Central Bank wants your views on the mortgage lending limits

[Brendan Burgess]

I did think that with interest rates lower and with 20 year rates available, well maybe it's less risky to borrow 4.5 times your income.

But that is only one risk removed.

You still face the following risks:

• losing your job
• Getting married
• having kids
• separating
• getting sick
• a general economic downturn
• Getting stuck in negative equity and wanting to trade up

It's just too risky borrowing 4.5 times your income - except in cases where your income is reasonably expected to rise significantly and the Central Bank allows exceptions.

Brendan

 

[Brendan Burgess]

But even if borrowing 4.5 times your salary were not risky, it won't help. It will just push up prices.

And people will have much bigger mortgages.

We need to focus on the real causes of the problem and not look for a scapegoat.

Brendan

 

[LS400]

PS I gave that 15 seconds thought,

About as much as most Politicians.

 

[LS400]

We need to focus on the real causes of the problem

It ain't whether it be 3.5 or 4.5 times salary, it runs much deeper. Its a mind set we have on needing to own our property.

This is where I would be focusing my thoughts. Security of Tenure.

 

[Brendan Burgess]

4.5 times a person's salary is reckless lending and reckless borrowing. It will lead us back to the bad old days of 20% of borrowers being in severe distress.

Whatever the problem is, reckless borrowing is not going to fix it.

Brendan

 

[LS400]

Here's a thought,

When I were a lad, as in buying my first house, like most starting out, I scraped the money together every month to pay my bills.

I'm now at an age where I can comfortably buy another property. I suggested here before, that I could provide a property in most parts of Dublin for €1000/month, if not subject to the horrendous tax take. If there was a threshold for example, in that everything above is subject to tax. it would smarten up a lot of people, and in my opinion regulate the letting industry, and in doing that soften up the pressure to buy at all costs.

But, the Government would rather see the institutional guy come in and pillage the market, absolutely sickening.

Its not reckless lending if you can afford it. You have laid out many risks, but these risks were there there when I was on crap money back in the day.

Hence, the think tank that has been flipping and flopping with still be here asking the same questions in 5 years. And, in saying that, there should be scapegoats, its not working and the first time borrowers cant hang on any longer, while political careers are coasting along nicely.

 

[Sarenco]

You still face the following risks:

• losing your job
• Getting married
• having kids
• separating
• getting sick
• a general economic downturn

Wouldn't you also face those risks if you were renting?

Getting stuck in negative equity and wanting to trade up

Adjusting the LTI ratio, while leaving the LTV ratio unchanged, shouldn't increase the risk of getting stuck in NE.

But even if borrowing 4.5 times your salary were not risky, it won't help. It will just push up prices.

You could equally argue that lowering the ratio to 2.5 times your salary would reduce house prices. The only snag is that it would no longer make economic sense to build new houses so we aren't solving the core supply problem.

We are now in a position where it typically costs a lot more to rent than to service a mortgage on a similar property and I believe the CBI's mortgage rules have contributed to this situation.

FWIW, the UK's FCA has set an overall LTI limit of 4.5 times salary, with some exceptions.

 

[Brendan Burgess]

You could equally argue that lowering the ratio to 2.5 times your salary would reduce house prices. The only snag is that it would no longer make economic sense to build new houses so we aren't solving the core supply problem.

Reducing it to 2.5 or increasing it to 4.5 does not address the problem at all.

The problem is the lack of supply, the cost of building houses and the local authorities taking a lot of the limited supply of private housing off the market for social housing.

We need to address the fundamental problems which would bring prices down.

Ideally, in time, we would bring the prices down to a level where we could reduce the maximum LTI to 2.5 times.

Brendan

 

[NoRegretsCoyote]

FWIW, the UK's FCA has set an overall LTI limit of 4.5 times salary, with some exceptions.

Ireland is now the only EU country using LTI. Many others use debt-service-to-disposable-income as a macro-pru measure. This, sensibly, means borrowing ability changes as interest rates do.

At some point we no longer have to ape the UK....

 

[Sarenco]

We need to address the fundamental problems which would bring prices down.

I think we can agree that the fundamental problem is an insufficient supply of new properties.

However, if overly strict mortgage lending requirements are frustrating would be buyers then we are really just increasing demand in the rental market.

Again, I think the key point is that the very significant falls in mortgage rates since 2015 justifies a modest adjustment to the LTI limit.

 

[Purple]

You could equally argue that lowering the ratio to 2.5 times your salary would reduce house prices. The only snag is that it would no longer make economic sense to build new houses so we aren't solving the core supply problem.

It would reduce the price of properties somewhat but given the net rental yields it would just drive more institutional and cash buyers into the market.

 

[24601]

4.5 times a person's salary is reckless lending and reckless borrowing. It will lead us back to the bad old days of 20% of borrowers being in severe distress.

Whatever the problem is, reckless borrowing is not going to fix it.

Brendan

Brendan, I'm just wondering if you could steer me towards any publications regarding what is the optimum maximum LTI? Have there been any international studies done that you are aware of?

 

[Sarenco]

Ireland is now the only EU country using LTI. Many others use debt-service-to-disposable-income as a macro-pru measure. This, sensibly, means borrowing ability changes as interest rates do.

I entirely agree with you that we should replace the LTI ratio with a (total) DTI ratio and using disposable (rather than gross) income would also be an improvement.

 

[Purple]

I think we can agree that the fundamental problem is an insufficient supply of new properties.

However, if overly strict mortgage lending requirements are frustrating would be buyers then we are really just increasing demand in the rental market.

Again, I think the key point is that the very significant falls in mortgage rates since 2015 justifies a modest adjustment to the LTI limit.

The issue is lack of supply and the amount of that supply being hovered up by people and entities who will then rent out the property. The biggest player there is the State. They are, by far, the biggest block on first time buyers getting their first home.

 

[Sarenco]

It would reduce the price of properties somewhat but given the net rental yields it would just drive more institutional and cash buyers into the market.

Perhaps but wouldn't an increase in the ratio also have the opposite effect?

 

[Purple]

I entirely agree with you that we should replace the LTI ratio with a (total) DTI ratio and using disposable (rather than gross) income would also be an improvement.

That would negatively impact lower income purchasers. The State would then have yet another scheme to counter that and an even more dysfunctional market.

 

[Purple]

Perhaps but wouldn't an increase in the ratio also have the opposite effect?

Yes. The opposite of this;

The problem with increasing the income to lending multiple is or course that the €320k house the prospective buyer is chasing will now cost €360k or €380k, but it's not a linear increase (see below). Increasing money supply just increases prices, it doesn't increase supply. The same people will be in the same place in the queue. The only difference will be that the same person who was going to buy the house anyway will have paid more for it.

The unintended consequence of all of this is that residential property has become more attractive and affordable for the cash buyer and large investor. That and the fact that there's no return on Bonds means that capital will keep flooding into the market so in that sense the existing lending multiples disadvantage anyone who is borrowing to buy a home. Given that 40% of homes are bought for cash the knock-on effect of increasing the lending multiple won't quite result in a corresponding increase in prices.

 

[time to plan]

I did think that with interest rates lower and with 20 year rates available, well maybe it's less risky to borrow 4.5 times your income.

But that is only one risk removed.

You still face the following risks:

• losing your job
• Getting married
• having kids
• separating
• getting sick
• a general economic downturn
• Getting stuck in negative equity and wanting to trade up

It's just too risky borrowing 4.5 times your income - except in cases where your income is reasonably expected to rise significantly and the Central Bank allows exceptions.

Brendan

Depends how long you fix rates for...

 

[Purple]

Depends how long you fix rates for...

No it doesn't. The unexpected changes to income or outgoings effects your ability to pay the fixed amount.

 

[Sarenco]

That would negatively impact lower income purchasers. The State would then have yet another scheme to counter that and an even more dysfunctional market.

Surely the progressive nature of our income tax system would mean that using disposable (rather than gross) income would proportionately benefit lower income purchasers?

Increasing the LTI/DTI ratio would also put young/lower income borrowers in a better position to compete with cash/institutional buyers.