Insanity of Central Bank

WizardDr

Registered User
Messages
1,553
Buying a house is something that only about 4% of people are doing at any one time. Those of you that already own a house will have no interest in what the Central Bank does or does not do. The fact that the Central Bank have not admitted that the so called original 'central bank guidelines' in the 1990s NEVER existed and its now taken 6 years since the onset of the crisis to come up with ONE strategy for dealing with house prices - we will put in place a 20% deposit - that will teach them. This is a scandal that it takes six years for a feeble response of one dimension in response to the huge catastrophic car crash that was the housing market. What exactly have the Central Bank been working so long at? This is a complete and utter farce.

When you have a market at the very bottom or slightly off the bottom, putting in place a 20% deposit is simply demonstrating that as a Central Bank that taking action - any action - is better than doing nothing. Even if its totally meaningless - but you rely on others not having access to information that would call this policy what it is - a complete and utter sham when nothing else is being done about the rest of the market. This is the Central Bank that showed leadership in calling the bailout. The same Central Bank who know that housing was the principal reason why the nation went completely beserk in the first place. So why would that Central Bank not call the rest of the issues - and force the Government into putting together a statutory National Strategic Housing Group to take the tasks one by one and deal with them? It told us to go to Europe and get a bail out. What is the pussyfooting about? Why one meaningless element when there is a symphony of connected issues to be dealt with?

If prices rise by say 4% a year - which they would do when an economy is growing (as ours is) ceteris paribus as economists say. In other words the 20% deposit is a bogus statement by the Central Bank when there are much more urgent issues in the housing market that need to be addressed.

The first is simply to have reliable statistics on the market in the first place. Apparently there were so many empty houses in the nation that whatever else was wrong, we had more houses than you could shake a stick at. Unfortunately the reality eventually started to come home to roost - the Mother was asking me why were rents going through the roof and how the hell could Dublin prices be rising at 20% given that there were so many empty houses and ghost estates and all that and that were vacancy rates so large that .. we didn't need to build for the next 500 years. So years on after this collapse we still do not have accurate figures on any of this. But rents are rising and property is still rising but may moderate a bit. How do I explain to the Mother what is going on?

One of these figures that we should compare against is Germany. The number of houses in Germany is about 480 per 1000 - and our number is 430. Germany has had very little house price inflation and most certainly no collapse and you wonder has it anything to do with the slight problem that there are lots of houses for the Germans to live in and that 'family sizes' in the broadest sense of the word are about 2.1 - and does Ireland have any similar traits so that 'family size' - could it be heading to 2.1 - maybe it would if there were houses enough for the 90,000 on the 'waiting lists'. But all these figures, opinions and comparisons need to be gone through. Economists - who assume things - assume that there is 'an annual demand for houses' or some such notion. When you have 430 houses per 1000 and there is huge evidence of 'family units' at 2 or 2.1 then 430 per 1000 means you have a shortage.

The Germans do social housing. We gave up in 1989. We built social 6.250 houses in 1974 when the total number of houses built were 26,000 - and we had no money then apparently. We have built or bought so few of these since 1989 that you actually almost say we built none.

The Germans may not occupy the house that they do buy. They rent it because its tax efficient to do so and then they rent off another guy. In fact you could do the same here as a buy to let and you could still get 'home loan interest relief' for the rented residence for the repair, upkeep and development of your principal residence on any interest on borrowings for those purposes and it does not have to be a secured loan. Not widely publicised but there you are - cat out the bag.

A second issue is just what is involved in putting together say a 300 house development. Do we know what is involved with regulations, bureaucracy and planning to complete a development? It will be a shocking result. [Identified in the UK as a major barrier - but when it took 10 years for our housing supply to double versus 18 months in the US - who had a bigger mess?]

A third issue is the notion of Community Housing / Renting and whether say Irish people should be able to invest in community housing. In other words affordable housing where the investors (us) get a reasonable return and house owners (us) can buy or rent at affordable interest rates or rent.

I am simply appalled at this weak Central Bank and its abuse of the machinery available to it.
They have shown the same approach to the forthcoming car crash as they did to the previous one. Expensive and lazy intellectually. In the name of the people GO!
 
Very hard to know where to start with this one. But just some random points.

1) Did you say all this in your submission on the proposals? Would you care to attach your submission to the post? If you don't want to be identified, you might email it to me. It took me ages to research and write and rewrite my submission. How long did it take you?

2) We have a severe housing shortage. Well spotted, the mother. But it is not the Central Bank's role to fix this. Granted they should be careful about taking actions to make it worse. But it's primarily the government's crazy tax take and regulations which are pushing up house prices.

3) The Central Bank strategy is not just about house prices. It's primarily about the stability of the financial system. But they do also want to avoid the economic consequences of house price bubbles.

4) This is a scandal that it takes six years for a feeble response of one dimension in response to the huge catastrophic car crash that was the housing market. What exactly have the Central Bank been working so long at?

Why not check out their Annual Reports? Their primary firefight has been to do with the solvency of the banks. That was a far higher priority than introducing rules when there was very little lending happening and when house prices were falling. There isn't anything urgent, yet, about these new restrictions.

5) Why one meaningless element when there is a symphony of connected issues to be dealt with?
The Central Bank will deal only with those issues over which it has control.

6) Economists - who assume things - assume that there is 'an annual demand for houses' or some such notion. When you have 430 houses per 1000 and there is huge evidence of 'family units' at 2 or 2.1 then 430 per 1000 means you have a shortage.

Excellent point. I have asked for an explanation for this myself. I do not understand why they say we need to build x new houses per year for the next y years. It would be better to say that we have a shortage of z houses in Dublin and we need to build them as soon as possible. (It's hard to believe that the person who made this excellent point is the same person who wrote the rest of the rant.)

7) They rent it because its tax efficient to do so and then they rent off another guy
Seems very inefficient to me. I like owning my house and being responsible for the upkeep and failure to upkeep it. I don't want to be a tenant and I certainly don't want to be a landlord. I don't want a tax system which encourages such inefficiency and I suspect that the German tax system is not like this, but I don't know enough about it.

8) A third issue is the notion of Community Housing / Renting and whether say Irish people should be able to invest in community housing. In other words affordable housing where the investors (us) get a reasonable return and house owners (us) can buy or rent at affordable interest rates or rent.

There isn't anything stopping you doing this at present. You can buy a property and rent it to rent allowance tenants. The Department of the Environment has the RAS where they will take over the house from you for 5 years and be responsible for everything. But you know, most investors are interested in profit. And they tend to find it more profitable and less hassle to rent to nice middle class people like economists, and, dare I say it, Drs. than to rent to people depending on social welfare to pay the rent.

9) They have shown the same approach to the forthcoming car crash as they did to the previous one.

They took little or no action to prevent the last car crash. They are taking action now, but the drivers and their cheerleaders do not like the action.

Brendan
 
What I read from Wizard .
1. He does not trust the Central Bank to manage ,I with him on that,
I think this 20% lark ,will if need be, be circumvented by Banks and borrowers to their own short to medium term ends.
What I read from Brendan.
Are arguments why this (belated) 20% and Central Banks efforts are (necessary) and that Central Bank is taking (belated) action.

If I could trust Central Bank to maintain vigilance , maybe 20% is OK.
If I could trust Banks to continue to observe the Spirit not just the Letter of 20% rule , maybe 20% rule is OK.
If I could trust our Borrowers to accept a GENUINE 20% @ all times , maybe 20% is Ok.

Surely for the next 5 years ,bring in a rule that anyone who takes a Mortgage or anyone who lends a Mortgage ,not to expect leeway if either foul up.

After 5 more years if we are not out of this hole , we are banjaxed!
 
I think, if we are in a situation where the Central Bank is having to manage banks to this extent, and if the banks cannot be trusted to lend responsibly themselves, we are always at risk of problems. The ultimate conclusion of that is sending every mortgage application to the Central Bank for final approval.

If these guidelines are such a good idea, why haven't the banks already adopted them? They should be taking a long term view of their own self-interest. Why aren't they? I think that's the crux of our current, and past, problems.

The Central Bank is looking at symptoms with these guidelines, not causes.
I'm not sure what the Central Bank can do about the root causes, it's probably something more for central government - but they seem to have abdicated the space to the Central Bank, who have put the problem into a box and locked it...
 
Last edited:
If these guidelines are such a good idea, why haven't the banks already adopted them? They should be taking a long term view of their own self-interest. Why aren't they? I think that's the crux of our current, and past, problems.

You got it in one. The nature of banking competition is that banks lend recklessly. Economic theory would suggest that they shouldn't but they do. Hence they need to be protected from themselves.

Brendan
 
Economic theory goes out the window when management can't lose. If the loan book performs well (at least in the short term) then it's bonuses all round! If it all goes horribly wrong on the other hand, sure depositors and/or the taxpayer will pick up the tab. Heads I win, tails you lose!

Whether or not the Governor sticks to his guns on his proposals will tell us a lot about our little country. I am not overly optimistic but I hope to be proved wrong.
 
Last edited:
I am wondering if there is not an easier way of balancing this out to make it more equitable across the board. The key concerns raised appears to be the ability of people (especially FTB) to save the required deposit when they are renting currently. Personally I believe LTI (Loan to Income) ratios are more important than LTV, as it shows ability to repay. LTV means the owner sets to lose financially if they default.

1. Implement clear LTI ratios, with no exceptions being made, and use the average of the last 3 years tax returns as the basis for the income calculation. This would show a consistency of earnings, as well as remove any ability to 'fudge' the income figures like what happened in the past

2. Two tier LTV ratios - one for those who have been renting consistently for 3 years and a separate one for those who have not been. Renting needs to be proven by lease and willing to produce bank statements for say 18 months (as opposed to 6 months) to prove this.
Or else maybe classify a portion of the rent paid as 'Deemed Savings' with maybe a monthly cap - for example if I have paid 40,000 euro in rent over the last 3 years, then 50% of it can be used as 'deemed savings' say to a cap of 500 euro/month [18,000 deemed savings and therefore allowed a higher LTV of this amount]
This would mean that all lease agreements should be formally lodged with the PRTB to show rent due, and would need to be updated if the rent amount changes (nominal fee), and will need the ability to search on these as part of a loan application, along with a letter from the landlord stating rent was paid on time each month etc.

3. I cannot but wonder that if the customer is paying a 20% plus deposit, and further repayments on the mortgage, they are set to lose in the case of a default. However, for this to be truly equitable, the banks also need to be in a position that they could also lose in the case of a default. This would mean that they are going to be less likely to take massive risks without the associated rewards. Personally I believe that if the customer is stumping up 20% up front, then the banks should be required to offer non-recourse loans, without exception.
The only downside of this is potential to impact the 'repossession' strategy of the banks, but being honest I think this needs to be addressed in any event, at least in the medium term.

I think the central bank are in a no win situation here. Their role has to be to govern the banks and sadly the banks in Ireland do not seem to be able to self-regulate themselves. Their proposals is purely to dampen the bank side of things, not look at this from a building more houses point of view - this needs to come from the government

Sadly, we are seriously properly obsessed in Ireland - and its not just about owning our own homes ! Agree something needs to be done in the rental area, but also more rights need to be afforded landlords where tenants do not pay. If this balance could be achieved, I am sure landlords would not be opposed to changes in this area at all.
 
I am wondering if there is not an easier way of balancing this out to make it more equitable across the board. The key concerns raised appears to be the ability of people (especially FTB) to save the required deposit when they are renting currently. Personally I believe LTI (Loan to Income) ratios are more important than LTV, as it shows ability to repay. LTV means the owner sets to lose financially if they default.

1. Implement clear LTI ratios, with no exceptions being made, and use the average of the last 3 years tax returns as the basis for the income calculation. This would show a consistency of earnings, as well as remove any ability to 'fudge' the income figures like what happened in the past

2. Two tier LTV ratios - one for those who have been renting consistently for 3 years and a separate one for those who have not been. Renting needs to be proven by lease and willing to produce bank statements for say 18 months (as opposed to 6 months) to prove this.
Or else maybe classify a portion of the rent paid as 'Deemed Savings' with maybe a monthly cap - for example if I have paid 40,000 euro in rent over the last 3 years, then 50% of it can be used as 'deemed savings' say to a cap of 500 euro/month [18,000 deemed savings and therefore allowed a higher LTV of this amount]
This would mean that all lease agreements should be formally lodged with the PRTB to show rent due, and would need to be updated if the rent amount changes (nominal fee), and will need the ability to search on these as part of a loan application, along with a letter from the landlord stating rent was paid on time each month etc.

3. I cannot but wonder that if the customer is paying a 20% plus deposit, and further repayments on the mortgage, they are set to lose in the case of a default. However, for this to be truly equitable, the banks also need to be in a position that they could also lose in the case of a default. This would mean that they are going to be less likely to take massive risks without the associated rewards. Personally I believe that if the customer is stumping up 20% up front, then the banks should be required to offer non-recourse loans, without exception.
The only downside of this is potential to impact the 'repossession' strategy of the banks, but being honest I think this needs to be addressed in any event, at least in the medium term.

I think the central bank are in a no win situation here. Their role has to be to govern the banks and sadly the banks in Ireland do not seem to be able to self-regulate themselves. Their proposals is purely to dampen the bank side of things, not look at this from a building more houses point of view - this needs to come from the government

Sadly, we are seriously properly obsessed in Ireland - and its not just about owning our own homes ! Agree something needs to be done in the rental area, but also more rights need to be afforded landlords where tenants do not pay. If this balance could be achieved, I am sure landlords would not be opposed to changes in this area at all.


Odyssey 06.
Of course Banks cannot be trusted. They have earned our distrust.

Brendan.
Banks do not need to be protected from themselves , we know we need to be protected from them.
(Banks like a biting dog , always revert to type)

Sarenco.
Agreed, heads Banks win , tail Banks win and we pay the tab.

Inf.
Like your post ,
Overall , I read it as sense but only if we had Leadership.
 
Good Post gnf and I broadly agree with your proposals. However I would make the following general comments:

1. It is definitely far more effective to set maximum LTI thresholds than LTV. However, the CB should only be employed in setting macro prudential rules as the specific circumstances which dictate "ability to pay" will differ for each individual borrower. I totally understand the difficulties we have in trusting banks to lend prudently. However, the CB are not in a position to micro manage lending and they have no choice but to predominantly trust the banks to both keep to the macro rules and apply their own prudential lending standards. The CB are not sufficiently staffed to micro manage each bank's lending portfolio.

2. I accept the sentiment of the rental proposal, but I think in practise this would be a difficult rule to apply. The only reason I'm saying this is that it is descending somewhat into micro management and as such I don't see Patrick Holohan wanting to go in that direction.

3. There is a perception out there that making HL lending non-recourse would make the banks more prudent in their decision making. In my own experience where there is significant negative equity in a property and the clients are genuinely unable to pay this, the bank ends up losing money. Our biggest difficulty now in taking recovery proceedings is MARP and the fact that it can take 2 years plus to reposess a property where the owners are not repaying the loan. Give the banks the option of speedy re-posession, 80% LTV and I would not see non-recourse as being a problem.

Despite the post title and initial rant over the CB, we are not heading back to "crazy lending practises" and the period from 2001-2008 was a first in Irish banking history which led to the "perfect storm" for potential bank loss. Prudential rules are necessary and as with all institutions handling large amount of funds, proper and timely oversight of the rules is a constant necessity. Blind trust is never a good policy and we would hope that the CB have learnt that lesson.
 
Back
Top