Central Bank decides against changing mortgage limits

Delboy

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Because if more people can actually buy homes, developers will build more homes to meet that demand.

I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying. In other words, the rules are restricting the “realisable” demand.
The rules aren't preventing potential buyers from buying, a lack of available housing and increased population numbers are what's preventing them.

The demand and higher prices are already there to entice Developers to build...if they could. A lack of construction workers is one of the main stumbling blocks (excuse the pun).
We are paying a lot of construction workers (along with other categories of workers here) to stay at home because of our generous social welfare system. A couple of days working for cash in hand and they are cleaning up.
We encourage our school leavers to go to college, some for meaningless courses, rather than go into trades. So the number of apprentices is miniscule.
Despite immigration continuing at a rate I believe this country cannot cater for, the numbers of construction workers amongst the immigrants seems to have fallen off a cliff. With economies in Eastern Europe having picked up, the endless supply of young/middle-aged men we saw coming here from 2002-2008 and going into the construction industry has all but stopped.
 

PGF2016

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615
Because if more people can actually buy homes, developers will build more homes to meet that demand.

I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying. In other words, the rules are restricting the “realisable” demand.
This doesn't make sense. The demand is there already.

Very skeptical interested to hear the source of the estimates. Is it a construction industry vested interest?
 

Purple

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We encourage our school leavers to go to college, some for meaningless courses, rather than go into trades. So the number of apprentices is miniscule.
And our apprenticeship training is rubbish and utterly outdated.
I served as apprenticeship in Toolmaking in the early 90's and it was hopelessly out of date then. The curriculum now is exactly the same. Where I work we have to hire guys from Eastern Europe or train them ourselves as there is literally no apprenticeship for them to do here.

I do hope that the construction trades are better than the engineering trades but having been on the receiving end of what Irish Tradesmen produce I seriously doubt it. That's why I have a 'No Irish' policy when I hire someone to do any building work and definitely a 'no Dub's' policy as they have no work ethic.
 

NoRegretsCoyote

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This doesn't make sense. The demand is there already.
Supply is inelastic but that doesn't mean that the demand side can do nothing.

Supposing you put vouchers through the doors of 100,000 first-time buyers. They would read "This voucher can be exchanged for a new-build house before the end of 2025. It entitles the developer of said house to €500,000"

Do you think you would not get more housebuilding? If not, why not?
 

skrooge

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I have seen estimates that the Central Bank rules are preventing as many as 500,000 potential home buyers from buying. In other words, the rules are restricting the “realisable” demand.

... And where exactly are the half a million housing units that are apparently lying empty?
 
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PGF2016

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Supply is inelastic but that doesn't mean that the demand side can do nothing.

Supposing you put vouchers through the doors of 100,000 first-time buyers. They would read "This voucher can be exchanged for a new-build house before the end of 2025. It entitles the developer of said house to €500,000"

Do you think you would not get more housebuilding? If not, why not?
Labour shortages for one. The industry doesn't have the capacity to build more. How does introducing more demand solve that?


Certainly the demand side can do something but is more expensive housing at a time when demand is so high a good thing?
 

NoRegretsCoyote

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How does introducing more demand solve that?
People will retrain. People will come from other countries. People will work overtime.

is more expensive housing at a time when demand is so high a good thing?


The absolute level of house prices is immaterial. What matters is how sustainable mortgage payments are as a share of household incomes. By that metric Irish house prices are not high compared to peers or the past.
 

Sarenco

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7,162
...is more expensive housing at a time when demand is so high a good thing?
The Commission thinks that Irish house prices are actually undervalued by reference to average household income growth and long-term average house prices.

Take a standard three-bed semi in a typical Dublin suburb - say, Lucan. The average sales price is around €350k. The monthly cost of a 90% mortgage @2.7% over 30 years is around €1,300. But to rent that property, it would cost around €2,300 per month.

Don't you think a renter would rather buy that property if they could?

Now let's say the Central Bank raised the LTI ratio to 4 and the price of an average 3-bed semi in Lucan increases to €400k. The monthly mortgage payment would rise to around €1,450 per month - still a heck of a lot less than the cost of renting that property.

But more importantly, developers would be significantly more incentivised to build new homes. Isn't that what we need?

It's amazing how labour shortages melt away when there's money to be made...
 

NoRegretsCoyote

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A couple on 100k a year with no other debt can borrow €350,000 under these limits. A couple on 100k a year with 30k debt can also technically borrow up to €350,000 according to the CB if the bank is satisfied with their own underwriting that they can afford the 30k debt repayments on top of the mortgage. But if the Central Bank only care about 'systemic risk' and banks over lending, why are they using blunt instruments that only look at mortgage debt? Individual banks will look at everyone's overall debt level and affordability so why don't we have central bank limits based on the same criteria??
Take a couple on €100. They can borrow €350k over 30 years at 2.5 at €1294 a month, or 25% of their net income of €5,160.

Take a couple on €50k. They can borrow €175k at 30 years at 2.5% at €647 a month, or 21% of their net income of €3,102.

This leaves two problems. The first is that these parameters are over-prudent. Even with a 200bp increase in rates the high-income household is pushed to mortgage payments of 34% of net income on mortgage payments, the low-income households just 28% of net income. There is a point where the pips start to squeak and it's closer to 40%. Research shows that 95th percentile for mortgage-service-to-income ratios are about 40% in many EU countries. In Ireland it's below 30%. There is headroom for people to borrow more and banks to take on more risk without catastrophic consequencies.

The second issue is that the LTI limit is calibrated on gross income (why?) but you make mortgage payments out of net income. Ireland's tax system is progressive. Your average tax rate climbs a lot when your income increases. But the LTI limits mean that low-income people are allowed much lower shares of their income on mortgage repayments. So not only are they disadvantaged by having less disposable income, but they are allowed to spend less of it on a mortgage too. Again, why?

Anyway whole LTI approach was flawed from the start. The original Central Bank paper in 2014 said that all the international evidence was around LTV and debt-to-income ratios, specifically looking at all borrowing of the household, not just the mortgage. Then it goes on to talk only about loan-to-income ratios. Why? Most likely because that's what the UK was bringing in that year! The paper also completely ignored the debt service to income approach which is not standard by now across the EU except Ireland.

These measures have taken on a theological quality down the North Wall at this stage. The Central Bank was alseep at the wheel through the last boom and is determined to over-compensate. Take a look at this long research paper which proudly details how Ireland is below or well below average on every measure of house prices or household indebtedness.

An old friend bought a house in the US recently. It was a 20% deposit, no exceptions. The Central Bank could have brought in an 80% LTV rate instead of LTI limits and literally every single mortgage issued since 2015 would be comfortably in positive equity right now even if the borrower had never made a single repayment. Is total debt an important prudential metric? Yes, in the context of a household's income and overall ability to pay. Some kind of cap on overall debt service expenditure by a household is necessary. But at the end of the day mortgages are collateralised lending and, if the collateral value is always higher than the loan, the bank is in a strong position and so is the system.

I thought these measures made sense when they were brought in in 2015. Banks had been imprudent and strong rules were needed. But Keynes said something like "when the facts change I change my mind. What do you do sir?". The economists at the Central Bank seem determined to ignore one of the greats of the profession. I think the landscape has changed a lot - not least the nearly 100bps decline in retail mortgage rates and decreases in personal taxation too - and I think the rules need to adapt as well.
 

skrooge

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Even with a 200bp increase in rates the high-income household is pushed to mortgage payments of 34% of net income on mortgage payments, the low-income households just 28% of net income. There is a point where the pips start to squeak and it's closer to 40%. Research shows that 95th percentile for mortgage-service-to-income ratios are about 40% in many EU countries. In Ireland it's below 30%.

The EU measure is a good starting point but we shouldn't follow it blindly.

The cost of getting it wrong is arguably more costly here than elsewhere. The recoverability of collateral takes longer and is more costly in Ireland than it is in the majority of the rest of Europe. On top of that the Irish economy is more volatile then the rest of Europe. Combine those things and I can see why the central bank would set a limit below the 40% mark.
 

Brendan Burgess

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Again, I will point out that you are focusing on the wrong issue.

Throwing money at it does not work. It makes the problem worse.

It would be much better to bring down the cost of building houses so that people did not need to borrow as much.

Brendan
 

Brendan Burgess

Founder
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47,243
Irish banks are lending 90% LTV in a market where they can't repossess houses. That is madness.

House prices will rise and fall. When they fall and people go into negative equity, many blame the banks and stop paying their mortgage.

Brendan
 

Brendan Burgess

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47,243
You are also forgetting that while the Loan to Income limit is 3.5 , the Central Bank rules allow 20% of mortgages to be above this cap for first time buyers.

The rules have been carefully calibrated. And they have helped contain the big increase in house prices.

Brendan
 

letitroll

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The ratio of debt to disposable income of Irish households was 209% at the end of 2009.

Since then it has fallen consistently as households have paid down debt and incomes have grown.

It is now at exactly 100%, a fall of over one half.

Irish households are in no way over-leveraged.

Yes my point isnt Ireland is over-leveraged NOW but rather the CBI regulations & people getting burned in 08/09 has led to debt aversion & reduction…..and this is how it should remain..…..as I explained Ireland should operate with one of the lowest debt to disposable income ratios in the Western World given our economic/monetary model is all out of our control…..this the operational leverage I outlined in my earlier post.

Secondly it should be clear to all at this point especially since 08 - that large domestic financial institutions operate with an implicit guarantee from the sovereign…..one can argue all day whether this is right or whether the living wills / capital ratios / coco bonds reforms since GFC have changed the probabilities meaningfully…..but it doesn’t escape the fact that the Irish state/taxpayer is the backstop. We should be even more concerned that the foreign lenders that were here Natwest / KBC etc. are pulling out.....increasing mortgage lending concentration in the very banks that WE would need to bail out in the future if something went wrong.
 
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Purple

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Changing the CB rules won't increase supply in any meaningful way. It will just make housing more expensive. That's all that matters.
 

NoRegretsCoyote

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You are also forgetting that while the Loan to Income limit is 3.5 , the Central Bank rules allow 20% of mortgages to be above this cap for first time buyers.

Central Bank's own research shows 10% of mortgages are above the limit, namely between 3.51 and 4.5 LTI. As much as 17% are between the very narrow interval of 3.45 and 3.5! This 3.5 number is really, really binding in practice.

The rules have been carefully calibrated. And they have helped contain the big increase in house prices.
But they are much more binding now with 2.5% interest rates than in 2015 when interest rates were more like 3.5%.

So the rules were either prudent in 2015 but conservative now. Or they were loose in 2015 but prudent now.

It can't be both.
 

PGF2016

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615
The Commission thinks that Irish house prices are actually undervalued by reference to average household income growth and long-term average house prices.

Take a standard three-bed semi in a typical Dublin suburb - say, Lucan. The average sales price is around €350k. The monthly cost of a 90% mortgage @2.7% over 30 years is around €1,300. But to rent that property, it would cost around €2,300 per month.

Don't you think a renter would rather buy that property if they could?

Now let's say the Central Bank raised the LTI ratio to 4 and the price of an average 3-bed semi in Lucan increases to €400k. The monthly mortgage payment would rise to around €1,450 per month - still a heck of a lot less than the cost of renting that property.

But more importantly, developers would be significantly more incentivised to build new homes. Isn't that what we need?

It's amazing how labour shortages melt away when there's money to be made...
Yes - there are many renters that would prefer to buy. That's given.

Are there developers who have capacity to build more and are not building at present?

There's demand.
There's a labour shortage.
There's money to be made.

Also - what's stopping developers from raising the prices as of now? If the demand is there surely they can do this already? Maybe they're just a charitable bunch.
 

Purple

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Also - what's stopping developers from raising the prices as of now? If the demand is there surely they can do this already? Maybe they're just a charitable bunch.
Are you saying that prices are not going up?
 

Purple

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Interesting piece by Eoin Burke-Kennedy in today's Irish Times suggesting that the headline that Irish property is 17% undervalued is misleading.
He does make the point that those with inherited (or gifted) wealth are the ones who can buy. The reality of how wealth is being concentrated in capital will keep being a problem, no matter how much we choose to ignore it.
 

PGF2016

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615
Are you saying that prices are not going up?
No, more saying what's stopping developers from putting prices up even higher. Or high enough to make it worth their while to build.

@Sarenco indicated that if prices were higher ....
developers would be significantly more incentivised to build new homes.
What's stopping developers from putting up prices to a level that will incentivize them to build new homes? The demand seems to exist already. CBI intervention should not be needed.

Edit: I'm guessing the answer is that while demand is high it is not high enough.
 
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