Central Bank decides against changing mortgage limits

[NoRegretsCoyote]

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]

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]

I don't think rents are relevant.

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

 

[Delboy]

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]

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]

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]

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]

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]

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]

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]

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]

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.

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]

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]

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

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]

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]

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]

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]

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]

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]

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.