"Central Bank mortgage rules are absolutely correct"

[Brendan Burgess]

I had an article supporting the Central Bank's rules in yesterday's Sunday Independent. Here are some extracts:

Politicians and commentators are excoriating the banks for reckless lending during the boom while in the same breath they are criticising the Central Bank for setting responsible borrower standards for first-time buyers.

...
It's very difficult for someone struggling to get on the housing ladder to see the bigger picture. They think that if only the lender would give them just a bit more money and require a bit less of a deposit, they would be able to buy their dream house.

But unfortunately, it does not work like that. If the lending restrictions were relaxed for everyone, then it would just push up the prices of all houses - newly built and second-hand. So the aspiring first-time buyer would be in a worse position.

It would take them just as long to get on the housing ladder and when they did eventually achieve it, they would end up with a bigger mortgage. And because they would be a much riskier borrower, the interest rate they pay and their monthly repayments would be even higher.

So the Central Bank is absolutely correct to stand firm and demand that the lenders and borrowers behave responsibly. It is in the interests of the banks. It is in the interests of the borrowers. And it is in the interests of the taxpayers.
...
The real problem is that it is not profitable for developers to build new houses because the costs of building are simply too high.

And the only solution is to bring down the cost of building houses. Well-meaning government policies in recent years have led to this very high cost and the very low level of building.
...

It's time we started learning from the past. If we impose very high specifications and taxes on the buyers of new homes, we should not be surprised that they can't afford to buy them without reckless borrowing.

If we allow reckless borrowing, we should not be surprised when it results in mortgage arrears and bank failures.

 

[Brendan Burgess]

Conal McCoille was on Morning Ireland this morning and made the interesting point that the average house price in Dublin is 6 times the average wage in Dublin.

Outside the urban areas, house prices are well within the CB guidelines.

So it's the high cost of housing and not the CB restrictions which is preventing people from buying houses.

 

[odyssey06]

It doesn't logically follow that because there was irresponsible lending in the past, that any guidelines introduced now to guard against reckless lending are absolutely correct.
It's entirely possible for there to be overkill.
No bank has to lend out money it doesn't want to.

I am not convinced that the Central Bank guidelines are absolutely correct.
Did we really some of the toughest restrictions on income ratios e.g. 3.5 and 20% deposits?
Does the 3.5 income ratio really make sense at all levels of income?

I don't understand the point Conal McCoille made. Any housing market is going to have a mix of urban and rural, urban is going to cost more due to land prices in urban areas. I'm not sure what type of functional property market he has in mind where all houses of same size are the same cost? Did he say what would be a 'reasonable' difference between urban and rural? So I don't think the argument that because rural homes are affordable under the CB guidelines the guidelines are all ok stands up to any scrutiny.

Of course the high specs etc and government charges need to be looked at, but we really should be speccing new houses to the level that we can afford given the long term savings both for the country and the owners in terms of emissions and energy costs.

So if the CB restrictions are preventing people from taking out low risk mortgages that they an afford and would enable them to purchase new homes, they are wrong. My feeling is that this is the case.

We didn't seem to have irresponsible lending in the 1990s, yet we didn't have these levels of restrictions in place (either by banks or regulator). What changed was that the banks went a bit mad when they had access to the Euro (which led to 100% mortgages), and in the Euro we couldn't raise interest rates to dampen down the property market.

 

[tallpaul]

In this I think Brendan is correct. The point is that the guidelines are being effective in ensuring that the banks are being hamstrung in lending. Banks will be banks and as sure as night follows day, if they could lend more in riskier endeavours they would do so, particularly when their balance sheets are improving quarter on quarter. They just can't help themselves. Thus, having these rules all but ensures that lending cannot get out of hand and those seeking loans are loaned to responsibly. In effect, people are being protected from themselves in not being able to get in too deep. Having the discipline to be prudent with money and save for a deposit is a good life skill!!

There have been many threads on AAM where posters thought they might be entitled to some sort of redress on the basis of reckless lending by financial institutions. Rubbish of course, but clearly what many people believe. Rules that rein in the whole market should be welcomed.

 

[newirishman]

[...]
I am not convinced that the Central Bank guidelines are absolutely correct.
Did we really some of the toughest restrictions on income ratios e.g. 3.5 and 20% deposits?
Does the 3.5 income ratio really make sense at all levels of income?
[...]
We didn't seem to have irresponsible lending in the 1990s, yet we didn't have these levels of restrictions in place (either by banks or regulator). What changed was that the banks went a bit mad when they had access to the Euro (which led to 100% mortgages), and in the Euro we couldn't raise interest rates to dampen down the property market.

So you are saying that it is OK to raise interest rates to curb lending and dampen down the property market, but it is not OK to use LTV's and LTI's as a measure?
I would disagree. Also, classifying one of the biggest housing bubbles as "banks went a bit mad" as quite some understatement.

I'd also disagree that we are talking about some of the "toughest restrictions on income ratios". Tough compared to what country?

It seems clear to me from the experience of the last 15 years that the price of a property has nothing to do with the costs associated with it, but only with the credit available to pay for it. Otherwise there is no reason whatsoever that we have people in NE to 10's of thousands of euros on not-fit-for-their-purpose shoebox apartments.

The main challenge shouldn't be to get people more into debt (why not do a multigenerational mortgage!), but should on supply side e.g. planning, costs of builds, developer profits, etc.

 

[odyssey06]

So you are saying that it is OK to raise interest rates to curb lending and dampen down the property market, but it is not OK to use LTV's and LTI's as a measure?

I didn't say it wasn't OK to use LTVs and LTIs, just that it's not OK to use LTVs and LTIs that are too restrictive.
To go back to interest rates, a central bank in the past may have made the right decision to raise rates in response to an over-heated property market. But it would have been legit to criticise it if it increased rates by too much, or increased rates to the right level but too quickly.

And it's not mutually exclusive to criticise the Central Bank, and also to criticise the government and councils for lack of supply side action.
If the price of houses is just down to the credit available, then we can lump all kinds of high spec requirements onto new builds and it wont impact sales and affordability. But clearly it is impacting things.

 

[Sarenco]

So if the CB restrictions are preventing people from taking out low risk mortgages that they an afford and would enable them to purchase new homes, they are wrong.

To be fair, the Central Bank did publish its research on loan-level data showing the relationship between LTV and LTI ratios when loans are originated and subsequent defaults.

[broken link removed]

The current LTV and LTI ratios look about right to me.

 

[Steven Barrett]

It's time we started learning from the past. If we impose very high specifications and taxes on the buyers of new homes, we should not be surprised that they can't afford to buy them without reckless borrowing.

Now we get into the other half of the equation. There has been too much rubbish thrown up during the Celtic Tiger, with you ending up with people like the Priory Hall residents being made homeless because of a reckless builder living it up in his Ailesbury Road home.

Then Alan Kelly reduces the size of apartments! Has he ever seen the size of an apartment in Dublin? You can't make them any smaller!!

The whole housing issue in Ireland is a total mess. There is a total lack of coherent planning by the local councils in their development plans. Stick a Spar into a development and that's the job done. Never mind schools for the kids to go to or areas for them to play.

The developers paid top whack for land and together with the high costs of building, will sit on the land for as long as it takes.

It is rich that the Central Bank are the ones that come in for flack, when they are the only ones who have their house in order in this regard. They saw what happened before and don't want a repeat of it. Going by what Kelly did, the government are encouraging another bubble.


Steven
www.bluewaterfp.ie

 

[Gordon Gekko]

In Dublin, the average price of a family home is €400,000 (source MyHome.ie). The Central Bank rules mean that someone must accumulate a deposit of €80,000, and have income of €91,000.

In a world where rents are sky-high, childminding costs are sky-high, taxes are sky-high, and bonuses are ignored unless they're "guaranteed", how on earth are people supposed to purchase a family home?

Because what's happening now is that wealthy people are buying family homes, either for their children as a succession play, or as an investment because of the spike in rents.

Mortages were capped at 90% for a long time, and we had no problems.

For social reasons, the limits need to be relaxed.

 

[Brendan Burgess]

In Dublin, the average price of a family home is €400,000 (source MyHome.ie). The Central Bank rules mean that someone must accumulate a deposit of €80,000, and have income of €91,000.

No. It's the high prices of houses in Dublin which means that people need €400k through a combination of a deposit and a mortgage to pay for them.

The CB is right to stop people from borrowing recklessly.

Brendan

 

[Sarenco]

In Dublin, the average price of a family home is €400,000 (source MyHome.ie). The Central Bank rules mean that someone must accumulate a deposit of €80,000, and have income of €91,000.

I'm not sure how you are defining an average family home but today's MyHome.ie report puts the median asking price for a 3-bed semi in Dublin at €285k and €399 for a 4-bed semi.

The latest CSO estimate of the median earnings for a full-time worker nationally is €32k and I suspect it's somewhat higher in Dublin. So a median priced 3-bed semi doesn't look particularly unaffordable to me for a household with two people earning median wages.

Even if affordability is stretched, allowing people to borrow excessively won't help. If you are right that potential purchasers, in aggregate, are struggling to meet the new deposit requirements then house prices will simply have to fall to the appropriate level.

Mortages were capped at 90% for a long time, and we had no problems.

The published Central Bank data would suggest otherwise.

The data shows a sharp increase in the losses of defaulted loans with an originating LTV greater than 85%. This finding is amplified for loans issued at the height of the house price cycle but also holds for loans issued several years prior to the peak.

In any event I don't see why the Central Bank should concern itself with social issues in formulating its mortgage lending restrictions. That's hardly the function of any prudential regulator.

 

[Joe_90]

Mortages were capped at 90% for a long time, and we had no problems.

I think this is the fundamental point. It should never have been more that 90%.

I recall in 2002 we were refused a mortgage, 2 newly qualified accountants in April went back and got the money. Had a 6 month review and were told that they were giving out loans of 150% based on the same criteria, start of the madness perhaps!

Personally I feel for people trying to get on the property ladder and that the introduction of a 10% deposit was very quick perhaps a phased introduction from 5% to 10% over a period of time.

But at the end of the day 10% is the right amount and that's where it's at.

 

[Gordon Gekko]

I'm not sure how you are defining an average family home but today's MyHome.ie report puts the median asking price for a 3-bed semi in Dublin at €285k and €399 for a 4-bed semi.

The data shows a sharp increase in the losses of defaulted loans with an originating LTV greater than 85%

Given that I said "€400k (source MyHome.ie)", I'd have thought that it was obvious that I was talking about the 4 bed semis.

The data may very well say that, but a fundamental issue is that the LTVs didn't cause the crisis. This was a once in a hundred year event. It's like we're obsessing about tsunamis and meanwhile nobody can live.

 

[odyssey06]

In any event I don't see why the Central Bank should concern itself with social issues in formulating its mortgage lending restrictions. That's hardly the function of any prudential regulator.

The people drawing up the guidelines on the high spec for emissions and energy profile of new homes are also not concerning themselves with social issues. Would it be prudential of them to do so? They would argue they have a remit to achieve certain energy targets not to increase housing supply. Something about a situation where we have such narrow remits and cross purposes doesn't add up to me... I'm not totally clear what the solution is at a management level, but there's clearly a problem.

But my main criticism of the Central Bank restrictions is noted earlier. I think they are more restrictive than they need to be.
Does 3.5 income ratio make sense for all income levels? I'd like to see the evidence why.

In the Central Bank's defence, their did build in a level of exceptions to the system for banks which is something good to see.

I just think coming out and stating that the actual rules are absolutely correct is a very strong claim and I don't think the Central Bank's evidence supports it. I would definitely like to see a lower level pass over the data by the Central Bank after 12 months operation to see what room there might be to refine things without disproportionately increasing the risk levels.

So in the original article, I agree with a lot of the thrust of the argument about the bigger picture and the need for responsible lending, just it makes a certain assumption about the actual rules which I have doubts over e.g. compare "It is absolutely correct that there are Central Bank mortgage rules..." to "The Central Bank mortgage rules are absolutely correct..."

 

[Sarenco]

Given that I said "€400k (source MyHome.ie)", I'd have thought that it was obvious that I was talking about the 4 bed semis.

The data may very well say that, but a fundamental issue is that the LTVs didn't cause the crisis. This was a once in a hundred year event. It's like we're obsessing about tsunamis and meanwhile nobody can live.

Well, it's not obvious to me that a 4-bed semi constitutes an "average family home" and I wouldn't have expected a household with average earnings to be in a position to afford that type of property.

I would strongly disagree that mortgage lending at high LTVs (and high LTIs and DTIs for that matter) wasn't a major contributor to our banking crisis. All the available evidence would suggest otherwise.

 

[Gordon Gekko]

I would strongly disagree that mortgage lending at high LTVs (and high LTIs and DTIs for that matter) wasn't a major contributor to our banking crisis. All the available evidence would suggest otherwise.

That's a strawman argument. I'm not advocating high LTVs. I'm advocating 90%.

 

[Delboy]

Increasing the mortgage % limits will not solve anything when there is such little supply. It will only give people more money to bid against each other.
Senseless

 

[odyssey06]

Increasing the mortgage % limits will not solve anything when there is such little supply. It will only give people more money to bid against each other. Senseless

But one of the reasons why there is so little supply is because of the high specs of new homes pricing people out of affording them. There's some of those specs that can be reduced but not all. Loosening the limits within proportionate risk levels will bring some of them into range that otherwise would not be.
Most of the constraints on supply are not due to restricted demand, but there is a connection on this one issue.

Otherwise we could have LTI of 2.5 and think we could have the same amount of housing stock as at 3.5 or 4.

 

[Sarenco]

That's a strawman argument. I'm not advocating high LTVs. I'm advocating 90%.

I was simply responding to your broad statement that "LTVs didn't cause the crisis".

The LTV limit is set at 90% for FTBs up to €220k (which is well above the national mix-adjusted median asking price for residential properties) and the 80% limit only kicks in for borrowings above this level for FTBs.

I have already posted the Central Bank's loan level data that shows that losses increase significantly on defaults for loans with an LTV over 85% at origination.

Internationally, LTVs over 80% would be considered very high risk from a lender's perspective. LTVs over 80% carry a higher risk weighting under Basle II and lenders have to set aside additional capital for such loans. In the US, borrowers are required to take out (very expensive) additional insurance (PMI) to provide additional protection to a lender once an LTV exceeds 80%.

It seems to me that the general 80% LTV limit is entirely appropriate.

 

[Brendan Burgess]

But my main criticism of the Central Bank restrictions is noted earlier. I think they are more restrictive than they need to be.
Does 3.5 income ratio make sense for all income levels? I'd like to see the evidence why.

In the Central Bank's defence, their did build in a level of exceptions to the system for banks which is something good to see.

I think that the limit should be 3.5 times.

But for lower incomes, it should be much lower.

If someone were on a salary of €100k, it is ok to lend them €500k?

One of the problems with salary limits, is that people can get 3.5 times a combined salary of €100k or €350,000. Then they split up and he has a €350k mortgage on a salary of €50k. And he will point blank refuse to sell the house and trade down to a mortgage of €175k.

Brendan