Friday 21 October 2016

Dan White: Purse strings are loosened... but problems remain


New mortgage lending is increasing but is still less than the amount being repaid on existing home loans.

At last, after nine years and a fall of more than 95pc in new mortgage lending, there are signs that the banks are finally beginning to lend to homebuyers once again.

The value of mortgages drawn down by homebuyers jumped by 73pc to €983m in the first quarter of 2015 compared to the same period last year, according to the latest figures from the Banking and Payments Federation.

After several years of bashing the banks for not lending enough in new mortgages, I'm prepared to acknowledge that the first quarter mortgage drawdown figures do represent considerable progress.

While new mortgages have been about as plentiful as hens' teeth for most of the past decade, the banks are finally beginning to loosen their purse strings once again.

But, and it's an awfully big "but", serious problems remain, as anyone who has tried to persuade their bank to give them a mortgage recently will testify.

When looking at the housing market and the amount of mortgages being lent by the banks to finance home purchases, it is important to look not at one figure, such as mortgage drawdowns, but two. This other figure is, of course, the amount of capital repaid by homeowners who already have mortgages.

When one does this an altogether less rosy picture emerges.

According to the Central Bank, the Irish banks had almost €77.4bn of mortgages on their books at the end of March and had securitised (lent on to investors) a further €36.8bn, i.e. a total of €114.1bn. While that might seem like a heck of a lot of cash it was down by almost €1.6bn since the end of 2014 and by a massive €7.7bn over the past 12 months.

It is the net increase or decrease in mortgage lending, new mortgages drawn down and fewer repayments on existing loans which are the key indicators of the health of the mortgage market.


And guess what, the market isn't that healthy at all. Based on the latest Central Bank and the Banking and Payments Federation statistics, about the best that can be said is that, while overall mortgage lending is still shrinking, it is shrinking less quickly than it once was.

In plain English, when it comes to mortgages, the banks are still taking money, lots of money, off the table. Based on my calculations it would appear that, for every euro repaid by existing mortgage borrowers over the past 12 months only 35 cent was lent out again by the banks in new loans.

And as if this wasn't enough to be getting on with, there is the small matter of the Central Bank's tough new mortgage rules, which have imposed tight restrictions the banks' new mortgage lending.

Most homebuyers are now only able to borrow a maximum of 80pc of the value of their new home while the amount which they can borrow is also capped at 3.5 times their income.

While it is still too early to gauge the impact of the new rules, which only came into force at the end of January, will mortgage lending continue to grow at its current blistering pace?

For what it is worth, new mortgage lending drawdowns actually fell quarter-on-quarter, by 27pc from €1.34bn in the final quarter of 2014 to €983m in the first three months of this year.

However, the fourth quarter is always the busiest period for the housing market while the first quarter is the quietest so it might be a good idea to see what the second quarter figures are like before jumping to too many conclusions.However, even at this early stage, it is difficult to resist the suspicion that the Central Bank rules will provide the banks with a readymade excuse to keep shrinking their mortgage books.

If writers like me criticise them for their unwillingness to lend to homebuyers, they can always point their fingers in the direction of the Central Bank. Nothing to do with us Guv!

Even if the banks do continue to increase their new mortgage lending, any advances will be exceeded by repayments on existing mortgages for the foreseeable future.


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