Central Bank study: Rental Markets, Savings and the Accumulation of Mortgage Deposits

Discussion in 'The Central Bank's 2016 review of mortgage limits' started by Brendan Burgess, Oct 5, 2016.

  1. Brendan Burgess

    Brendan Burgess Founder

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    Rental Markets, Savings and the Accumulation of Mortgage Deposits

    The ability of households to accumulate mortgage deposits has been the subject of significant public debate in recent years, with rental and house purchase prices rising. This article examines:

    • The required down-payment for a first time buyer purchase of a three-bedroom property
    • The number of years of saving required to purchase a three-bedroom house in Dublin (2.5 to four years), other urban areas (1 to 1.5 years), and non-Dublin, non-urban areas (below one year)
    The Central Bank has published a short discussion on the Central Bank’s YouTube Channel:

    Fergal McCann, Senior Economist discusses the time to save for mortgage deposits
     
  2. Brendan Burgess

    Brendan Burgess Founder

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    Last edited: Oct 6, 2016
    From the Abstract:
    In this article we ...calculate the required down-payment for a First-Time Buyer (FTB) purchase of a three-bedroom property.

    We then utilise this down-payment requirement to estimate the number of years of saving required (Time to Save, TTS), given current prices, to purchase a three-bedroom property while renting a two-bedroom property, for a couple with no children.

    The Irish housing market can be divided into three segments:
    Dublin, where TTS as of 2016q2 is estimated between 2.5 and 4 years depending on area;
    other urban areas with TTS of 1 to 1.5 years;
    non-Dublin, non-urban areas where TTS is estimated below one year.

    From the Introduction:

    A number of key findings emerge from our analysis. Firstly, we show that the absolute level of down-payment required to purchase a three-bed property in most areas outside Dublin has increased by less than €5,000 between mid-2014 and mid-2016. In Dublin however, there have been large increases in down-payments for the average three bedroom house, with the down-payment in South County Dublin moving from €35,000 to €76,000 over the two years (with this change being the result both of increased regulatory down-payment requirements and house price increases). In other areas of the City
    and County of Dublin, increases of €10,000 -€22,000 have been seen for the same property type over the same period. This highlights the different situation facing borrowers inside and outside Dublin.

    From the conclusions

    In looking at changes over time, we estimate that in Dublin over the period 2014q2 to 2016q2, TTS has increased by between one and two years depending on locality, while in the rest of the country TTS increases of between three and six months are more
    common.
     
    Last edited: Oct 6, 2016
  3. Brendan Burgess

    Brendan Burgess Founder

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    Last edited: Nov 26, 2016
    Findings

    upload_2016-10-5_15-5-23.png
    Note:
    The Average FTB Income is the average combined income of couples who bought houses over the last 18 months in that area. So it was €72,966 in Dublin City Centre
    The "National 60th" is €51,000 which puts you just into the top 40% of earners
    The "National 80th" is €84,000 which puts you just into the top 20% of earner.


    So taking the first line, Dublin City Centre:
    The average three bed house costs around €345k (my calculation)
    The deposit required would be €47k (10% of €220k + 20% of €125k)
    The average combined gross income of a couple of first time buyers in Dublin City Centre in the last year has been €73k
    The net income after tax was €58,000
    Their rent for a two bed apartment was €17,220 (A two bed apartment in Dublin City Centre)
    Their other household expenditure was €21,396 ( 120% of ISI Guidelines for a couple without kids, with one car)
    Their savings each year were €19,384

    With this level of savings, it would take them 3.82 years to save the deposit required of €47k.

    ( These figures don't add up. If they are saving €19k a year, they would have the deposit in less than two years???)
     
    Last edited: Nov 26, 2016
  4. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Is that not far too long?
     
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  5. Sarenco

    Sarenco Frequent Poster

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    Do you think so?

    I would have thought that most FTBs would have saved for around 3 or 4 years for a deposit in the past.
     
  6. Gordon Gekko

    Gordon Gekko Frequent Poster

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    I guess I'm specifically referring to the move from €35k to €76k in South Dublin.

    4 years to pull that together sounds punchy to me.
     
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  7. Sarenco

    Sarenco Frequent Poster

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    Sorry, I'm not following you - is the chart not saying the average FTB in SCD can save the average deposit in 2.64 years? Maybe I'm reading it wrong.
     
  8. Gordon Gekko

    Gordon Gekko Frequent Poster

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    That means the average first time buyer is saving €2,400 a month.

    Intuitively, how can that be right?

    It sounds too high.
     
  9. Sarenco

    Sarenco Frequent Poster

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    Out of an average income of €110k? That doesn't sound overly challenging - does it?

    Mind you, I find it hard to believe that the average SCD FTB has an income of €110k.
     
  10. Gordon Gekko

    Gordon Gekko Frequent Poster

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    My point exactly. There's something about these figures that doesn't pass the smell test.
     
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  11. username123

    username123 Frequent Poster

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    When ye say FTB, do ye mean a couple or an individual? That would surely change complexion of the savings rate?
    Report says couple so just to be sure we're talking about same thing.
     
  12. Gordon Gekko

    Gordon Gekko Frequent Poster

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    Someone on €55k takes home €36k a year, i.e. €3k a month.

    Let's say it's a couple, so €6k a month. €1,500 a month rent per the above charts. €1,000 a month creche (probably more). €2,500 a month savings. €1,000 left for everything else, food, utilities, commuting, clothing.

    There's a credibility gap here.

    The Central Bank are destroying the fabric of our society and it's been hidden by quirks in the system such as the Dwelling House Exemption and parental assistance.

    The Central Bank rules condemn the proverbial nurse and guard to a lifetime of renting as the banks are using the exemptions to cherrypick future high earners.
     
  13. Sarenco

    Sarenco Frequent Poster

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    I've now had a chance to read the paper itself - it's a fine piece of work IMO.

    Expenditure is based on ISI reasonable living expenses, plus 20%, for a childless couple with one car. A fairly typical FTB couple I would have thought.


    Really? I can't see how the Central Bank's rules are having much impact at all on FTBs -

    http://www.askaboutmoney.com/threads/limited-impact-of-central-bank-mortgage-rules-on-ftbs.199839/

    I certainly don't see how they are "destroying the fabric of our society"!
     
    Last edited: Oct 5, 2016
  14. Gordon Gekko

    Gordon Gekko Frequent Poster

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    The hole the size of Texas in this study is the fact that the notional couple are childless.

    The hoovering up of exemptions by the wealthy is one of the big societal issues.
     
  15. Brendan Burgess

    Brendan Burgess Founder

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    Hi Gordon

    I was wondering about that.

    I would have thought that the majority of couples have a plan - save for a deposit, buy a house and then have children. So the CB study reflects that.

    Obviously, if you both drive new cars, have kids first and then start thinking about buying a house, you are going to find it very difficult.

    I would have thought that there were other bigger question marks about the representativeness of the study which exaggerate the TTS:
    • Why would a childless couple saving for a house choose to rent a two bed apartment? They should be renting a bed-sit if they are saving for a deposit
    • Why would a childless couple buy a 3 bed semi-detached house? They should be buying a smaller house to get on to the housing ladder and they can trade up later.
    • Some people have quoted the time taken for a couple of first time buyers in the top 40% of incomes to buy a 3 bed house in south Dublin! That should be their final home, not their starter home.
    What this study shows is the exact opposite to what you are suggesting. The Central Bank rules have not hindered first time buyers from getting on the property ladder. In fact, they have probably helped by cooling down price inflation.

    Brendan
     
    Last edited: Oct 6, 2016
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  16. Brendan Burgess

    Brendan Burgess Founder

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    Thinking about it further, the study really exaggerates the Time to Save.

    This is the time from scratch where people start with absolutely no savings at all. I would think that people, even vaguely thinking of buying a house, would be putting something aside.

    There is no mention of the 15% exceptions allowed. A good proportion of these are for first time buyers buying above the €220k mark who are getting 90% of the full amount.

    And, of course, it doesn't mention the fact, that many people can get help from their family towards the deposit.


    Brendan
     
    Last edited: Oct 6, 2016
  17. Brendan Burgess

    Brendan Burgess Founder

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    They will need an exception from the Loan to Income rules:

    upload_2016-10-6_9-42-56.png
     
  18. Sarenco

    Sarenco Frequent Poster

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    I suppose it is difficult to model a typical FTB couple.

    FWIW, the average age of mothers at maternity for births registered in Q1 2016 was 32.7 years (per the CSO) whereas the average age of FTBs was 33 years (per the CBI).
     
  19. Brendan Burgess

    Brendan Burgess Founder

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    What is the combined income of a 28 year old nurse and 28 year old garda?

    A garda after 4 years, appears to earn €32k basic. I presume it's a bit higher with allowances and overtime.

    A nurse appears to be on €31k basic.

    So, with no promotion, and some overtime, they would appear to be earning around €65k.

    They will have net income of €54k ( no tax at 40%!)
    They will pay €14,000 for a two bed apartment in North County Dublin
    Their other household expenditure will be €21k
    Which leaves them savings of around €20k a year.

    After three years, they would have €60k.
    With 3.5 times their income, they would get a mortgage of €230k
    So they can buy a house for around the €300k mark.

    They will not be able to buy a 3 bed house in South County Dublin, but should be able to get a starter home in most other places.

    Brendan
     
    Last edited: Oct 7, 2016
  20. username123

    username123 Frequent Poster

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    FWIW I can probably wade in as an actual person that the report addresses:
    • Childless couple in 30s
    • FTBs
    • Renting 2 bed apartment in Rathmines, E1500 per month. Lived here 2 years.
    • Started saving for house for "properly" last year, however this is not much of a change for me, as I was always a saver. GF recently only got good job that allowed saving.
    • Not expecting any family help for purchase
    Agree with Brendan on a few points:
    • No new stuff - we traded from having a car each to having one, cycle to work etc
    • Existing savings - I have been saving since I started work
    • House savings - I have turbo-charged the savings in last year, circa 45% of income saved each month
    • Not looking to buy 3 bed semi D, a 2 bed townhouse-type purchase and we are done

    Dis-agree with Brendan on a few points:
    • Bedsit - No way, value my sanity and relationship too much (in fact, trading down to 1 bed apartment is almost as expensive at the moment). Moving now would result in paying almost same rent, for something much worse. Have you looked at daft.ie recently with a filter of E1000 max? However, we are hoping to move another place slightly farther away for E800 per month (friend of friend landlord, hence the price, and its not a dump)
    • Get on ladder and trade up later? That hasn't worked out recently......!
    By Christmas this year, we will have 100K cash as deposit. Finding right house is then the issue. If we move to the E800 per month place in new year, it will feel less like burning money while searching for the house.

    Just posting my situation as a actual comparison, not saying its right or wrong.
     
    Last edited: Oct 6, 2016
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