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
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