Buyers still in house market despite prices

The capacity of purchasers to afford houses has not diminished since mid-1998 despite the impact of strong house price inflation, according to a new report.

The report - by Goodbody Stockbrokers - said that rising gross earnings, falling tax rates and mortgage rate competition were combining to maintain what it described as "acceptable affordability levels".

The affordability threshold was deemed to be mortgage payments of up to 45 per cent of income for first-time buyers borrowing up to 80 per cent of the value of a property.

"While house prices have been going up, other elements have been moving in the opposite direction, with the net impact that it is no worse than in 1998," said Mr Oliver O'Shea, banking analyst at Goodbody Stockbrokers.

"A big element has been the entry of Bank of Scotland into the market with its standard variable rate mortgage of 3.95 per cent when the average rate at the time was 5.25 per cent. Most others have matched that offer."

Goodbody's housing affordability predictions are likely to continue until the end of 2001, even taking into account mortgage rate increases to 7 per cent, said Mr O'Shea.

"Our assumptions are that earnings will continue to rise and that there will be a 2 per cent reduction in the upper and lower tax bands and that house price inflation will taper off," he said.

But the report's analysis also showed that single earners purchasing new Dublin properties on high loan to value ratios have been experiencing repayment stress for some time.

"Single earners with high loan to value mortgages are potentially on the brink of repayment stress at current levels," said Mr O'Shea.

"`However, our research also suggests that mortgages have not been widely available to this category of borrower and, therefore, bank exposure to this type of risk appears limited."

The research indicates that banks are only lending 68 per cent of the purchase price and are not over-exposing themselves by over-lending.

With strong asset value growth and with mortgage indemnity cover, lenders are well protected against losses in the unlikely scenario of a crash in the market, the report said.

There is also no evidence to suggest a property market collapse similar to the UK housing market crisis, it said. Personal debt levels and the repayment burden are low relative to the UK, according to Goodbodys. While debt gearing in Ireland has increased from 40 per cent to just under 70 per cent over the 1990s, it still remains below the level of 100 per cent in the UK, it said.