ladder rather than use it.  

We should focus on devising a system which promotes a steady turnover in property. I'm not a fan of FTB grants but if you have to have them let them be for all properties. That way you can incentivise existing owners to trade up (thanks to higher equity). The people with the most money can now afford the new/Rolls-Royce housing.  From a government perspective they claw more of the grant back through a second lot of stamp duty. 

Where a change in the mortgage measures might help is the deposit requirement. 20% deposit for second time buyers is a punitive charge. It reduces the level of transactions and clogs up the market. A 10% rate for all would seem to tick the macro-prudential box. Is it really the case that existing purchasers are twice as likely to default?


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## Sophrosyne (27 Sep 2021)

Brendan Burgess said:


> We also need to bring down the costs of buying land for housing. The state needs to acquire large tracts of land by compulsory purchase at their current use value – which would usually be the agricultural value. The local authority should put in the infrastructure such as roads and water and schools and then sell off the ready to go sites to builders on condition that they build starter homes.
> 
> If the government reversed all the policies which have made housing unaffordable, they could also scrap the artificial interventions such as Help to Buy, Shared Equity and Affordable Homes. Homes should be naturally affordable and not made artificially so to compensate for the government’s action in other areas.


 
Couldn't agree more.


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## PGF2016 (27 Sep 2021)

Brendan Burgess said:


> Ross Maguire, an investor in residential property, called on the Central Bank to allow lenders to give First Time Buyers 100% mortgages and to give borrowers more than 3 ½ times their income. He argued that repayments on such mortgages would be lower than the cost of renting similar properties.


I heard Ross on the radio last week. He kept saying that people couldn't get mortgages and was never challenged on this. The people he is talking about can all get mortgages. The mortgages they are offered aren't big enough to buy the houses they want. An important difference.

Two wrong's don't make a right. It's silly, in my opinion, to cause more issues by relaxing the mortgage rules to fix a problem with housing supply / costs. 

Also, he kept saying "Johnny pays €1k a month in rent. Why not give him a mortgage for €1k a month?". A mortgage isn't the only cost for a house. There's also fees, maintenance, insurance etc. Just because you can afford the mortgage doesn't mean you can afford the house.


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## Brendan Burgess (27 Sep 2021)

skrooge said:


> I'd go a step further and say we probably all started off with a second-hand car.



Skrooge

That is a great one. I will plagiarise that.

Brendan


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## Mocame (27 Sep 2021)

Well done Brendan for writing this article.  It is really great to see someone making the point that lower prices not higher debt is the solution to  housing affordability.

Just one issue - I don't think there is any evidence that the state taking a % of new developments for social housing pushes up prices for everyone else.  When social housing is procured in this way the developer is compensated in the following way-
- existing use value (for the land) +
- construction costs of dwellings +
-'reasonable profit' which is set at 5%
Therefore the developer doesn't actually make any loss on the social housing which has to be passed on to anyone else. 

Currently developers have lots of problems raising development finance and there is evidence that guaranteed sales of social housing help them raise the finance necessary to complete the rest of the development.  This is particularly important for smaller developers.  In addition sales prices for development land have adjusted to reflect the fact that the land for social housing has to be transferred at existing use value.


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## NoRegretsCoyote (27 Sep 2021)

Mocame said:


> It is really great to see someone making the point that lower prices not *higher debt* is the solution to housing affordability.


Gross debt to disposable income of Irish households has fallen from 199% in 2010 to 112% in 2019. It's getting close to the euro area average of 94%.

Ireland still has a younger population so you would expect it to have more debt to buy houses compared to a very old place like Italy.

The Brits are at 122% and the Dutch are at 191%. These are pretty high-performing economies with stable banks by all assessments too.

Irish households are not overindebted by any means compared to peer countries today, or Ireland of the past.

High debt is okay once it is sustainable, and in Ireland's case it very much is.


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## Brendan Burgess (27 Sep 2021)

Mocame said:


> I don't think there is any evidence that the state taking a % of new developments for social housing pushes up prices for everyone else.



Interesting point which I will reflect on.

I would have thought that a developer makes more profit selling at market price than to the local authority. 

So he might not lose actual cash by selling to the local authority, but his overall profit is lower.  So he has to achieve his total return over 90 units instead of 100 units.

Brendan


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## Protocol (27 Sep 2021)

Instead of focussing on demand-side issues, we need to focus more on supply-side.

Massive cuts in cost of land
Much cheaper finance
De-risk building houses, so 15% developer margin's aren't required
Massive boost to labour supply of builders.


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## Purple (27 Sep 2021)

Mocame said:


> Just one issue - I don't think there is any evidence that the state taking a % of new developments for social housing pushes up prices for everyone else.


Who do you think is renting the buy to let properties?

On the issue of price, what percentage of people who own houses could afford to buy that house at todays prices?
Average household income in Ireland is around €30,000. Average incomes for working people are around €45,000. At 3.5 times income that's a mortgage of €157,500. The median price of a house is around €350,000.

What other asset class could that be said of?


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## Protocol (27 Sep 2021)

Household incomes, 2019





__





						Income - CSO - Central Statistics Office
					






					www.cso.ie
				




Mean gross = 70,092
Median gross = 51,217

Here, gross includes social benefits.


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## Purple (27 Sep 2021)

There are tens of thousands of properties that could be used for residential purposes. They are the rooms over shops, many of which were originally designed to be lived in. We should be homing in on those to get them back into use ASAP. The owner should not have any increase in rates and grants should be available to cover the cost of bringing them up to code.

Instead we have pre-63 properties which are absolute hovels and fire traps. I looked at a property recently with a relative in such a building in South Dublin. It was advertised as a one-bed unit. The place stank and was damp. The owner had broken through into the attic and there were beds and mattresses all over the place. I think 9 people were living there. It was Dickensian. The rent was €1250 per month.


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## Leo (28 Sep 2021)

NoRegretsCoyote said:


> What matters is the monthly mortgage payment to provide shelter for me and my family. The policy discussion should focus on _affordability_, not prices.


So you don't think that if you had paid 40% less for that same property that your monthly mortgage payments would be lower, and thus more affordable / sustainable?


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## NoRegretsCoyote (28 Sep 2021)

Leo said:


> So you don't think that if you had paid 40% less for that same property that your monthly mortgage payments would be lower, and thus more affordable / sustainable?


Indeed. Over the last 20 years the value of my house has varied from €300k to €900k. Interest rates have fallen and risen. Trackers were available, then they weren't. Underwriting standards were loosened, then tightened. Average wages have risen.

All of these factors feed into affordability. Price is not the only one.


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## Purple (28 Sep 2021)

Protocol said:


> Household incomes, 2019
> 
> 
> 
> ...


Median Gross is a fair figure to use, even though lenders won't allow you to include children's allowance as income. At that amount the median household could borrow €179,259.50. That wouldn't buy much.


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## Purple (28 Sep 2021)

Homelessness happens when the cost of the average home, rented or bought, is more than one third of the average income of the average household.  When rents are lower than that we just don't see it.


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## Leo (28 Sep 2021)

NoRegretsCoyote said:


> Over the last 20 years the value of my house has varied from €300k to €900k. (snip) Average wages have risen.


So the single dominating factor affecting affordability of that home is the price.


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## NoRegretsCoyote (28 Sep 2021)

Leo said:


> So the single dominating factor affecting affordability of that home is the price.


My next door neighbour paid more but has a 70bp tracker.

I paid less but am paying 2.8% (was 4.3% at origination).

There are a lot of things in the affordability equation. Price doesn't "dominate".


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## Leo (28 Sep 2021)

NoRegretsCoyote said:


> My next door neighbour paid more but has a 70bp tracker.
> 
> I paid less but am paying 2.8% (was 4.3% at origination).
> 
> There are a lot of things in the affordability equation. Price doesn't "dominate".


If person A buys a property at 900k on a 70pb tracker, and person B buys one for 300k on a 4.3% variable, who pays more each month?


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## Purple (28 Sep 2021)

Leo said:


> If person A buys a property at 900k on a 70pb tracker, and person B buys one for 300k on a 4.3% variable, who pays more each month?


And trackers are gone now, having made a relatively brief appearance in the market.


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## dereko1969 (28 Sep 2021)

Protocol said:


> Instead of focussing on demand-side issues, we need to focus more on supply-side.
> 
> Massive cuts in cost of land
> Much cheaper finance
> ...


What risk is there in building houses at the moment? If they're built in the right places they'll sell, if they're not then they probably shouldn't have been granted planning permission.
What interest rates are builders being charged at the minute? And what is the cause of that being higher than it should (if indeed it is).
How do you boost labour supply?


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## kinnjohn (28 Sep 2021)

dereko1969 said:


> What risk is there in building houses at the moment? If they're built in the right places they'll sell, if they're not then they probably shouldn't have been granted planning permission.
> What interest rates are builders being charged at the minute? And what is the cause of that being higher than it should (if indeed it is).
> How do you boost labour supply?


Very well said  dereko 1969
I think you should have said, what  risk is there in building homes with planning in the right places and of a design that can be sold to the average Industrial wage earner close to their place of work who  save a deposit to buy a home after five years saving a deposit,


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## Purple (28 Sep 2021)

kinnjohn said:


> Very well said  dereko 1969
> I think you should have said, what  risk is there in building homes with planning in the right places and of a design that can be sold to the average Industrial wage earner close to their place of work who  save a deposit to buy a home after five years saving a deposit,


There's no risk in that scenario. In reality the developer buys the land with a loan then spends 5-8 years getting planning permission and then actually building the houses. 
Nobody is building houses in cities which can be sold to the average Industrial wage earner close to their place of work who save a deposit to buy a home after five years saving a deposit, not without a big handout from the State.


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## kinnjohn (28 Sep 2021)

Purple said:


> There's no risk in that scenario. In reality the developer buys the land with a loan then spends 5-8 years getting planning permission and then actually building the houses.
> Nobody is building houses in cities which can be sold to the average Industrial wage earner close to their place of work who save a deposit to buy a home after five years saving a deposit, not without a big handout from the State.


In 2005 the population of Dublin was forecast to reach 2 million, By 2021
 think the present population of Dublin at present 1.43,

 there is  570000 fewer living in Dublin  than the forecast figure for 2021 I don't think Dublin shrunk,  there must be scope to build seeing  the population is 570000 less than expected by 2021,

at present, the government are giving handouts to people to build mansions that were going to be built with or without a handout,


If people on average wages are  working in our cities there has to be planning to house them long term,

There is a very big unforeseen social security retirement bill on its way for people on low wages who moved to Ireland move out of Ireland  after 15/ 20 years because of housing problems, We might as well spend it on housing than recycling labor because of housing problems related to the wage levels paid in our Citys,

If you are on an average wage after  four five six seven or eight years of savings there should be a  plan that the average wage earner can secure a home for the rest of their working life and retirement, in the area they worked all of their life,

 this is how it was at the start of your working life you posted you are in your mid to late forties
I am in my late sixties and it was the same back then as when you started working,

The Citys I have visited of late within the EU new building seems to be planned around smaller units but homes for all who work within them,

From what I can see the age profile of staff  on average are older than Ireland  and they appear to be holding down full-time jobs,

I get the feeling in Ireland people on low to average income who travel long distances opt out of work long before the state contributory retirement date, I suspect the state is picking up the tab somewhere along the line,


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