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Saturday 16 December 2017

Too little, too late as Central Bank move to stop new bubble

Way back in the pre-Celtic Tiger era, lenders imposed strict conditions on borrowers, assuming that you could persuade them to give you a mortgage at all.

The maximum most banks or building societies would lend was two-and-a-half times the annual income of the main income earner and one times the second partner's income.

They also insisted on a hefty deposit, usually at least 20pc of the purchase price.

What this meant was that a couple where one partner earned the average public sector wage of €47,000 and where the other partner earned the average private sector wage of €36,000 would be able to borrow a maximum of €153,500. Throw in a 20pc deposit and the most they could afford to pay for a house would have been €192,000.

Then we joined the euro and the Europeans started throwing money at us. The Irish banks threw caution to the wind.

With some predictable results: In the dozen years after 1995 property prices quadrupled and then more than halved in the five years after 2007. This boom and bust ruined the Irish banks and ended up costing the unfortunate Irish taxpayer €64bn.

One would have thought that the Irish banks would have learned their lesson, but no, like the French royal family the Bourbons, they appear to have learned nothing and forgotten everything.

WORRIED

Instead they seem determined to revert to their previous bad habits with widespread reports of banks being prepared to lend home buyers up to five times their annual income and over half of all mortgage loans paid out last year having had deposits of less than 20pc.

Now, admittedly very late in the day, the Central Bank, which is supposed to be regulating the banks, is getting worried about what looks suspiciously like a new house price bubble.

In a research paper published this week it points out that many countries including Sweden, Norway, Finland, Hong Kong and most recently the UK have imposed either minimum deposits and/or maximum income multiples on bank mortgage lending.

The paper also showed that there is a very strong correlation between mortgage arrears and loans with either small deposits and/or high income multiples with a quarter of the loans with the smallest deposits or highest income multiples being in arrears.

The research paper is likely to be followed next week by a consultation paper in which the Central Bank is expected to propose a maximum multiple of four times annual income and a maximum loan-to-value ratio of 80pc, ie a minimum 20pc deposit.

If the Central Bank follows through on these proposals and imposes binding income multiples and minimum deposit requirements on bank mortgage lending, then the implications for the housing market could be very significant indeed.

Take our previous couple. With a combined annual income of €83,000 the most which they could borrow would be €332,000.

Which, when the 20pc deposit was added, would mean that the most they could pay for a house would be €415,000 - although how anyone could afford to save a deposit of €83,000 in this day and age is quite beyond me.

The average Dublin second-hand house price stood at €330,000 in April.

Dublin house prices have risen by a further 15pc since then meaning that the average second-hand house price in the capital is now about €380,000.

SOARING

What this means is that Dublin house prices are already beyond the reach of most people on even average incomes while those on below-average incomes can only dream of owning their own home.

While soaring house prices may be good news for the banks ahead of this month's ECB stress tests and for the Government which owns most of them, it is very bad news for most of the rest of us.

The Central Bank is right to be concerned and shouldn't be afraid to take tough action to force the banks to impose stricter mortgage lending criteria.

If it doesn't, and the banks are allowed to revert to their old ways, then we will all end up paying the price.

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