No point building houses if mortgage rules are too severe

Loan to value (LTV) ratios are the talk of the town at the minute thanks to the Central Bank’s decision to publish new rules for lenders around home loans.

To recap, the regulator has proposed that from January 1st borrowers must have accumulated at least a 20 per cent deposit of the price of the house to qualify for a mortgage. Banks must also apply a 3.5 times income threshold when deciding how much to lend.

The rules come as the property market is showing definite signs of life after seven years of stagnation. And at a time when the Government is trying to encourage the building industry back on to its feet through its Construction 2020 initiative.

The new rules are designed to pre-empt another bubble rather than reacting to recent increases in house prices. But they threaten to stymie lending and thus new building activity. There’s no point in building new housing units if citizens are struggling to get a mortgage.

It’s worth noting that mortgage lending this year will total about €3 billion. At its peak in 2006, total mortgage lending was €39.8 billion. Talk of another bubble is premature.

This got an airing at the Banking & Payments Federation Ireland’s (BPFI) national conference in Dublin on Tuesday.

Irish MEP Brian Hayes, who was a minister of State at the department of finance up until his election to the European parliament this year, described the new rules as "unfair" and called for cheaper long-term loans to be made available.

“I don’t agree with the 20 per cent deposit proposal,” he said, adding that the rules do not take account of a person’s ability to pay back the loan.

Sharon Donnery, the Central Bank's director of credit institutions' supervision, responded by saying a "prudent approach to new lending is essential to avoid repeating past mistakes".

Diplomatic furrow

After the conference

AIB

chief executive

David Duffy

, who is also president of the BPFI, ploughed a diplomatic furrow. He “fully” supports the Central Bank’s new rules in the broad sense of managing risk. However, the requirement that borrowers should have a 20 per cent deposit might be a “little too high” and there could be “unintended consequences” for some buyers. “We [BPFI] will look at a submission over the next few weeks to deal with that.”

Another submission will come from the Department of Finance, with the Minister, Michael Noonan, indicating recently that it will be providing its thoughts to the Central Bank by the December 8th deadline. This suggests the Minister is not in agreement with the regulator on the limits being proposed.

When the Central Bank first published the rules last month it didn't seem like it was for turning, consultation process or no consultation process. However, in a speech last week the governor Patrick Honohan appeared to hold out the prospect of some changes around the edges that might include an insurance policy to cover some of the amount of the mortgage.

Reducing the rate to nearer 15 per cent, or its phased introduction over a period of years, might be another approach.

Figures compiled by the BPFI, and shared with The Irish Times, show that for the second quarter of this year the median LTV for first-time buyers was 87.5 per cent. Put another way, the median deposit for this group of borrowers was 12.5 per cent.

For so-called “mover-purchasers” the deposit figure was 25.5 per cent, presumably reflecting the equity in their homes. These figures are based on a large sample of mortgages issued by the federation’s members.

Permanent TSB chief executive Jeremy Masding will today tell the Oireachtas Finance Committee that the Central Bank's proposals would have a "significant impact on the availability of mortgage finance to key customer segments" if introduced. These are first and second-time buyers, who account for about 90 per cent of Irish mortgages.

PTSB’s opinion is that housing supply is the critical issue not “excessive or cavalier lending”. It would prefer a more moderate approach to LTV limits that can be “transitioned over a period”, a “graduation” of the timing to avoid a cliff event, and a focus on affordability and repayment capacity as opposed to income limits.

These sound like reasonable suggestions. Over to you, governor.

Twitter: @CiaranHancock1