Central Bank wants your views on the mortgage lending limits

[skrooge]

I think the one thing we can agree on (maybe) is that there is a supply issue.

How do we address it? We currently subsidise FTB's to try and purchase these properties, I find this a little strange. Ftbs are generally the poorest part of the property ladder. Why not use the property ladder to our advantage rather than spending a fortune trying to bypass it. Surely we should be building new houses that the existing owners want to trade up to. Let ftbs buy the properties these existing owners move out of. Is this not a more sustainable?

For it to work it might mean changing our incentive structure and possibly taxation but it's how the market use to work. Rather than a subsidy for ftbs just do away with/reduce stamp duty on new property. It becomes equally attractive to all then. I can't imagine this would be as costly to the government as their current FTB grant

The above probably won't happen but I don't think it's that crazy a thought.

As for the mortgage measures I think they could be more targeted. A wealthy household does not need a boost. But a 20% deposit does stop some people moving.

To encourage builders to build we probably need to boost lower income households purchasing capacity. Effectively raise the floor on property market. I don't see the need to raise the roof. This suggests some kind of sliding scale. Targeting a disposable income figure might address this. Or you can borrow X times the first part of your income but less against the balance.

If 3.5 times isn't sufficient to increase supply what would be? Secondly how prudent would that figure be? There is always a trade-off between prudence and helping the economy (in the short term at least)

 

[Brendan Burgess]

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?

The only study I know of is the Irish property crash where there were no LTI or LTV limits and about 200,000 people got into mortgage difficulty.

When I bought my first house, the limit was 2.5 times salary but interest rates were higher than they are now. I still think that 2.5 is about right for the long term if we had demand and supply in balance.

Brendan

 

[time to plan]

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

There are multiple factors at play.

 

[Purple]

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

Given that utilities, groceries, car insurance, school uniforms and book, car service and tyres etc are around the same for a household with an income of €60k as for a household with an income of €300K the net disposable income of the latter household will be far greater, even taking income tax into account.

Unexpected costs will probably swallow a larger chunk of the lower income households net income.

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

I agree with you there but much higher rates of stamp duty for non residential buyers would have the same result without the risk for the buyer.

 

[time to plan]

Another way of looking at this is somebody's ability to pay rent. If I've paid rent of €1500 per month on time each month for 2 years, and I have a permanent job, I can probably manage to pay a mortgage of €1000 per month, particularly if I have a long-term fixed rate.

 

[Brendan Burgess]

That is the great quandary. It is actually cheaper to pay a mortgage than to rent a similar property.

But if you lend everyone more money, it doesn't help. It just pushes up the prices.

We have to focus on the real problems which are the lack of houses available for first time buyers and their high prices because it's expensive to build them and because investors are buying them to rent for social housing.

Brendan

 

[Sarenco]

Given that utilities, groceries, car insurance, school uniforms and book, car service and tyres etc are around the same

Net disposable income is simply what's left when all taxes have been deducted. Perhaps you are thinking of discretionary income?

If the ratio was calculated off disposable, rather than gross, income it would benefit lower earners.

 

[time to plan]

That is the great quandary. It is actually cheaper to pay a mortgage than to rent a similar property.

But if you lend everyone more money, it doesn't help. It just pushes up the prices.

We have to focus on the real problems which are the lack of houses available for first time buyers and their high prices because it's expensive to build them and because investors are buying them to rent for social housing.

Brendan

You describe it well. I understand that lending more drives up prices, but using lending criteria as a long-term tool to keep prices down has the effect of trapping people paying rent to make up for a policy failure in supply, in my opinion. It transfers money from poorer people to richer people / investment vehicles - no wonder the landlord TDs love it.

It also builds a problem for the state for the future as more people will be retiring having to pay rent, and fewer people will have an asset to liquidate to pay for long-term care (whatever you think of the rights and wrongs of it).

Deal with the supply problem properly, and then if someone can pay rent, then they can pay a mortgage.

 

[NoRegretsCoyote]

If the ratio was calculated off disposable, rather than gross, income it would benefit lower earners.

At the moment you can plug in numbers that show a low-income household will only be able to get a mortgage resulting in payments of 23% of its net income.

That's far below a prudent limit which I would put somewhere in the 30% -35% range. Lots of these households already pay as much in rent.

 

[odyssey06]

At the moment you can plug in numbers that show a low-income household will only be able to get a mortgage resulting in payments of 23% of its net income.

That's far below a prudent limit which I would put somewhere in the 30% -35% range. Lots of these households already pay as much in rent.

There are additional expenses with ownership of a property you don't have renting - maintenance, insurance, tax, service charges in some estates & apartments. Hard to put an exact % on it but if can afford the rent but you are at your limit - you can't afford it as owner.

 

[LS400]

There is not the space left in Dublin to satisfy the building of units with the requirements of:

First timers getting on the ladder,
Investors with cash on deposit sitting in Accounts
And, the Institutional LLs Hovering Machine.

A Government policy could fix this with a substantial tax disincentive on second property purchases`s for the next 5 years. This will even up the playing field to some extent.

I say Dublin, because the fall out from Dublin, affects the next border towns.

 

[time to plan]

When I lived in the UK, there was an Irish report from the '60s or '70s (?) (damned if I can remember what it's called) that was often referenced. It had never been implemented. If I remember it correctly, the upshot was:

Rather than a system where landowners and developers make huge profits of land by gaining planning permission, the planning authorities hold a reverse auction for land without planning permission and then when the state owns it, it grants planning permission. E.g. Fingal County Council or An Bord Pleanála decides to build 200 houses and associated infrastructure, retail etc. around Rusk & Lusk train station, and invites bids to sell on a specification.

Then when the land is bought, private developers can build and the houses can be sold, and the profit that the state / council makes can be ploughed into further land purchases or social housing. There are other models as well where the council / state keeps an interest in the land ownership but not the building.

Lots of ways it could work, but what the principle does is to stop huge transfers of wealth from house buyers to landowners via the act of granting planning permission. Personally I would just compulsory purchase the land at fair market value + a premium, and change the constitution via a referendum if needs be, but that's just me.

 

[The Horseman]

You describe it well. I understand that lending more drives up prices, but using lending criteria as a long-term tool to keep prices down has the effect of trapping people paying rent to make up for a policy failure in supply, in my opinion. It transfers money from poorer people to richer people / investment vehicles - no wonder the landlord TDs love it.

It also builds a problem for the state for the future as more people will be retiring having to pay rent, and fewer people will have an asset to liquidate to pay for long-term care (whatever you think of the rights and wrongs of it).

Deal with the supply problem properly, and then if someone can pay rent, then they can pay a mortgage.

Lending does not drive up prices rather lack of supply does. The role of the central back is to ensure that banks are lending prudently. It is up to us as individuals or the State were appropriate to house people.

We have this concept that construction prices are ever increasing be it raw material prices, labour shortages etc. On the one hand we want properties built but we don't want to pay the costs associated. Suppliers of raw materials and labour will go where they can get the best price (this is simple economics).

We as a society need to take some big decisions as to how to "square the circle". Everybody can't live where they want to unless they are willing to pay for it in some way either financially or in smaller sized properties.

Alot of people keep referring to the European model of renting for life. How do they deal with the requirement to rent in retirement? How do they fund medical care (their equivalent of the Fair Deal scheme)

 

[Sarenco]

At the moment you can plug in numbers that show a low-income household will only be able to get a mortgage resulting in payments of 23% of its net income.

That's far below a prudent limit which I would put somewhere in the 30% -35% range.

Exactly.

The LTI limit of 3.5 times gross income was probably about right back in 2015 when the measures were originally introduced. But mortgage rates have fallen by at least 25% since 2015 so the limit is now overly restrictive and should be modestly increased to reflect a more appropriate level of affordability for borrowers.

Inappropriately limiting access to mortgage finance will to continue to put increased pressure on the rental market - people have to live somewhere. Rising rents will limit the ability of would be buyers to save and will incentivise more institutional/cash buyers to enter the market.

Last year approximately 40% by value of residential property purchases were by institutional/cash buyers (it's normally around half that level). That indicates a dysfunctional market as increasing numbers of potential owner occupiers are getting caught in a "rent trap".

We have to focus on the real problems which are the lack of houses available for first time buyers and their high prices

I think that's framing the issue too narrowly. In my opinion, our problem is a lack of supply of new housing - full stop.

A modest relaxation of the mortgage limits should prompt a supply response so it is not necessarily the case that prices will rise. Or at least rise to a corresponding degree.

 

[NoRegretsCoyote]

There are additional expenses with ownership of a property you don't have renting - maintenance, insurance, tax, service charges in some estates & apartments.

Also the pleasure of paying off your own capital and not your landlord's!

But mortgage rates have fallen by at least 25% since 2015 so the limit is now overly restrictive and should be modestly increased to reflect a more appropriate level of affordability for borrowers.

A lot of people think act like 3.5 was handed down by God in the Sinai desert and written on stone tablets and not, in fact, haggled over by a committee of humans down the docklands in December 2014

 

[time to plan]

Lending does not drive up prices rather lack of supply does. The role of the central back is to ensure that banks are lending prudently. It is up to us as individuals or the State were appropriate to house people.

We have this concept that construction prices are ever increasing be it raw material prices, labour shortages etc. On the one hand we want properties built but we don't want to pay the costs associated. Suppliers of raw materials and labour will go where they can get the best price (this is simple economics).

We as a society need to take some big decisions as to how to "square the circle". Everybody can't live where they want to unless they are willing to pay for it in some way either financially or in smaller sized properties.

Alot of people keep referring to the European model of renting for life. How do they deal with the requirement to rent in retirement? How do they fund medical care (their equivalent of the Fair Deal scheme)

Lending AND lack of supply drive prices up.

If mortgages were banned (no lending), all other things being equal, prices would decrease.
If people would be allowed to borrow many time more than they can now, there would be more money chasing the same supply and, all other things being equal, prices would increase.

 

[NoRegretsCoyote]

If mortgages were banned (no lending), all other things being equal, prices would decrease.

If mortgages were banned all house purchase would be funded from savings and inheritances, and you would have very little new build.

Supply and demand are like two blades of a scissors. You need both to cut the paper. Right now the demand blade is sharp and the supply blade is blunt. Sharpening the demand blade a bit more will still cut the paper better even if the supply blade is still blunt. Best of all would be to sharpen both, but it's not an either/or.

 

[The Horseman]

Lending AND lack of supply drive prices up.

If mortgages were banned (no lending), all other things being equal, prices would decrease.
If people would be allowed to borrow many time more than they can now, there would be more money chasing the same supply and, all other things being equal, prices would increase.

Supply (or lack thereof) is whats driving up prices. As supply increases price falls until equilibrium is reached. Supply is not the responsibility of the Central bank income multiples.

If mortgages were banned than prices would not decrease, supply would, otherwise why would a developer build if he can't sell.

Demand is outstripping supply because of scarce resources. We don't have the same numbers in construction and the associated businesses to meet demand. As such price for scarce resources increases and these increases have to be paid for.

The key is how do you increase supply in the short to medium term to meet and even exceed demand in the long term if you want to keep a check on prices as competition will automatically do this.

Whether people like it or not we will have to pay to encourage an increase in supply certainly in the short term.

 

[Purple]

Net disposable income is simply what's left when all taxes have been deducted. Perhaps you are thinking of discretionary income?

If the ratio was calculated off disposable, rather than gross, income it would benefit lower earners.

Sure, I'm talking about the ability to service the loan if unexpected expenses occur.
You can calculate the amount someone can borrow using any criteria you like but things happen that screw up the best laid plans and those things are more likely to cause people on low incomes to be unable to pay their mortgage.

 

[Purple]

Inappropriately limiting access to mortgage finance will to continue to put increased pressure on the rental market - people have to live somewhere. Rising rents will limit the ability of would be buyers to save and will incentivise more institutional/cash buyers to enter the market.

Last year approximately 40% by value of residential property purchases were by institutional/cash buyers (it's normally around half that level). That indicates a dysfunctional market as increasing numbers of potential owner occupiers are getting caught in a "rent trap".

Rather than increasing the mortgage rates to allow those buyers to compete with cash buyers, who are almost always investment buyers, why not introduce a 15% stamp duty on all property purchases where the purchaser is not an owner occupier.

Since the majority of institutional buyers are buying the properties in order to rent them to the State for social housing the State is the biggest actor excluding first time buyers from the market and attracting cash buyers into the market. That has to be fixed too.