# Central Bank decides against changing mortgage limits



## Sarenco (25 Nov 2021)

No changes to the mortgage rules -










						No changes to Central Bank's mortgage rules
					

The Central Bank has left its mortgage rules unchanged after its annual review was published today.




					www.rte.ie


----------



## Sunny (25 Nov 2021)

Really was a missed opportunity. And then to give the banks permission to take part in the Government equity share scheme considering the impact that will have on house prices and consistent warnings that it will not work. Waste of public consultation and smacks of political interference.


----------



## Brendan Burgess (25 Nov 2021)

Good decision. 

They have highlighted risks in the market such as 

_Today's Financial Stability Review says the risks from the Covid-19 pandemic are "receding" and its impact on the banking sector is beginning to "dissipate".

However, it warns there is a risk of a sudden increase in interest rates if inflation persists.

There are also risks if fallout from events like the difficulties of Chinese property fund Evergrande were to spread beyond Asia._

People taking out mortgages assume that their current personal circumstances  will remain unchanged and that the economic environment will remain unchanged.  They won't, so it's right to have lending limits.


----------



## Brendan Burgess (25 Nov 2021)

_However, it will now let banks carry forward above-limit loans approved from one calendar year to the next._

Another good change. The operation of the rules was administratively difficult.


----------



## Brendan Burgess (25 Nov 2021)

https://www.centralbank.ie/financial-system/financial-stability/macro-prudential-policy/mortgage-measures
		



*Key findings from the 2021 annual mortgage measures review*

House price growth has accelerated in recent months, fuelled by the continuing imbalance between supply and demand, which was exacerbated by the COVID-19 shock.
Structural and cyclical forces are likely to put continued upward pressure on house prices. Survey evidence and updated house price forecasts suggest market participants’ expectations with respect to the degree of near-term house price growth have increased during 2021. Construction cost inflation and the implementation of recent Government housing policy initiatives are also likely to influence house price developments over the near-to-medium term.
The mortgage market has undergone a robust recovery, with recent mortgage market activity showing that the volume of drawdowns and approvals have more or less returned to pre-pandemic levels.
There are few signs of a general deterioration in new lending standards that would adversely affect bank and borrower resilience, with the use of allowances for high LTV and LTI lending still remaining below pre-pandemic levels.
Credit dynamics have not been playing an increased role in explaining recent house price trends.
The resilience benefits of the mortgage measures were evident in payment break take-up rates during the pandemic. Borrowers with high LTI and LTV at origination exhibited far higher take-up rates of payment breaks in 2020 than those with smaller mortgage burdens.
Overall, the mortgage measures will continue to play an important role in fostering resilience and containing pro-cyclical dynamics in a housing market that will continues to face considerable supply / demand pressures.


----------



## NoRegretsCoyote (25 Nov 2021)

Brendan Burgess said:


> People taking out mortgages assume that their current personal circumstances will remain unchanged and that the economic environment will remain unchanged. *They won't, *so it's right to have lending limits.


Of course they won't stay unchanged, on average they will get better!

Most people take out mortgages in their late 20s early 30s, but your income generally peaks late 40s to 50.


----------



## Brendan Burgess (25 Nov 2021)

The changes to the operation of the allowances are on Page 76 of


----------



## Brendan Burgess (25 Nov 2021)




----------



## Brendan Burgess (25 Nov 2021)




----------



## Brendan Burgess (25 Nov 2021)

NoRegretsCoyote said:


> Of course they won't stay unchanged, on average they will get better!



Correct.

And, on average, no one was in arrears during the financial crash. 

But we are not dealing with averages. We are dealing with a system where some people will suffer a big change in circumstances, and the mortgage measures mitigates the extent of the damage done to them.

Brendan


----------



## NoRegretsCoyote (25 Nov 2021)

Brendan Burgess said:


> And, on average, no one was in arrears during the financial crash.


No but prices were vastly overvalued going in and there was a global recession with a much nastier local effect.



Brendan Burgess said:


> We are dealing with a system where some people will suffer a big change in circumstances, *and the mortgage measures mitigates the extent of the damage done to them.*



The purpose of the measures is not to protect consumers but the financial system as a whole.

In any case you cannot have banking without risk.


----------



## Sunny (25 Nov 2021)

Brendan Burgess said:


> Correct.
> 
> And, on average, no one was in arrears during the financial crash.
> 
> ...



Nobody was talking about scrapping the limits. They were talking about making them more realistic. There are people paying over €2k in rent being refused mortgages that would cost them hundreds of euro less every single month because of LTI limits. The central bank argument that people can just give up a rental property if they get into financial trouble is to be honest pathetic. People have to live somewhere.

Their argument that the Government scheme is a matter for bank balance sheets and can be managed through capital requirements is also seriously flawed. Any increase in bank capital that needs be retained to allow banks participate in this scheme costs money. And someone needs to pay for that. We can't be arguing for lower mortgage rates and then welcoming any scheme that requires banks to hold even more capital against their mortgage book.

So what the Central Bank have done today is allowed banks to participate in a scheme that will drive up house prices by increasing demand and purchasing power of households in a period of low housing supply. Increased the purchasing power of a certain cohort of the population while limiting others and then casually mentions that banks might be required to hold more capital to meet the risks of the scheme. They could have left the LTI limits at 3.5x for anyone taking part in the scheme or even reduced them to 3x while adjusted them for people who were trying to get a mortgage without State intervention. It wouldn't have led to market instability. 

FTB of new houses are now way better off than people still stuck in starter homes or unsuitable homes after the last recession.


----------



## RetirementPlan (25 Nov 2021)

NoRegretsCoyote said:


> Most people take out mortgages in their late 20s early 30s, but your income generally peaks late 40s to 50.


Not anymore. From: https://www.irishexaminer.com/news/...led Characteristics of,in 2019, the CSO found.



> The median age for a sole purchaser increased from 34 years in 2010 to 42 in 2019, the CSO found.
> 
> For joint purchasers, the median age rose three years, from 35 to 38.


----------



## Brendan Burgess (25 Nov 2021)

Sunny said:


> There are people paying over €2k in rent being refused mortgages that would cost them hundreds of euro less every single month because of LTI limits.



But once your raise the limits, house prices go up, so it does not solve the problem!


----------



## NoRegretsCoyote (25 Nov 2021)

RetirementPlan said:


> Not anymore.


I meant specifically first time mortgages.

Most people who are ever going to take out a mortgage will do so by 35.

Still well before lifetime earnings generally peak.


----------



## cremeegg (25 Nov 2021)

We are so busy not repeating the excesses of the 2000's that we are making whole new mistake.

When Ireland joined the Euro a wave of money was attracted to fund Irish housebuilding. This was mostly loaned to individual purchasers. Hundreds of thousands of houses were built and people and families were housed. The statistics of the total % of houses in Ireland today which were built between 1997 and 2007 are staggering. I will try to find a source. Some people got into trouble repaying these loans. Note this trouble arose because because they lost their jobs or their income was reduced in the recession. No one had to pay more than their initial expectations, interest rates did not rise significantly or at all.

On average the housing policies of the 2000s were a huge success.



Brendan Burgess said:


> on average, no one was in arrears during the financial crash.


And lots of people got new houses.

Today no one is getting a new house. As for the people who are not being permitted to over borrow today and are avoiding the fate of those people who fell into arrears in 2010. They are sofa surfing or living with their parents now and planning on voting SF in the next election. 

They will be homeless or a burden on the state in the future. They are no better off than those few who lost their homes during 2010s.

Much of what property is being built is owned by corporations and rented. The rents charged are high and those tenants housing costs are not reduced despite the fact that those costs will continue for life. Unlike those who borrowed in the 2000s who will have mortgages paid off when they retire.


----------



## Brendan Burgess (25 Nov 2021)

I fully agree it's a problem. But reckless lending to reckless borrowers will only make the problem worse.

It won't increase the supply of housing. 

Brendan


----------



## Sarenco (25 Nov 2021)

I still think it's very odd that the Central Bank is ignoring the fact that average mortgage rates on new housing loans are at least 25% lower than average rates when the measures were first introduced in 2015.

It would make a lot of sense to move to a debt-service-to-disposable-income ratio to reflect the lower cost to consumers.


----------



## Brendan Burgess (25 Nov 2021)

Hi Sarenco

But rates will rise over the next couple of years.  
And they realise how high house prices are and that looser lending will just push up prices.

Brendan


----------



## Baby boomer (25 Nov 2021)

Brendan Burgess said:


> I fully agree it's a problem. But reckless lending to reckless borrowers will only make the problem worse.


Perhaps there's a middle route that would see a slight loosening of the limits without venturing into the territory of reckless lending/borrowing? 

It's also important to distinguish between a motivation to avoid reckless lending and a motivation to keep prices in check. Because there's far more effective ways of achieving the latter aim.



Brendan Burgess said:


> It won't increase the supply of housing.
> 
> Brendan


Basic economic law of supply and demand says it will.   If builders think more people will have more money to buy their product, they'll produce more houses.


----------



## NoRegretsCoyote (25 Nov 2021)

Brendan Burgess said:


> But rates will rise over the next couple of years.


Which is why the limits should be calibrated as a limit on (stressed) mortgage payments a share of household income.


There is no world where a 3.5x LTI is appropriate at 4% lending rates but not very conservative at 2%.


----------



## Brendan Burgess (25 Nov 2021)

So if rents were lower in Ireland, would you then think that the limits were ok, as rents would be lower than the mortgage payments? 

Brendan


----------



## NoRegretsCoyote (25 Nov 2021)

I don't think rents are relevant.

It's about stopping banks from trying to grab market share with imprudent lending practices.


----------



## Delboy (25 Nov 2021)

Baby boomer said:


> Basic economic law of supply and demand says it will.   If builders think more people will have more money to buy their product, they'll produce more houses.


Basic laws of economics do not apply to Irish housing and have not done so for the past 20 or so years


----------



## skrooge (25 Nov 2021)

A. Ireland is a small open economy prone to booms and busts depending on international developments. 
B. Ireland is in a monetary union so without the flexibility of fx rates all the correction have to come in the form of nominal correction (jobs, wages etc)
C.  You can't reposes a property in anything approaching a quick, cost efficient manner. 

Combine these factors and I see a lot of grounds for keeping conservative mortgage rules. 

As for the interest rate argument, yes rates are lower now than in 2015 but do we think the last 5 years are an accurate reflection of the next 5-10 years? I don't have to look too far to see stories about rising inflation and potential interest rate rises. We're also facing into a period of lower competition in the mortgage market with KBC and Ulster leaving. The likely direction of travel on rates is up.

Is it better for the housing market to have mortgage rules that are tweaked (up and down) every year (and the associated speculation/market shut down that goes with that) or to have a rule that is constant but occasionally too conservative?


----------



## Brendan Burgess (25 Nov 2021)

NoRegretsCoyote said:


> I don't think rents are relevant.



One of the arguments made in this thread and made by many commentators is that it is cheaper for someone to buy a house with a 90% mortgage and 4 1/2 times income than to pay rents. 

So it's a point that has to be challenged.

Brendan


----------



## Baby boomer (26 Nov 2021)

Brendan Burgess said:


> One of the arguments made in this thread and made by many commentators is that it is cheaper for someone to buy a house with a 90% mortgage and 4 1/2 times income than to pay rents.
> 
> So it's a point that has to be challenged.
> 
> Brendan


But don't pretend you're doing that person a favour by imposing artificial rules that "save" them from the (statistically quite small) possibility of incurring imprudent borrowings, at the cost of paying eye-watering rents.  Particularly if your real aim is to actually protect the banks from imprudent lending!  

Look, I'm a landlord and it suits me to have high rents - I'm making out like a bandit at the moment.  But I only got to own my PPR and be a landlord by undertaking what would now be regarded as "imprudent" borrowing. (It wasn't really - it was a calculated risk that happened to work out well.)  Back in the day, was it was a choice I got to make.  We are now rigging the system to deny that choice to the younger generation.  That's profoundly unfair.


----------



## skrooge (26 Nov 2021)

Baby boomer said:


> But don't pretend you're doing that person a favour by imposing artificial rules that "save" them from the (statistically quite small) possibility of incurring imprudent borrowings, at the cost of paying eye-watering rents.  Particularly if your real aim is to actually protect the banks from imprudent lending!



But the primary aim is not to protect that one person, it's to protect all of us from the fallout when that person and many like them default.


----------



## letitroll (26 Nov 2021)

Correct descision by the CBI - if the Irish government wants to load up house buyers purchasing power go for it (or lower buildings costs would be another option) but dont leverage up the domestic financial system itself again.

See the CBI has got the memo on Ireland that lots of people on here miss, in fact its like the fish in water that doesnt even realize he’s swimming in water - see when you have a country like Ireland you have high OPERATIONAL leverage (small open globally traded economy + high FDI reliance - jobs & corp tax + zero monetary policy/currency control) the last thing you do when so much of your economy is out of your control is introduce FINANCIAL leverage into your own domestic financial system. We ran the experiment in 2008. In fact Ireland’s economy resembles a leveraged QQQ ETF…..we’ve skillfully or by accident hitched our wagon to fast growing sectors (ICT/SaaS/life sciences) these sectors will have down periods too, like the global economy and were leveraged to them.

An old colleague explained to me before about companies with high operating leverage - think Siemens making ball bearings for Chinese factories, in a bad year their orders can be down 50%…..the last thing you do in that scenario is run that company with financial leverage. Ireland is the same when real economic trouble hits the global economy again ala 2008 and rest of the world is getting hit with 5% falls in GDP, Ireland is gonna drop more, when it needs a devaluation of the currency of ~20%, the ECB/EU will only devalue the Euro 10%, Ireland will have to a have painful internal devaluation like we did in 09-12.

Ireland’s economic/political/monetary model is a prosperous one but its not without its drawbacks - its analogous to driving a car with a spike on the steering wheel and the CBI is the only passenger who seems to realize it while everybody else is asking the driver to put the foot down.


----------



## NoRegretsCoyote (26 Nov 2021)

Brendan Burgess said:


> One of the arguments made in this thread and made by many commentators is that it is cheaper for someone to buy a house with a 90% mortgage and 4 1/2 times income than to pay rents.


People can sustain higher rents than mortgage payments. If their income changes they can move to something within their means and the landlord can find another tenant. There is no system-wide financial stability issue here.

Back to the rules, many EU member states have a rule something like stressed total debt repayments should not exceed 40% of income. The Irish rules are equivalent to something more like 25%-35%, which in my view is excessively prudent. The UK uses an LTI approach and has a limit a lot higher of 4.5 despite retail interest rates about the same.

I think the Irish system can take on a bit more risk and it would do a little to stimulate housing demand.


----------



## NoRegretsCoyote (26 Nov 2021)

letitroll said:


> the last thing you do in that scenario is run that company with financial leverage.


The ratio of debt to disposable income of Irish households was 209% at the end of 2009.

Since then it has fallen consistently as households have paid down debt and incomes have grown.

It is now at exactly 100%, a fall of over one half.

*Irish households are in no way over-leveraged.*


----------



## skrooge (26 Nov 2021)

NoRegretsCoyote said:


> People can sustain higher rents than mortgage payments. If their income changes they can move to something within their means and the landlord can find another tenant. There is no system-wide financial stability issue here.


That makes perfect sense. So no need for Central back rent rules but put the same person in a mortgaged house and they can't downsize in the same manor hence the need for the mortgage rules.



NoRegretsCoyote said:


> Back to the rules, many EU member states have a rule something like stressed total debt repayments should not exceed 40% of income. The Irish rules are equivalent to something more like 25%-35%, which in my view is excessively prudent. The UK uses an LTI approach and has a limit a lot higher of 4.5 despite retail interest rates about the same.


Take the UK for example, it is a bigger economy, it has it's own monetary policy this helps to reduce the shocks faced by households so they can have relatively less conservative rules. 

You also have to factor in a different tax system, a banking system that has reasonable access to collateral and where banks aren't running for the exits to get out of the country.

While not all those points apply to every EU countries you have to admit we've dealt ourselves a bad hand to start with. Hence the need for now conservative rules here.


----------



## Brendan Burgess (26 Nov 2021)

letitroll said:


> lower buildings costs would be another option -  but don't leverage up the domestic financial system itself again.



This is the key point. 

We try to solve every problem in this country by throwing more money at it, and it just does not work.

The right approach is to bring down the cost of developing new houses.

Brendan


----------



## Sarenco (26 Nov 2021)

Brendan Burgess said:


> Hi Sarenco
> 
> But rates will rise over the next couple of years.
> And they realise how high house prices are and that looser lending will just push up prices.
> ...


That’s certainly a possibility but there was also the possibility of rate rises back in 2015 - we only know that rates actually fell with the benefit of hindsight.

So either the rules were too lenient back in 2015 or they are too conservative now.

Also, the overwhelming majority of new home loans are now fixed-rate products.

IMO the Central Bank should have moved to an LTI ratio of 4 to reflect the lower cost of credit.  That would prompt a further supply response and would help to take some of the heat out of the rental market.


----------



## ryaner (26 Nov 2021)

The UK central bank recently raised the possibility of increasing their LTI limits based on some of the newer full term fixed rate products. And IMO there is some sense in that as you no longer need to stress test for higher interest rates when you lock in for the term.


----------



## NoRegretsCoyote (26 Nov 2021)

Brendan Burgess said:


> The right approach is to bring down the cost of developing new houses.


"Look over there!"

On the supply side planning and development cheaper would be great but this is not easy and demands huge amounts of tiny changes without clear results.

On the demand side there is literally a policy lever that the Central Bank can pull tomorrow that would lead to a material increase in housebuilding without compromising financial stability.


----------



## Purple (26 Nov 2021)

NoRegretsCoyote said:


> On the demand side there is literally a policy lever that the Central Bank can pull tomorrow that would lead to a material increase in housebuilding without compromising financial stability.


Would it though?
The same labour supply constraints would be there.
The same planning delays would be there.
The same financing costs would be there.
The same dysfunctional and grossly inefficient construction sector will still be supplying the houses.
All that will happen is more money will wash over those structural problems, hiding them in a sea of leverages cash. 

The reality is that around the same number of houses would be built.
The same people would end up owning them.
They would just have paid more for the same house because of the increased income multiple allowed when borrowing.

Increasing the amount that people can borrow is like everyone on the terrace of a football stadium going up one step thinking they will have a better view. The reality is they won't, they'll have the same people blocking their view, they'll just be higher up.


----------



## PGF2016 (26 Nov 2021)

Sarenco said:


> MO the Central Bank should have moved to an LTI ratio of 4 to reflect the lower cost of credit. That would prompt a further supply response and would help to take some of the heat out of the rental market.


Why would that prompt a further supply response? Demand is outstripping supply at present. There's no shortage of buyers and supply shouldn't be constrained by this. 

And do developers / builders really need prices to rise more (which would be a by product  of changing the LTI) to be able to profitably develop new sites?


----------



## Sunny (26 Nov 2021)

And yet the Central Bank approved banks participating in a scheme that they admit themselves is going to increase house prices and put some risk on to bank's balance sheets. The central banks job is protect the system. Not to protect individuals. Yet they have decided that a Government scheme that will drive up prices and create risks for banks is acceptable but changing from LTI to DSI carries too much systemic risk. I simply don't buy it.

Banging on about interest rates are going to rise is nonsensical at the moment. I could walk into Finance Ireland tomorrow and get 80% LTV mortgage for 20 years at 2.9%. The repayments would be more than manageable for someone that is currently paying over €2000 per month in rent. The idea that people's situation might change? Well wow. That's the same for absolutely everyone. The difference between using blunt LTI restrictions or using Debt Servicability is not going to change that.

Only three Countries in Europe including the UK use the LTI restriction. Even the Central Bank said themselves:

_At the time of the introduction of the mortgage measures, consideration was given to introducing a debt-based instrument in Ireland rather than the loan-to-income ratio. But in the (then) absence of a credit register, it was impractical to attempt to establish enforceable regulations on total debt._

Well that register is now there. 

Nobody is talking about abandoning limits or allowing people to borrow 5 or 6 times their income again. We are talking about using less blunt measures when looking at household debt

A couple on 100k a year with no other debt can borrow €350,000 under these limits. A couple on 100k a year with 30k debt can also technically borrow up to €350,000 according to the CB if the bank is satisfied with their own underwriting that they can afford the 30k debt repayments on top of the mortgage. But if the Central Bank only care about 'systemic risk' and banks over lending, why are they using blunt instruments that only look at mortgage debt? Individual banks will look at everyone's overall debt level and affordability so why don't we have central bank limits based on the same criteria??


----------



## Sarenco (26 Nov 2021)

PGF2016 said:


> Why would that prompt a further supply response?


Because if more people can actually buy homes, developers will build more homes to meet that demand.

I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying.  In other words, the rules are restricting the “realisable” demand.


----------



## Delboy (26 Nov 2021)

Sarenco said:


> Because if more people can actually buy homes, developers will build more homes to meet that demand.
> 
> I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying.  In other words, the rules are restricting the “realisable” demand.


The rules aren't preventing potential buyers from buying, a lack of available housing and increased population numbers are what's preventing them.

The demand and higher prices are already there to entice Developers to build...if they could. A lack of construction workers is one of the main stumbling blocks (excuse the pun).
We are paying a lot of construction workers (along with other categories of workers here) to stay at home because of our generous social welfare system. A couple of days working for cash in hand and they are cleaning up.
We encourage our school leavers to go to college, some for meaningless courses, rather than go into trades. So the number of apprentices is miniscule. 
Despite immigration continuing at a rate I believe this country cannot cater for, the numbers of construction workers amongst the immigrants seems to have fallen off a cliff. With economies in Eastern Europe having picked up, the endless supply of young/middle-aged men we saw coming here from 2002-2008 and going into the construction industry has all but stopped.


----------



## PGF2016 (26 Nov 2021)

Sarenco said:


> Because if more people can actually buy homes, developers will build more homes to meet that demand.
> 
> I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying.  In other words, the rules are restricting the “realisable” demand.


This doesn't make sense. The demand is there already. 

Very skeptical interested to hear the source of the estimates. Is it a construction industry vested interest?


----------



## Purple (26 Nov 2021)

Delboy said:


> We encourage our school leavers to go to college, some for meaningless courses, rather than go into trades. So the number of apprentices is miniscule.


And our apprenticeship training is rubbish and utterly outdated.
I served as apprenticeship in Toolmaking in the early 90's and it was hopelessly out of date then. The curriculum now is exactly the same. Where I work we have to hire guys from Eastern Europe or train them ourselves as there is literally no apprenticeship for them to do here.

I do hope that the construction trades are better than the engineering trades but having been on the receiving end of what Irish Tradesmen produce I seriously doubt it. That's why I have a 'No Irish' policy when I hire someone to do any building work and definitely a 'no Dub's' policy as they have no work ethic.


----------



## NoRegretsCoyote (26 Nov 2021)

PGF2016 said:


> This doesn't make sense. The demand is there already.


Supply is inelastic but that doesn't mean that the demand side can do nothing.

Supposing you put vouchers through the doors of 100,000 first-time buyers. They would read "This voucher can be exchanged for a new-build house before the end of 2025. It entitles the developer of said house to €500,000"

Do you think you would not get more housebuilding? If not, why not?


----------



## skrooge (26 Nov 2021)

Sarenco said:


> I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying.  In other words, the rules are restricting the “realisable” demand.



... And where exactly are the half a million housing units that are apparently lying empty?


----------



## PGF2016 (26 Nov 2021)

NoRegretsCoyote said:


> Supply is inelastic but that doesn't mean that the demand side can do nothing.
> 
> Supposing you put vouchers through the doors of 100,000 first-time buyers. They would read "This voucher can be exchanged for a new-build house before the end of 2025. It entitles the developer of said house to €500,000"
> 
> Do you think you would not get more housebuilding? If not, why not?


Labour shortages for one. The industry doesn't have the capacity to build more. How does introducing more demand solve that?


Certainly the demand side can do something but is more expensive housing at a time when demand is so high a good thing?


----------



## NoRegretsCoyote (26 Nov 2021)

PGF2016 said:


> How does introducing more demand solve that?


People will retrain. People will come from other countries. People will work overtime.



PGF2016 said:


> is more expensive housing at a time when demand is so high a good thing?




The absolute level of house prices is immaterial. What matters is how sustainable mortgage payments are as a share of household incomes. By that metric Irish house prices are not high compared to peers or the past.


----------



## Sarenco (26 Nov 2021)

PGF2016 said:


> ...is more expensive housing at a time when demand is so high a good thing?


The Commission thinks that Irish house prices are actually undervalued by reference to average household income growth and long-term average house prices.








						Irish property is undervalued by 17%, says EC, so will prices rise further?
					

Prices in Ireland have risen at the second-fastest rate in the EU, a new report finds




					www.irishtimes.com
				




Take a standard three-bed semi in a typical Dublin suburb - say, Lucan.  The average sales price is around €350k.  The monthly cost of a 90% mortgage @2.7% over 30 years is around €1,300.  But to rent that property, it would cost around €2,300 per month.

Don't you think a renter would rather buy that property if they could?

Now let's say the Central Bank raised the LTI ratio to 4 and the price of an average 3-bed semi in Lucan increases to €400k.  The monthly mortgage payment would rise to around €1,450 per month - still a heck of a lot less than the cost of renting that property.

But more importantly, developers would be significantly more incentivised to build new homes.  Isn't that what we need?

It's amazing how labour shortages melt away when there's money to be made...


----------



## NoRegretsCoyote (27 Nov 2021)

Sunny said:


> A couple on 100k a year with no other debt can borrow €350,000 under these limits. A couple on 100k a year with 30k debt can also technically borrow up to €350,000 according to the CB if the bank is satisfied with their own underwriting that they can afford the 30k debt repayments on top of the mortgage. But if the Central Bank only care about 'systemic risk' and banks over lending, why are they using blunt instruments that only look at mortgage debt? Individual banks will look at everyone's overall debt level and affordability so why don't we have central bank limits based on the same criteria??


Take a couple on €100. They can borrow €350k over 30 years at 2.5 at €1294 a month, or *25%* of their net income of €5,160.

Take a couple on €50k. They can borrow €175k at 30 years at 2.5% at €647 a month, or *21%* of their net income of €3,102.

This leaves two problems. The first is that these parameters are over-prudent. Even with a 200bp increase in rates the high-income household is pushed to mortgage payments of 34% of net income on mortgage payments, the low-income households just 28% of net income. There is a point where the pips start to squeak and it's closer to 40%. Research shows that 95th percentile for mortgage-service-to-income ratios are about 40% in many EU countries. In Ireland it's below 30%. There is headroom for people to borrow more and banks to take on more risk without catastrophic consequencies.

The second issue is that the LTI limit is calibrated on gross income (why?) but you make mortgage payments out of net income. Ireland's tax system is progressive. Your average tax rate climbs a lot when your income increases. But the LTI limits mean that low-income people are allowed much lower shares of their income on mortgage repayments. So not only are they disadvantaged by having less disposable income, but they are allowed to spend less of it on a mortgage too. Again, why?

Anyway whole LTI approach was flawed from the start. The original Central Bank paper  in 2014 said that all the international evidence was around LTV and *debt*-to-income ratios, specifically looking at all borrowing of the household, not just the mortgage. Then it goes on to talk only about *loan*-to-income ratios. Why? Most likely because that's what the UK was bringing in that year! The paper also completely ignored the debt service to income approach which is not standard by now across the EU except Ireland.

These measures have taken on a theological quality down the North Wall at this stage. The Central Bank was alseep at the wheel through the last boom and is determined to over-compensate. Take a look at this long research paper which proudly details how Ireland is below or well below average on every measure of house prices or household indebtedness.

An old friend bought a house in the US recently. It was a 20% deposit, no exceptions. The Central Bank could have brought in an 80% LTV rate instead of LTI limits and literally every single mortgage issued since 2015 would be comfortably in positive equity right now even if the borrower had never made a single repayment. Is total debt an important prudential metric? Yes, in the context of a household's income and overall ability to pay. Some kind of cap on overall debt service expenditure by a household is necessary. But at the end of the day mortgages are collateralised lending and, if the collateral value is always higher than the loan, the bank is in a strong position and so is the system.

I thought these measures made sense when they were brought in in 2015. Banks had been imprudent and strong rules were needed. But Keynes said something like "when the facts change I change my mind. What do you do sir?". The economists at the Central Bank seem determined to ignore one of the greats of the profession. I think the landscape has changed a lot - not least the nearly 100bps decline in retail mortgage rates and decreases in personal taxation too - and I think the rules need to adapt as well.


----------



## skrooge (27 Nov 2021)

NoRegretsCoyote said:


> Even with a 200bp increase in rates the high-income household is pushed to mortgage payments of 34% of net income on mortgage payments, the low-income households just 28% of net income. There is a point where the pips start to squeak and it's closer to 40%. Research shows that 95th percentile for mortgage-service-to-income ratios are about 40% in many EU countries. In Ireland it's below 30%.



The EU measure is a good starting point but we shouldn't follow it blindly.

The cost of getting it wrong is arguably more costly here than elsewhere. The recoverability of collateral takes longer and is more costly in Ireland than it is in the majority of the rest of Europe. On top of that the Irish economy is more volatile then the rest of Europe. Combine those things and I can see why the central bank would set a limit below the 40% mark.


----------



## Brendan Burgess (27 Nov 2021)

Again, I will point out that you are focusing on the wrong issue. 

Throwing money at it does not work. It makes the problem worse.

It would be much better to bring down the cost of building houses so that people did not need to borrow as much.

Brendan


----------



## Brendan Burgess (27 Nov 2021)

Irish banks are lending 90% LTV in a market where they can't repossess houses.  That is madness. 

House prices will rise and fall. When they fall and people go into negative equity, many blame the banks and stop paying their mortgage. 

Brendan


----------



## Brendan Burgess (27 Nov 2021)

You are also forgetting that while the Loan to Income limit is 3.5 , the Central Bank rules allow 20% of mortgages to be above this cap for first time buyers. 

The rules have been carefully calibrated.  And they have helped contain the big increase in house prices.

Brendan


----------



## letitroll (27 Nov 2021)

NoRegretsCoyote said:


> The ratio of debt to disposable income of Irish households was 209% at the end of 2009.
> 
> Since then it has fallen consistently as households have paid down debt and incomes have grown.
> 
> ...



Yes my point isnt Ireland is over-leveraged NOW but rather the CBI regulations  & people getting burned in 08/09 has led to debt aversion & reduction…..and this is how it should remain..…..as I explained Ireland should operate with one of the lowest debt to disposable income ratios in the Western World given our economic/monetary model is all out of our control…..this the operational leverage I outlined in my earlier post.

Secondly it should be clear to all at this point especially since 08 - that large domestic financial institutions operate with an implicit guarantee from the sovereign…..one can argue all day whether this is right or whether the living wills / capital ratios / coco bonds reforms since GFC have changed the probabilities meaningfully…..but it doesn’t escape the fact that the Irish state/taxpayer is the backstop. We should be even more concerned that the foreign lenders that were here Natwest / KBC etc. are pulling out.....increasing mortgage lending concentration in the very banks that WE would need to bail out in the future if something went wrong.


----------



## Purple (29 Nov 2021)

Changing the CB rules won't increase supply in any meaningful way. It will just make housing more expensive. That's all that matters.


----------



## NoRegretsCoyote (29 Nov 2021)

Brendan Burgess said:


> You are also forgetting that while the Loan to Income limit is 3.5 , the Central Bank rules allow 20% of mortgages to be above this cap for first time buyers.



Central Bank's own research shows 10% of mortgages are above the limit, namely between 3.51 and 4.5 LTI. As much as *17% are between the very narrow interval of 3.45 and 3.5*! This 3.5 number is really, really binding in practice.



Brendan Burgess said:


> The rules have been carefully calibrated. And they have helped contain the big increase in house prices.


But they are much more binding now with 2.5% interest rates than in 2015 when interest rates were more like 3.5%.

So the rules were either prudent in 2015 but conservative now. Or they were loose in 2015 but prudent now.

It can't be both.


----------



## PGF2016 (29 Nov 2021)

Sarenco said:


> The Commission thinks that Irish house prices are actually undervalued by reference to average household income growth and long-term average house prices.
> 
> 
> 
> ...


Yes - there are many renters that would prefer to buy. That's given.

Are there developers who have capacity to build more and are not building at present? 

There's demand.
There's a labour shortage. 
There's money to be made. 

Also - what's stopping developers from raising the prices as of now? If the demand is there surely they can do this already? Maybe they're just a charitable bunch.


----------



## Purple (29 Nov 2021)

PGF2016 said:


> Also - what's stopping developers from raising the prices as of now? If the demand is there surely they can do this already? Maybe they're just a charitable bunch.


Are you saying that prices are not going up?


----------



## Purple (29 Nov 2021)

Interesting piece by Eoin Burke-Kennedy in today's Irish Times suggesting that the headline that Irish property is 17% undervalued is misleading.
He does make the point that those with inherited (or gifted) wealth are the ones who can buy. The reality of how wealth is being concentrated in capital will keep being a problem, no matter how much we choose to ignore it.


----------



## PGF2016 (29 Nov 2021)

Purple said:


> Are you saying that prices are not going up?


No, more saying what's stopping developers from putting prices up even higher. Or high enough to make it worth their while to build.

@Sarenco indicated that if prices were higher ....


Sarenco said:


> developers would be significantly more incentivised to build new homes.


What's stopping developers from putting up prices to a level that will incentivize them to build new homes? The demand seems to exist already. CBI intervention should not be needed.

Edit: I'm guessing the answer is that while demand is high it is not high enough.


----------



## skrooge (29 Nov 2021)

NoRegretsCoyote said:


> Central Bank's own research shows 10% of mortgages are above the limit, namely between 3.51 and 4.5 LTI. As much as *17% are between the very narrow interval of 3.45 and 3.5*! This 3.5 number is really, really binding in practice.



How binding the rules are shouldn't be a factor in the decision making process. While parts of the housing market are dysfunctional the part whereby estate agents extract the most they can from a purchaser works very well. 

Change the rules and they will be binding very quickly


----------



## Sarenco (29 Nov 2021)

PGF2016 said:


> What's stopping developers from putting up prices to a level that will incentivize them to build new homes?


Are there sufficient numbers of potential buyers with the ability to finance those purchases at higher prices?

If not, then the demand doesn't exist at those higher prices.


----------



## letitroll (30 Nov 2021)

NoRegretsCoyote said:


> But they are much more binding now with 2.5% interest rates than in 2015 when interest rates were more like 3.5%.
> 
> So the rules were either prudent in 2015 but conservative now. Or they were loose in 2015 but prudent now.
> 
> It can't be both.



Your forgetting that Ireland is predominately a floating rate mortgage market or at best short-term fixed (3-5yrs)…….so in an equation where your trying to determine a prudent lending model …….where  X is income and Y is interest rates……and Y (interest rates) can move all over the place over time and you the sovereign have ZERO control over those rates……..well the only prudent thing to do is attach your model to X (income) which is stable or growing over time……hence why loan-to-Income is the only way to construct a prudent lending framework In Ireland.

If the central bank wanted to introduce flexibility I would agree with moving to a lending model for 30 year fixed rate mortgages ONLY where you could use disposable income to debt servicing ratios as your framework.


----------



## NoRegretsCoyote (30 Nov 2021)

letitroll said:


> Your forgetting that Ireland is predominately a floating rate mortgage market or at best short-term fixed (3-5yrs)


Ireland is moving away from variable and towards fixed rate issuance, and longer and longer terms are available. Variable rates are not unknown in the rest of Europe either! 



letitroll said:


> If the central bank wanted to introduce flexibility I would agree with moving to a lending model for 30 year fixed rate mortgages ONLY where you could use disposable income to debt servicing ratios as your framework.


I could agree here a bit. A higher debt-service-to-income level allowed if you fix for long.


----------



## Purple (30 Nov 2021)

The rarest commodity in the construction equation is suitable zoned land. There are a small number of big players that control most of it. Increasing the finance available to buyers by increasing borrowing income multiples will just increase the cost of the site rather than the margin available for the actual builder. 

Increasing the income lending multiples will just increase the value of development land. Why build on it at all when it's an appreciating asset and you don't have to do a thing with it? Why bother with the cost and hassle of building?

The constraints here are land and labour. The State can fix both issues. They can introduce a property tax than is in fact a site value tax and they can levy it on all land which has been zoned as residential for more than a fixed period (24 months, 36 months etc). That will force zoned land onto the market. At the same time they can streamline the planning process. 
Fixing the labour shortage is a bigger issue. Construction is hard and requires skilled Trades and, relative to many lower skilled jobs which require a 3rd level qualification, it is under paid. Folding Apprenticeships into the CAO system is a good start but attracting higher calibre students is also key, as is actually training them properly instead of just foisting the whole thing back on the employer.


----------

