Affordability improves for first-time buyers

First-time buyers are now using a smaller chunk of their net incomes to repay their mortgages than they were in December, the latest EBS/DKM affordability index suggests.

However, the improvements in affordability for buyers are sparking concern that house prices may soar again in 2007.

The index, published by Irish Property Buyer magazine, shows that the average first-time buyer working couple spent almost 2 per cent less of their net income on their loan repayments in January than they did in December.

However, this is still likely to be higher than the relative cost of mortgages before the current round of interest rate tightening began.

The easing of repayment burdens is mostly the result of the Government's doubling of mortgage interest relief in the Budget, which has cancelled out the effect of around three-quarter point hikes in interest rates by the European Central Bank (ECB).

In January, the average couple spent 24.7 per cent of their net incomes on their mortgage, compared to 26.6 per cent in December. Dublin couples devote a higher slice of their earnings to their mortgages, spending 29.8 per cent of their incomes in January, although this is also down from 32.7 per cent in December. EBS, which will lend on the basis that repayments do not exceed 40 per cent of borrowers' net incomes, has changed its policy on stress testing to see if buyers can cope with future rate rises.

While most lenders stress test on the basis of two percentage points above standard variable rates, EBS is now testing to see if borrowers' can afford to repay loans at a rate of 6 per cent, just 1.25 percentage points above its current standard variable rate.

EBS marketing manager Dara Deering denied that the change in its credit criteria, which will mean it will lend larger mortgages to buyers, amounted to irresponsible lending.

Annette Hughes, director of DKM Economic Consultants, said there was a risk that the improved affordability for first-time buyers, combined with lower levels of housing supply and an imminent peak in the cycle of rate hikes, could be enough to generate a fresh surge in house price inflation.

Forecasts that house prices would grow by 3 - 6 per cent in 2007 represent "quite a sharp slowdown" that Ms Hughes said she did not anticipate happening yet. Her view was echoed yesterday by Bloxham Stockbrokers economist Alan McQuaid, who said it "would be no great surprise" if house price growth picked up again.