Brendan Burgess
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Here is the text of an article I had in yesterday's Sunday Times. (This is the version as submitted. They made minor edits to the text.)
The Central Bank is conducting its annual review of the mortgage lending limits which restrict mortgages for most first-time buyers to 90% of the price of the house and to 3 ½ times their income. In last week’s Sunday Times, Ross Maguire, an investor in residential property, called on the Central Bank to allow lenders to give First Time Buyers 100% mortgages and to give borrowers more than 3 ½ times their income. He argued that repayments on such mortgages would be lower than the cost of renting similar properties.
He also made the somewhat surprising argument that handing out 100% mortgages and bigger multiples of a person’s income would not lead to house price inflation.
We do have a serious problem with high house prices throughout the country. And it is very frustrating for a couple to be paying rent every month because they can’t afford to get on the housing ladder. And Ross is absolutely right, that, in the current market, it is cheaper to repay a mortgage than to pay rent. So, if an individual could borrow 100% of the cost of a house, it would make sense for them to do so instead of paying rent. But if the lenders give everyone 100% mortgages and 5 times their income, then house prices will soar and first-time buyers will be no better off. In fact, they will be far worse off. Higher house prices will mean that it will still be very difficult to get on the housing ladder. But worst of all, those who do manage to buy a house will be saddled with much bigger mortgages and bigger repayments over 35 years.
When people take out mortgages, they assume that their current positive financial situation will persist. But life has a nasty habit of interfering. They have children and childcare expenses. They take time off work. Couples split up. They lose their jobs. They get sick. A couple earning €50k each can borrow €350k between them. That is 3 ½ times their income. But if one of them loses their job, they then are trying to service a €350k mortgage from a salary of €50k.
The human cost of reckless lending is enormous. After the last crash, over 20% of people went into mortgage arrears. That represents about 150,000 families. Even today, over ten years after the crash, we still have about 30,000 families in arrears over 90 days. These were people who should have been enjoying their life together as a couple bring up their children and planning for the future. Instead, they faced mortgage arrears and negative equity, harassing phone calls from their lenders and the ever-present threat of repossession and homelessness. We do not want a repeat of this.
A mortgage equal to 3 ½ times a couple’s income and 90% of the value of a house is too high. It should be gradually reduced to 3 times income and 80% of the house value.
Instead of attempting to solve the affordability problem by handing out ever bigger mortgages, we should solve it by bringing down the cost of building starter homes so that people on moderate incomes can afford to buy starter homes with modest mortgages. We need to make it more attractive for developers to build starter homes instead of upmarket homes.
Government policies have made housing unaffordable for people on moderate incomes. Reversing these policies can make them affordable again.
The government charges first-time buyers 13.5% VAT on their new home. It’s crazy that during a housing crisis, that a house which would otherwise cost €250,000 is pushed up to €283,000 by the imposition of VAT. VAT should be set at zero for starter homes as it is in the U.K.
Developers of new housing estates must allocate part of the land for social housing. This pushes up the price of the houses. So, not only are first-time buyers paying for their own homes, but they are also funding their neighbours in local authority homes. Developers of starter homes should be exempt from the requirement to provide social housing.
Developers must also pay development levies. These should be scrapped for starter homes.
Well intentioned governments have implemented housing standards which result in every new home being a Rolls Royce. These standards may be appropriate for upmarket homes, but we need less exacting standards for starter homes. Most buyers of starter homes would settle for a Mini and trade up to a Rolls Royce later.
We also need to bring down the costs of buying land for housing. The state needs to acquire large tracts of land by compulsory purchase at their current use value – which would usually be the agricultural value. The local authority should put in the infrastructure such as roads and water and schools and then sell off the ready to go sites to builders on condition that they build starter homes.
If the government reversed all the policies which have made housing unaffordable, they could also scrap the artificial interventions such as Help to Buy, Shared Equity and Affordable Homes. Homes should be naturally affordable and not made artificially so to compensate for the government’s action in other areas.
The policies of successive governments have pushed up the cost of building houses. It is up to the government to reverse these policies. Relaxing the mortgage rules would exacerbate the problem, not solve it.
Brendan Burgess is the founder of the consumer forum Askaboutmoney.com
The Central Bank is conducting its annual review of the mortgage lending limits which restrict mortgages for most first-time buyers to 90% of the price of the house and to 3 ½ times their income. In last week’s Sunday Times, Ross Maguire, an investor in residential property, called on the Central Bank to allow lenders to give First Time Buyers 100% mortgages and to give borrowers more than 3 ½ times their income. He argued that repayments on such mortgages would be lower than the cost of renting similar properties.
He also made the somewhat surprising argument that handing out 100% mortgages and bigger multiples of a person’s income would not lead to house price inflation.
We do have a serious problem with high house prices throughout the country. And it is very frustrating for a couple to be paying rent every month because they can’t afford to get on the housing ladder. And Ross is absolutely right, that, in the current market, it is cheaper to repay a mortgage than to pay rent. So, if an individual could borrow 100% of the cost of a house, it would make sense for them to do so instead of paying rent. But if the lenders give everyone 100% mortgages and 5 times their income, then house prices will soar and first-time buyers will be no better off. In fact, they will be far worse off. Higher house prices will mean that it will still be very difficult to get on the housing ladder. But worst of all, those who do manage to buy a house will be saddled with much bigger mortgages and bigger repayments over 35 years.
When people take out mortgages, they assume that their current positive financial situation will persist. But life has a nasty habit of interfering. They have children and childcare expenses. They take time off work. Couples split up. They lose their jobs. They get sick. A couple earning €50k each can borrow €350k between them. That is 3 ½ times their income. But if one of them loses their job, they then are trying to service a €350k mortgage from a salary of €50k.
The human cost of reckless lending is enormous. After the last crash, over 20% of people went into mortgage arrears. That represents about 150,000 families. Even today, over ten years after the crash, we still have about 30,000 families in arrears over 90 days. These were people who should have been enjoying their life together as a couple bring up their children and planning for the future. Instead, they faced mortgage arrears and negative equity, harassing phone calls from their lenders and the ever-present threat of repossession and homelessness. We do not want a repeat of this.
A mortgage equal to 3 ½ times a couple’s income and 90% of the value of a house is too high. It should be gradually reduced to 3 times income and 80% of the house value.
Instead of attempting to solve the affordability problem by handing out ever bigger mortgages, we should solve it by bringing down the cost of building starter homes so that people on moderate incomes can afford to buy starter homes with modest mortgages. We need to make it more attractive for developers to build starter homes instead of upmarket homes.
Government policies have made housing unaffordable for people on moderate incomes. Reversing these policies can make them affordable again.
The government charges first-time buyers 13.5% VAT on their new home. It’s crazy that during a housing crisis, that a house which would otherwise cost €250,000 is pushed up to €283,000 by the imposition of VAT. VAT should be set at zero for starter homes as it is in the U.K.
Developers of new housing estates must allocate part of the land for social housing. This pushes up the price of the houses. So, not only are first-time buyers paying for their own homes, but they are also funding their neighbours in local authority homes. Developers of starter homes should be exempt from the requirement to provide social housing.
Developers must also pay development levies. These should be scrapped for starter homes.
Well intentioned governments have implemented housing standards which result in every new home being a Rolls Royce. These standards may be appropriate for upmarket homes, but we need less exacting standards for starter homes. Most buyers of starter homes would settle for a Mini and trade up to a Rolls Royce later.
We also need to bring down the costs of buying land for housing. The state needs to acquire large tracts of land by compulsory purchase at their current use value – which would usually be the agricultural value. The local authority should put in the infrastructure such as roads and water and schools and then sell off the ready to go sites to builders on condition that they build starter homes.
If the government reversed all the policies which have made housing unaffordable, they could also scrap the artificial interventions such as Help to Buy, Shared Equity and Affordable Homes. Homes should be naturally affordable and not made artificially so to compensate for the government’s action in other areas.
The policies of successive governments have pushed up the cost of building houses. It is up to the government to reverse these policies. Relaxing the mortgage rules would exacerbate the problem, not solve it.
Brendan Burgess is the founder of the consumer forum Askaboutmoney.com
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