Time to change CBI affordability rules?

Zebedee

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Colin Hunt (MD AIB) is calling for changes to cbi affordability rules (interview in indo today). I know fox and henhouse come to mind but I would be interested in the views of this forum on his suggestion.

 
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It seems that a lot of people have no idea of what is manageable debt levels and when it comes to their home and a good location for their kids to grow up and they will stretch themselves to the absolute limit so I think that the current restrictions should remain. I honestly can't get my head around the price of standard houses in Dublin at the moment and the cost to build is already ridiculous while builders are apparently so busy that they are putting work off for weeks so why throw fuel on the fire?
 
House building costs must fall to affordable levels.

Three costs are excessive:

Site/land costs
Finance costs
Developer margins
 
I think the multiplication amount should be a variable pending age. Someone mid 20s v someone mid 40s is a vastly different max term
 
Bear in mind rules were set nearly five years ago when retail interest rates were close to a hundred bp higher than now.

Lower rates means a set fraction of a given income will afford more mortgage than it did when rates were higher.

The 3.5xincome rule doesn't allow for more affordability that comes from lower rates.

There are good reasons for not adjusting in line with the credit cycle, to avoid the mistakes of the past.

At the same time it looks like we are in a low-for-long interest rate environment. If that's the case, then households should be able to deal with 4xincome as a default.
 
The rules were put in place to prevent a recurrence of the problems that arose as a result of the overloading in the past. They have achieved that effectively.

They do nothing to prevent the problems of the present, lack of new builds.
 
Hunt said
“But given the fact that they have done exactly what they were supposed to do, which was to put a lid — and a very, very effective lid, on house price inflation — now it is effectively zero and some would say Dublin is falling, which has negative confidence impact by the way. And given the fact that we are coming potentially into a changed economic landscape it would be worth revising them at this point, I think.”

He said borrowing and lending would “inevitably be at far more conservative levels in the future than it has been in the past. I am not saying for one minute that you would do away with the rules, I think they are very, very useful and an important initiative and one we support. But certainly, given the changes that have happened, it would be worth having a look and seeing if you can have some change”.
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He made no actual proposals.

A First Time Buyer can borrow 90% of the price of a house. That is way too risky for the lender. They should not lend more than 80% to anyone.

When house prices fall, many Irish borrowers will stop paying their mortgage. And why wouldn't they, when the system does not allow repossessions.

So should the lenders lend more than 3.5 times income? Again, I think that this is the absolute maximum.

Relaxing the rules would allow the banks lend more. This would just push up prices and not make it any easier for people to buy houses.

Banks would get a temporary lift to profits as they could lend more. But then they would suffer when the bad debts come home to roost.

There are plenty of things we could do to help people get housing but relaxing the lending rules is not one of them.

Brendan
 
The Irish Examiner had 3 different articles on this topics last Saturday, in their vested interest property supplement
 
I can’t think of a better alternative. You could argue that LTI could be higher (I think it’s 4.5 in the UK) or lower but I think the restriction is necessary.

I don’t think lower long term interest rates should lead to a higher LTI as it is the risk of recession that is the more likely event than a rapid increase in interest rates.

I think tailoring the rate should be part of the banks own risk management process rather than the CBI rules.

I have heard arguments about using a contra cyclical LTV (ie increasing during recession/reducing during boom). However it is very difficult to determine where you are in the cycle. Ie if house prices fell 10pc last year and 10pc this year it would be a brave person who would start raising the LTV limit.
 
He made no actual proposals.

A First Time Buyer can borrow 90% of the price of a house. That is way too risky for the lender. They should not lend more than 80% to anyone.

When house prices fall, many Irish borrowers will stop paying their mortgage. And why wouldn't they, when the system does not allow repossessions.

So should the lenders lend more than 3.5 times income? Again, I think that this is the absolute maximum.

You're conflating two issues. In general:

  • The loan-to-income restrictions are designed to limit probability of default.
  • The loan-to-value restrictions are designed to limit loss given default.

In a sense the LTI restriction is more important as if the bank gives loans only to good quality customers then it reduces the risk of default arising at all.

On the LTV restrictions, people forget the average LTV falls quicker over the course of the mortgage now that we have lower interest rates. Take €100k over 20 years. On 4.5% the remaining LTV is 61% after 10 years. On 2.5% the remaining LTV is only 56% after 10 years.
 
I am not sure about "conflating" - the two are intertwined.

Many Irish people who went into negative equity stopped paying their mortgage when they could have well afforded to.

Of course, in financial terms, the LTV should not matter. But in practice it did. The incentive to pay your mortgage remains strong when you have equity. It weakens a lot when you are in negative equity.

When house prices recovered much quicker than expected and people saw that they would lose their positive equity if they were repossessed, they started paying their mortgage again.

I would point out that this applied to many Irish people but certainly not most. The majority of people saw their mortgage as a personal responsibility and paid it whether they were in negative equity or not.

Brendan
 
I actually have some sympathy for the view that the Central Bank's mortgage rules could be relaxed somewhat and this may possibly be a good time to do so.

Property prices (certainly in Dublin) seem to have levelled off considerably over the last 12 months, whereas rental inflation is still galloping ahead. I suspect this is partly due to the Central Bank's rules (i.e. would be buyers find themselves renting for longer which is adding to the demand for a static/diminishing stock of rental properties).

Personally, I wouldn't like to see any changes being made to the LTV limits.

However, now that the consumer credit register is up and running, I think it would make sense to replace the LTI limit with a broader debt-to-income (DTI) limit of 4 or even 4.5 (the DTI ceiling in the UK).
 
I'd be curious to see what impact this would have on prices. An LTI increase from 3.5 to 4 would be dampened by the LTV requirement.

For example:

if you borrow 3.5* income you need 0.39* income to meet the 10% deposit requirement.

4*income implies you need .44* income to meet the 10%. Saving the additional 5% may be challenging in the current rental market.

I'd fully expect people to be complaining a year later that its impossible to save 45% of their income and call for LTV to be changed. It's a slippery slope if they were to change things.
 
It might, actually, if it triggers the development of more new homes and takes pressure off the rental market.

You are completely right.

There are structural issues with the cost of building in Ireland at all levels (land, labour, developers' margins, etc).

But new house development is not perfectly price inelastic.

If your objective is more new builds, then higher prices will get you more new builds! 30% higher prices may not get you 30% more new dwellings, but it won't get you 0% either if you get my picture.

High house prices have their downsides, but prices serve a useful purpose as a signal in a market, and expensive houses are probably better than no new houses at all.
 
I am not sure about "conflating" - the two are intertwined.

Many Irish people who went into negative equity stopped paying their mortgage when they could have well afforded to.

Of course, in financial terms, the LTV should not matter. But in practice it did. The incentive to pay your mortgage remains strong when you have equity. It weakens a lot when you are in negative equity.

It's hard to disentangle the effect of lower incomes and lower house prices. House prices fell at the same time a lot of people lost their jobs, and house prices have recovered at the same time the labour market has improved a lot.

Some research evidence shows that there are a lot of people in plenty of positive equity with very sustainable mortgages are in arrears.

We discussed the issue here.
 
I actually have some sympathy for the view that the Central Bank's mortgage rules could be relaxed somewhat and this may possibly be a good time to do so.

Property prices (certainly in Dublin) seem to have levelled off considerably over the last 12 months, whereas rental inflation is still galloping ahead. I suspect this is partly due to the Central Bank's rules (i.e. would be buyers find themselves renting for longer which is adding to the demand for a static/diminishing stock of rental properties).

Personally, I wouldn't like to see any changes being made to the LTV limits.

However, now that the consumer credit register is up and running, I think it would make sense to replace the LTI limit with a broader debt-to-income (DTI) limit of 4 or even 4.5 (the DTI ceiling in the UK).


Personally I think this is only part of the situation. Increasing the access to credit will simply push prices up (look at the help to buy scheme). There is no doubt that we need increased supply, but where and what type is the question.

The introduction of the consumer credit register is certainly a major plus but at the opposite end of the process we need to look at the low level of repossessions.
 
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