Don’t blame the Central Bank for the broken housing market

Is a soft-landing ever possible in the Irish housing market? Or in the roller-coaster world of the Irish property market are we heading for another housing bubble which will, some day, inevitably burst?

Certainly the Central Bank does not want a surge of imprudent bank lending to take hold on its watch – and it is determined to stop history repeating itself after the crash which followed the vast upsurge in mortgages and house prices that came to an abrupt end in 2008. It thus came as no surprise that it didn't ease the rules in its latest annual review.

The Central Bank review finds that house prices and bank lending are now broadly in line with economic fundamentals. You might say that the housing market is somewhere around where it was in 2002-2003, in the sense that prices had risen on the basis of a period of solid economic growth. What the bank wants to stop is a repeat of what happened subsequently, with an extraordinary credit driven boom taking hold.

One figure tells the story. In the year to the third quarter of 2006, mortgage drawdowns reached a staggering €28 billion. This year the figure may reach around €7 billion, or perhaps a bit more. Mortgage borrowing has been growing quickly, with the latest figures from the Banking and Payments Federation showing a 20 per cent annual rise in the number of loans in October and a 34 per cent rise in their value. But when loans repayments are counted in, the total volume of residential mortgages on the books of Irish banks is only now starting to increase year on year.

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Significant scope

There is some good news here for those looking to buy property. The Central Bank does see significant scope for further growth in bank mortgage books, so it is certainly not trying to restrict the volume of lending. Its review refers to as yet unpublished research which says that, on the basis of current income levels, mortgage lending is still below what would be expected.

Also, a tweak in the rules means that relatively more first-time buyers may be able to avail of an exemption which allows the 3.5 times loan limit to be exceeded. In contrast, second and subsequent buyers may find it more difficult to get a loan above the limit, as in future the Central Bank says this should be available only in relation to 10 per cent of such borrowers, compared to 20 per cent now.

The difficult thing for buyers, of course, is that the regulator is only one player in a market which remains dysfunctional. Lack of housing supply is pushing up prices – out of the reach of increasing numbers – and meaning many simply cannot find a place to buy. The Central Bank report estimates that housing turnover in 2016 was just 2.7 per cent, compared to a figure or around 4 per cent-5 per cent in a normally functioning market.

It’s not the regulator’s job to fix this one, or to change its rules to allow buyers to chase prices they can’t afford. Of course, that doesn’t make it any easier on young buyers, but that is the reality. Don’t blame the Central Bank for the broken housing market.

Scarce properties

The other big consideration for buyers, of course, is price. Many are chasing scarce properties only to watch prices rise above what is affordable. The recent ESRI paper reckoned that prices could rise 20 per cent over the next three years, which is a bit slower than they have been increasing but still way ahead of expected income growth. Many broker estimates are for a similar gradual slowdown in the rate of price increase, now running at just under 13 per cent nationally.

However, Central Bank governor Philip Lane took a more cautious approach, pointing to the risks for the economy and house prices, ranging from Brexit, to changes in international tax, to the likelihood of European Central Bank interest rates starting to increase (albeit not for a while yet). At some stage affordability will also become a bigger constraint – at the moment prices continue to rise because some people can afford to pay. And finally, Lane points out, if Government policy succeeds in increasing housing supply, then this too would act to dampen prices.

The Central Bank feels these warnings justify its stance of making sure lending is prudent. But it is also worth noting for those looking to enter the market. Prices can fall as well as rise. And some time over the next two to three years interest rates are going to start increasing again.