Are the Central Bank rules actually helping First Time Buyers get on the housing ladder?

Brendan Burgess

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IPAV, the auctioneers' body have made a submission saying: MORTGAGE LENDING RULES HAVE STAGNATED MARKET AND IS NOW CHOKING IT - SURVEY


On reading this, it occurs to me that the rules might actually be helping First Time Buyers.

" Impact of Macroprudential Rules:
Property prices stabilised initially, then stagnated and are now in a downward trajectory

Supporting Evidence


...

DAFT: The Daft.ie House Price analysis of recent trends in the Irish residential sales market Q2 2016:

-The annual increase in average house prices currently stands at 6.3%, compared to 8.5% six months ago and 15.5% at the start of 2015.

-Dublin inflation slows to 1% year-on-year"

They seem to be implying that annual increases of 15% is good for buyer and increases of 1% are bad for buyers.

If the Central Bank rules have stopped house prices from increasing by around 20% in the last 18 months, then it surely means that first time buyers would be finding it easier to get on the housing ladder.

Brendan
 

Gerry Canning

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The 1st time buyers with adequate deposit and an ability to show that they can pay rent + mortgage are ok.
The 1st time buyers who can (only) show they have for years paid more in rent than a mortgage cannot raise deposit and are effectively excluded.

Central Bank rules are blunt and have a welcome dampening effect on prices , but they don,t help consumers ,all they do is ensure that their Banking friends don,t re-mess up.
 

leanbh

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I was interested in the statistic that 60 per cent of purchases are for cash? Was it always this high? Is it an unintended consequence of the rules that investors have enhanced purchasing power, that this in turn pushes up rents? If a person can't save the deposit because of the high rent doesn't this create an imbalance between an ordinary joe soap who just once a modest home and an investor.
 

Gerard123

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Brendan, great performance on rte radio this morning. Simple messages came across very well rather than complicating with too many stats.

Auctioneer that was on cited a survey of 180 auctioneering firms - isn't that a bit like asking 180 kids if they like sweets? Answer is preordained.

Saving for a few years for a house deposit. I heard a contributor on the radio indicating that people not saving for a house and complaining is a bit like a 60 year old only starting to save for a pension and then complaining about the unfairness of pensions. How many existing house owners of the 2 million+ nationwide decided to buy a house without saving for a period of time?

Appreciate that there are some complexities to be worked through and resolved. For example people paying rent - some acknowledgement in the formula of their paying rent on a sustained basis is needed. Perhaps take a % of the rent, say 75% of the past two years rent, 50% of years 3-5, etc and include that in the deposit calculation. Would need rent certified, e.g. proof via bank statements, PRTB registration, etc. (Reason for not taking higher levels of the rent is that there are other costs connected with owning a house that renters usually do not bear, maintenance, property taxes, etc). Would need to have proper controls built in else there may be abuses of the system.

At the same time LTV can not (should never) be 100% even for renters else the banks have all the risks of the ownership in practice. And we know from experience what that can mean for ordinary taxpayers and people who are paying their mortgages!

Gerry - don't follow the logic that central bank rules in this area don't help consumers. They may not help a % of the population seeking to buy houses and are financially stretched, (sympathy there), but they certainly help the vast majority of the consumer population in ensuring that house prices are not allowed run amok, with the result that it is consumers who end up picking up the tab via bailouts. That is certainly helping the consumer. Agree some bluntness to the rules, and they should be ironed out, unfortunately any set of rules to have teeth has an element of bluntness.
 

T McGibney

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they certainly help the vast majority of the consumer population in ensuring that house prices are not allowed run amok, with the result that it is consumers who end up picking up the tab via bailouts. That is certainly helping the consumer. Agree some bluntness to the rules, and they should be ironed out, unfortunately any set of rules to have teeth has an element of bluntness.
Price fixing never works and never helps consumers, Gerard. It simply distorts the market and creates side-effect bubbles and shortages elsewhere, for example in rents. The longer the price fixing goes on, the more grotesque these side-effects will be, until the artificial house-of-cards collapses.

The notion that consumers must fund the bailout of failed financiers is a particularly Irish one. It should not be policy and shouldn't be allowed temper policy.
 

Gerard123

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Price fixing never works and never helps consumers, Gerard. It simply distorts the market and creates side-effect bubbles and shortages elsewhere, for example in rents. The longer the price fixing goes on, the more grotesque these side-effects will be, until the artificial house-of-cards collapses.
I don't agree that sensible Central Bank rules on lending is tantamount to price fixing, frankly that's a ridiculous comment. Relaxing bank lending won't build a single additional house, it will simply bid up prices. Rent issues are due mostly to lack of supply and the lack of a proper housing market.

In fact extending credit will potentially make the situation worse as house prices will increase in line with increased lending. Landlords who are at the margins will sell up (me being one!) and that will reduce supply further in the short term. Personally I would love to see a credit bubble and large house price inflation as I could sell up and get out of negative equity quickly and sleep better, but I recognise that may solve one set of problems potentially at the increased risk of creating others.

The notion that consumers must fund the bailout of failed financiers is a particularly Irish one. It should not be policy and shouldn't be allowed temper policy.
Agree but we saw what happened and the pressure applied. Much of the extravagant lending that ultimately led to the bailouts was precisely due to lax lending rules, excessive credit and a central bank and regulator asleep. Give us a proactive central bank and regulator, warts and all.
 

trasneoir

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Dublin [property] inflation slows to 1% year-on-year
So about half a point ahead of general inflation - isn't this roughly where it's "supposed" to be in terms of long term international trends? Can anybody who isn't an auctioneer confirm?

The notion that consumers must fund the bailout of failed financiers is a particularly Irish one.
I seem to recall a larger country to the west of us who did likewise. (No, not Iceland, father west again)

bailout of failed financiers ... should not be policy
Maybe it shouldn't, but all evidence suggests that it is. Even if it weren't policy to bail them out, preventing financiers from lending recklessly would be a sensible protection for their shareholders and bondholders.
 

T McGibney

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Relaxing bank lending won't build a single additional house, it will simply bid up prices.
This will indeed be the case in the short term, but we're currently in a position where the artificial suppression of house prices means that new house construction for sale is unprofitable. Fix the former and you'll fix the latter.

I recognise that may solve one set of problems potentially at the increased risk of creating others.
By intervening in the market to suppress prices and supply, the State is already doing this.

Agree but we saw what happened and the pressure applied. Much of the extravagant lending that ultimately led to the bailouts was precisely due to lax lending rules, excessive credit and a central bank and regulator asleep. Give us a proactive central bank and regulator, warts and all.
If we have a proactive central bank and regulator, why do we also need to fix the market?

If we don't have a proactive central bank and regulator, why don't we get one?
 

T McGibney

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I seem to recall a larger country to the west of us who did likewise. (No, not Iceland, father west again)
I think you'll find the yanks haven't wrapped their property market in cotton wool for the past 8 years.

Maybe it shouldn't, but all evidence suggests that it is. Even if it weren't policy to bail them out, preventing financiers from lending recklessly would be a sensible protection for their shareholders and bondholders.
The State shouldn't be in the business of protecting shareholders and bondholders from their investee companies' own stupidity. And even if they are, there are surely better ways of doing it than grotesquely distorting the supply of residential accommodation with all the mayhem and misery that this brings.
 

Gerard123

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This will indeed be the case in the short term, but we're currently in a position where the artificial suppression of house prices means that new house construction for sale is unprofitable. Fix the former and you'll fix the latter.
Agree to disagree so. Noting artificial in the CB ensuring sensible lending policies are adopted by the Banks. That is absolutely in the interests of the vast majority of consumers in Ireland.

New house price construction - matters such as high levels of tax on new builds, wage levels, site costs - all have a huge impact on profitability of house building. Also high personal taxes are a major issue as it limits disposable income, people ability to save a deposit, etc. Its not a simple case of looking at one issue (such as lending) in isolation and blaming that for creating an artificial housing market. General economic environment and conditions all come into play, no one factor in isolation.

I would be in agreement for some tweaks to the rules, such as recognising rents paid, income levels (by that I mean if you're on higher income there is a better ability to pay proportionally more than a blunt x times income). But not wholesale changes.
 
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T McGibney

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Agree to disagree so. Noting artificial in the CB ensuring sensible lending policies are adopted by the Banks. That is absolutely in the interests of the vast majority of consumers in Ireland. End of.
There is something highly artificial about a situation where we've needed tens of thousands of new housing units annually for several years and a combination of State policies and practices - including the imposition of arbitrary lending rules that may or may not constitute or facilitate "sensible lending policies" - have ensured that this demand cannot be met.

This is in nobody's interest.


Its not a simple case of looking at one issue (such as lending) in isolation and blaming that for creating an artificial housing market.
Except I haven't done that. I've simply said that price fixing doesn't work. And the CB rules are a key element of an explicit price-fixing strategy.

But not wholesale changes.
We have a housing crisis. We need wholesale changes to fix it.
 

trasneoir

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We have a housing crisis.
I'd see the current situation as the hangover from a crisis of unsustainable private debt. From that perspective, facilitating more unsustainable private debt doesn't seem like a long term solution.

I'd also be slow to characterize "you can't borrow money you can't afford to repay" as price fixing. I appreciate where you're coming from, affordability criteria are a significant state intervention in the market (though Brendan's recent figures suggest the effects are overstated), but I wouldn't expect an old regulatory strategy (ie. do nothing) to produce new results.
 
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T McGibney

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I'd see the current situation as the hangover from a crisis of unsustainable private debt.
How? Higher taxes on landlords and tighter and more costly building regulations have nothing to do with the 2008-10 debt crisis. The economy has improved yet we don't have enough homes and seem unable to correct this. We can't blame the bust for everything.

. I appreciate where you're coming from, affordability criteria are a significant state intervention in the market (though Brendan's recent figures suggest the effects are overstated), but I wouldn't expect an old regulatory strategy (ie. do nothing) to produce new results.
Except I haven't advocated that strategy.
 

Gerard123

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There is something highly artificial about a situation where we've needed tens of thousands of new housing units annually for several years and a combination of State policies and practices - including the imposition of arbitrary lending rules that may or may not constitute or facilitate "sensible lending policies" - have ensured that this demand cannot be met.

This is in nobody's interest.
Agree with the broad thrust of the comments, but not the part about arbitrary lending rules. Rules are needed to prevent reckless and unsustainable lending, and while no set of rules are perfect or can satisfy everyone, with some tweaks the existing rules can be improved and are acceptable at this time. Relaxing credit rules and extending credit without additional builds will simply drive up prices.

Except I haven't done that. I've simply said that price fixing doesn't work. And the CB rules are a key element of an explicit price-fixing strategy.
For clarity I wasn't saying you had done that, I was seeking to put things in context and highlight some other considerations that apply.

We have a housing crisis. We need wholesale changes to fix it.
I agree we need wholesale changes to fix the housing crisis. I do not agree that we need wholesale changes to the existing CB rules at this time.

I think we're wordsmithing at this stage and the conversation may become circular or repetitive. We don't agree on some matters which is fair enough.
 
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trasneoir

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Except I haven't advocated that strategy.
I may have misinterpreted your preferred approach to lending as "step back and let free markets sort it out". If I'm misrepresenting your position on the lending rules, can you spell it out for me?

It's an approach with which I've got some sympathy - the natural consequences of reckless lending (and borrowing) may be instructive to the survivors. My objection is that it won't work as long as the eu and the electorate insist that the state protect the losers from the natural consequences.

I'm totally agreed that building needs to be profitable, and policy changes may be needed if it isn't. I just can't see how more (and riskier) personal debt can be part of any sustainable solution.
 

Gerry Canning

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T Mc Gibney
{the USA havn,t wrapped their Banks in cotton wool} ?
It seems that between one financial shift and another 60% of all USA mortgage risk has been effectively passed back to Joe Citizen.
Reminds me of Ireland !.
Maybe that's how Capitalism works ie with implicit guarantees from Joe Public, ?.
 

Sarenco

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The value of home loans to FTBs rose by almost 17% in the year to end-May 2016 (per the IBF).

I have yet to see any evidence whatsoever that the Central Bank mortgage rules are causing a problem for FTBs.

Are rents particularly high at the moment relative to house prices? Well by historic standards they're about average.
 

Username2012

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They are helping 1st time buyers (and all buyers) by saving them from themselves. The fundamental determinant of house prices in the short/medium term is earnings* leverage, and as earnings don't vary thay much in short period for cohorts as a whole it really is finance (excellent overview here https://www.theguardian.com/books/2013/aug/18/default-line-extract-faisal-islam-housing).

As a hopeful first time buyer in the next few years I'd much rather wait a year or two than pay multiples more of my annual salary due to loose lending standards.
 

Username2012

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I think you'll find the yanks haven't wrapped their property market in cotton wool for the past 8 years.



The State shouldn't be in the business of protecting shareholders and bondholders from their investee companies' own stupidity. And even if they are, there are surely better ways of doing it than grotesquely distorting the supply of residential accommodation with all the mayhem and misery that this brings.
Given we guarantee deposits the state is very much in that business
 

trasneoir

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It seems that between one financial shift and another 60% of all USA mortgage risk has been effectively passed back to Joe Citizen.
Maybe that's how Capitalism works ie with implicit guarantees from Joe Public, ?.
To some extent, yes. All sorts of business can have negative externalaties - costs or risks which are not naturally borne by the business themselves.
In the last couple of centuries we have learned the importance of regulation and taxation in discouraging companies from polluting, addicting, robbing, poisoning or killing their customers (or joe public).

In this century, we'll need to figure out how to discourage business from fattening or bankrupting them.

Where states have failed to anticipate or manage these negative externalaties, the public (or the customers) always pay, one way or another. In terms of government bailouts, the cost of superfund (the US body that cleans and compensates for pollution by under-regulated businesses) over the last 35 years utterly dwarfs the bailouts of financial institutions. I suspect the health costs caused by the ongoing misdeeds of the agri-food industry will be right up there too.
 
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