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Thursday 8 December 2016

Dan White: Thank God for tough lending rules taking heat out of market

The Central Bank in Dublin
The Central Bank in Dublin

This time last year it was beginning to look like déjà vu all over again in the housing market.

Prices rose by 2.9pc nationally and by 3.3pc in Dublin in the month of June 2014 alone. For those of us who had seen it all before, it was beginning to look suspiciously like a re-run of the mad events of 2005 and 2006.

Except that this time around there was one enormous difference: a Central Bank boss, Patrick Honohan, willing and able to do his job properly.

In October the Central Bank announced tough new mortgage lending rules for the banks.

These rules came into force at the end of January despite much posturing by politicians - many of whom had previously complained about the failure of Professor Honohan's predecessor to cool down an over-heating housing market in the mid-noughties.

Most homebuyers can now borrow no more than three-and-a-half times their pre-tax income and require a 20pc deposit, i.e. a couple earning €80,000 per year are restricted to a maximum loan of €280,000 while they would have to save a €70,000 deposit to buy a house for €350,000.

Well guess what? The new lending restrictions are working with the latest figures from the CSO showing that house prices rose by just 0.4pc outside of Dublin and actually fell by 0.4pc in the capital last month.

Which strikes me as being about right.

For all of the talk from the property lobby about a shortage of supply in the housing market - almost a certainly a short-term phenomenon that will quickly right itself as more new houses are built and the banks increase new mortgage lending - the ability of purchasers to pay the higher prices now being demanded hasn't increased.

Recovering

While the Irish economy is now recovering, with the ESRI predicting that the domestic economy will grow by 4.2pc this year and a further 3.6pc in 2016, earnings are still going nowhere fast.

The most recent CSO figures show that average private sector earnings rose by just 0.6pc in the 12 months to the first quarter of 2015 while average public sector earnings rose by a scarcely detectable 0.1pc.

Any increase in earnings in 2015 is likely to be very modest, probably no more than 2-3pc. Which of course means that the capacity of homebuyers to pay higher house prices will remain extremely restricted for the foreseeable future.

So what does this mean for homeowners either in arrears on their mortgages and/or stuck in negative equity?

Recent statistics from the Central Bank show a steady decline in the number of homeowners in arrears on their mortgages. This number is likely to continue to fall as more people find jobs.

However, there remains a hardcore of borrowers, almost 80,000, who are more than 12 months behind on their mortgage repayments. It's difficult to resist the conclusion that most of these are hopeless cases.

The best thing that could be done for the bulk of these borrowers is to encourage them to give up their properties in return for the banks accepting the sale proceeds in full and final settlement of their loan.

Not alone would this increase the supply of homes coming on the market it would also free distressed borrowers from the burden of unrepayable loans.

But what about homeowners stuck in negative equity, with half of those who took out mortgages in the peak years of 2006 and 2007 still owing more on their loans than their homes are now worth? Won't flat or falling house prices mean that these people won't be able to escape negative equity?

Not necessarily. In matters economic as elsewhere in life, time is a great healer. Most homeowners in negative equity are now at least eight or nine years into their loans.

This means that even borrowers with very long mortgages are now beginning to make inroads into their principals rather than just paying interest.

It makes far more sense to let time do its work on negative equity rather than inflate another housing bubble. We should protect future homebuyers by keeping prices under control instead.

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