Mortgage rules will slow house building, say developers

Some 96 per cent of developers believe the new Central Bank mortgage rules will have a negative effect on residential development over the next two years, according to the inaugural Knight Frank New Homes Construction Survey.

The research, based on responses gleaned from the agent’s developer database, claims there needs to be a “sensible adjustment” to the Central Bank’s rules in the Dublin region which limit lending to non-first-time buyers to 80 per cent of the property price while first-time buyers can borrow 90 per cent of a property’s value up to €220,000 and 80 per cent of any amount above this limit.

Introducing the new rules at the bottom of the economic cycle has "clearly impacted on development activity", the survey suggests. James Meagher, a director at Knight Frank, believes first-time buyers are being pushed out to the regions as they are unable to afford the deposit for a three-bed semi within the M50.

“The knock-on effect of this leads to urban sprawl,” says Meagher. “Furthermore, while the Central Bank’s mortgage rules have dampened down Dublin residential property inflation to an annual rate of 1.2 per cent, they have contributed to Dublin’s prime rental inflation running at around 8.8 per cent as fewer can buy and are stuck in the rental sector.”

‘Sustainable level’

Knight Frank’s survey found developers believe around 9,000 units a year would be a “sustainable level of residential building in Dublin” but only 3,000 units will be built in 2015. Each year since 2010 new residential construction in Dublin has been lower than at any level since the early 1970s.

“The disconnect between the current cost of construction and the reduced purchasing power of prospective home buyers, driven by the new Central Bank lending regulations, appears to be behind the construction gridlock,” the survey states.

Not surprisingly, perhaps, the developers also used the survey to vent frustration at the planning system, with 98 per cent finding building regulations introduced in recent years as “challenging” to building activity, while 67 per cent of builders see the planning system as inefficient.

One developer commented: “I think that the Government needs to look at the amount that goes in planning contributions and VAT. On a typical three-bed semi in Dublin that would sell for €300,000, approximately €90,000 goes to government or semi-state bodies.”

Developers, however, welcomed reform of Part V of the Planning Act – this made it mandatory for developers to set aside up to 10 per cent of new developments for social use. More than 60 per cent said the changes would have a positive impact.

Regarding building land purchases, 78 per cent of respondents planned to increase their land stock over the next year, with 48 per cent targeting acquisitions with planning permission compared to 30 per cent without planning.

This bias “reflects the preference of capital funders for schemes with planning as the cost of funding for schemes without planning can be prohibitively high in the current finance-constrained environment,” says Meagher. “But we are seeing encouraging signs of recovery in the provision of financing for developers, with the availability of finance now greater than any period seen in the past five years. Senior debt providers are now starting to compete against those offering mezzanine and equity finance, while the two pillar banks have re-emerged as lenders for projects which have planning permission in place.”

Some 75 per cent of the developers surveyed operate in the Dublin area with a further 16 per cent operating in Leinster. Five per cent worked in Munster and 2 per cent in Connaught.