Few housebuyers will be affected by the changes

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Brendan Burgess

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This is an article I have in today's Sunday Business Post

Few housebuyers will be hit by changes

03:55, 1 February 2015 by Brendan Burgess

Some of the commentators on the Central Bank’s new mortgage limits have suggested that many families will be locked out of the housing market and that people who already have a home will be prevented from trading up. If house prices and incomes stay at around the current levels, then the new rules will have very little impact. Very few people who got a mortgage during 2014 would have been refused had these mortgage limits been in place last year.

The limits are very cleverly designed. The people most affected are those who are trading up. At present they need a deposit of only 8 per cent of the price of the new house. Under the new rules, they will need a deposit of 20 per cent.

In 2014, 30 per cent of trader-uppers did borrow in excess of 80 per cent. But the rules allow the lenders to make exceptions in 15 per cent of cases. So only around 15 per cent of people who traded up last year would have been refused, had these rules been in place.

That 15 per cent would not have been homeless as a result. They would have had to wait a bit longer to build up the 20 per cent deposit. Or maybe they would have traded up to a slightly cheaper house. Or maybe they had other savings which they could have used to reduce their borrowings. So all in all, very little impact on trader-uppers.

The sliding loan-to-value limit means very little change either for the vast majority of first-time buyers. A first-time buyer who buys a property for €300,000 will require a deposit of €38,000 up from €30,000 before the limits are introduced. A first-time buyer who buys a property for €400,000 must now have a deposit of €58,000, up from €40,000. Very few people could afford to pay €400,000 for their first home. Many of these have in excess of the minimum deposit anyway. And, in any event, the lenders are allowed to exceed the limits in 15 per cent of cases. So very little impact on first-time buyers either.

If so few people are affected, why bring in the rules at all? Well, to prevent a bubble developing. The Central Bank is trying to break the link between the availability of credit and house prices. Lenders cannot be trusted to lend sensibly, and borrowers cannot be trusted to borrow sensibly.

If household incomes remain at roughly the same level as they are now, but house prices continue to increase at 20 per cent a year, then these new limits will begin to have an impact. People will not be able to borrow the amount needed to get on the housing ladder or to trade up, so any housing bubble will be slowed down.

That is good for borrowers, good for the banks and good for the stability of the overall economy.

While the rules are appropriate, they could be refined a bit better. For example, the 80 per cent limit for trader uppers is appropriate in a normal market where borrowers tend to build up equity in their home after a few years. But in a market where prices are 40 per cent below their peak, the 80 per cent limit should be flexible. The new rules exempt borrowers who are currently in negative equity but a borrower who is currently at 98 per cent loan to value will not be exempt. Perversely, it will be easier to get a negative equity mortgage than a positive equity mortgage. The rules should be tweaked to remove this sort of anomaly.

The biggest problem we face in Ireland at the moment is the shortage of housing to buy and the shortage of housing to rent.

But the shortage of housing is not the Central Bank’s responsibility, and it would be wrong for it to attempt to solve this problem by allowing reckless lending to push up the prices of houses in an effort to encourage builders to build more houses.

Government tax policy and building regulations are major contributors to the high cost of building and the high price of houses. Around €40,000 of the selling price of a €300,000 house goes to the government in Vat and social housing levies.

House prices are increased by a further €20,000 due to crazy building regulations which mean that every house built today is a Rolls-Royce, whereas most first-time buyers would make do with a Mini as their first home.

The government can help bring down the price of houses across the market and can help first-time buyers get on the housing ladder by addressing these taxation and planning issues.

Brendan Burgess is the founder of the consumer forum Askaboutmoney.com
 
Brendan

How can you dismiss 15% of people as being very few?

What about the tsunami of 30-somethings who are working their way out of "apartment negative equity" and trying to save to buy a family home?

This rule devastates them.
 
Hi Gordon

People in negative equity are exempt from the LTV rules!

15% of trader-uppers in positive equity are affected by the rules. But the effect is small in most cases. So the rule doesn't "devastate" anyone.

The biggest losers from reckless lending, are the reckless borrowers themselves. These rules help to prevent reckless borrowing. They will also help to head off a housing bubble which will be good for most purchasers.

Brendan
 
No, people in negative equity who have a transfer option aren't affected. What about Danske/NIB and BOSI customers? I don't believe it's helpful to use the term "reckless" either. I saved and bought a home which is still worth a lot less than I paid for it - Was I reckless? Renting in Ireland is a very risky proposition as one doesn't have the protections afforded to our European neighbours. I sought out the best value mortgage I could find (ECB +0.5%) but have ended up in limbo as a result of the bank's withdrawal from Ireland - Was that reckless?
 
I read the article in the business post today and would question the idea that it will affect "a few". Having said that I would not say it would necessarily devastate young home buyers for the following reasons:

1. If there really is a tsunami of would-be buyers who cannot now buy, then the price of houses will have to drop to their levels to allow them to buy. That's how markets work.
2. Many discussions on the new rules use examples of €300K, €350K houses. There are plenty of houses even in Dublin which are around €200k. So with a smaller deposit there are still places that can be bought.
3. If the rules do not affect some people, let's say cash buyers, who can continue to buy houses at the current price levels, they could be the problem area for continuing price rises. They could be the ones who stand in the way of price drops. The question is how many of them are around. The other question is who are they? I'd imagine an amount of them could be buy-to-letters in which case there will be more rental supply on the market. This could drop the price of rents. In any case I think the ratio of cash buyers to mortgage buyers would have peaked during the crash and the amount of cash buyers should be very limited, leading back to point #1 above.

So in summary I would not say buyers need despair yet. Let's see how the market develops with this new rule.
 
What about Danske/NIB and BOSI customers?

I can't see how you are affected by the Central Bank regulations? I doubt if you could convince any other bank to give you a NE mortgage before the regulations. And you won't be able to do so now either?

If you have such a cheap tracker, then you should rent out the property and rent another property as your home.
 
Ironically, if you have agreement from your lender to move in negative equity, these rules set a ceiling on the price you can accept for your existing property. As soon as you make a profit on the sale the new rules apply and you may find yourself with less money available to buy your new property. This is not hypothetical - I know someone in this exact situation.
 
This is not hypothetical - I know someone in this exact situation.

At the Press Conference last week, I gave an example of someone with a 98% LTV mortgage being subject to the new rules, while someone with a 125% LTV mortgage was not. The reply from Governor Honohan, was that these would be very few and would be covered by the 15%.

Last year, between all the lenders, there were only 300 NE mortgages.

Brendan
 
At the Press Conference last week, I gave an example of someone with a 98% LTV mortgage being subject to the new rules, while someone with a 125% LTV mortgage was not. The reply from Governor Honohan, was that these would be very few and would be covered by the 15%.

Last year, between all the lenders, there were only 300 NE mortgages.

Brendan
I have provisional approval under the old rules on a negative equity property. It went sale agreed back in November. I am still waiting on the sellers bank to give consent. At this stage I am thinking of pulling out of the purchase because its dragging on so long. My approval expires in June but my bank told me that if I pull out of this purchase and look for approval on another home, then I would have to pay 20% deposit under the new rules. I am a second time buyer - I sold me home last Sept. I asked about the 15% exception ruling and was told that they were not applying this rule. So there are people affected by this change.
 
I asked about the 15% exception ruling and was told that they were not applying this rule. So there are people affected by this change.
You are being affected by a change in your lender's policy. They aren't even pretending that their hands are tied - they have the discretion to do a deal, and they are choosing not to.
 
You are being affected by a change in your lender's policy. They aren't even pretending that their hands are tied - they have the discretion to do a deal, and they are choosing not to.
Thanks trasneor. Is anyone aware of any bank that are offering the 15% exception. I sold my house to trade up under the old rules. Now I have to come up with 20%. Seems a very unfair rule.
 
Going back to the time when this rule was first proposed I suspected that many banks would not fill their 15% exception option. It's just too difficult a rule to police. You will find in practice that with very limited exceptions the 20% rule will be strictly adhered to by the majority of banks.
 
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