For Stefan Gerlach, the Swedish-Swiss former Central Bank of Ireland deputy governor, the big problem in the Irish residential property market is as glaring today as when he left Dublin almost six years ago.
“I’ve had a lengthy career but never owned a house in my life,” says the now chief economist with Swiss private bank EFG Bank, as he gets up in the middle of a FaceTime interview to give The Irish Times a virtual tour of the modern, three-bedroom apartment, with postcard countryside views, that he has rented for the past six years 15km from Zurich.
"Switzerland has a well-functioning rental market and the home ownership rate is just a little over 40 per cent," he says. "The problem in Ireland is that the rental market is dysfunctional and there is an obsession – similar to other English-speaking countries – with buying your own home.
“And buying in Ireland, as the financial crisis showed, is a risky business for borrowers, banks and taxpayers.”
Gerlach joined the Central Bank a decade ago this month as the State was in the middle of a €67.5 billion international bailout programme, after the spiralling cost of bailing out the banks, following Europe's biggest property crash, froze the government out of international capital markets.
He was part of a team that introduced mortgage-lending rules in 2015, capping loans against property values and borrowers' incomes, with the aim of preventing, as the bank's then governor, Patrick Honohan, put it, "the credit-chasing-prices-chasing kind of bubble" of the past.
Review
The current Central Bank governor, Gabriel Makhlouf, announced in May that he was carrying out a major review of effectiveness of the so-called macroprudential mortgage rules – outside of the usual annual assessment to see if they need minor tweaking. Gerlach says that attempts to change the rules should be resisted.
“The mortgage rules made good sense at the time they were introduced,” he said. “They continue to prevent people from taking on more financial risk than they can handle.”
But with house price growth running at an annual rate of more than 8 per cent as of July, according to the Central Statistics Office (CSO), are the rules keeping inflation in check or actually crimping supply and exacerbating the problem? The debate is only beginning to heat up as Makhlouf continues his review, which is set to run into the first half of next year.
As things stand, the rules restrict the loan-to-value limits on a private residential home loan to between 80 per cent and 90 per cent of the value of a property while a separate loan-to-income (LTI) rule restricts consumers to borrowing 3.5 times their salary – with lenders having limited scope for exceptions.
Economists in the Central Bank have estimated that Irish house prices could have been 25 per cent higher prior to the Covid-19 pandemic had the limits not been in place, with similar implications for the price-to-income ratio, a key measure of housing affordability.
However, the State’s biggest housebuilders – Cairn Homes and Glenveagh Properties – have stepped forward in recent weeks to argue that the rules are affecting the viability of certain projects for smaller builders, who are largely reliant on alternative finance providers after mainstream banks retrenched from development lending in the wake of the crash.
"The majority of smaller developers are funded by alternative finance [providers, rather than banks]," Glenveagh chief executive Stephen Garvey said in an interview with this newspaper last week. "They need to factor in a minimum margin to get finance. Then they need to prove to the lender that they can sell enough units at a point in time to repay their loans. Finance costs end up getting higher the riskier the project. It's a double-edged sword."
It comes at a time when the Government’s Housing for All plan, unveiled earlier this month, aims to deliver 300,000 new homes by the end of the decade. About 22,000 houses and apartments will be built this year and 27,000 in 2022, according to Banking and Payments Federation Ireland (BPFI) estimates – still well shy of the 35,000-40,000 economists reckon are needed every year.
Deterrent
"The lack of realisable demand – ie mortgage-backed customers – still remains the biggest deterrent for capital providers," Cairn Homes chief executive Michael Stanley said in a letter sent to Makhlouf last week, seen by The Irish Times.
“I am of the opinion that the accommodation crisis in Ireland today would not be as extreme if there had been a more dynamic approach adopted to flex the rules during this period. The rules should have taken into account the changes to purchasers’ ability to meet their mortgage repayments over the last six years and the broader societal impacts.”
Stanley, also a board member of industry group Irish Institutional Property, is proposing that the “blunt” LTI restrictions be swapped for mortgages set on a debt-servicing ratio. He argues that limiting most mortgages to 3.5 times household income has become more restrictive for households since 2015 as interest costs have come down over the period – serving to push would-be homeowners into the rental sector, which is also severely short of supply.
The Irish home ownership ratio has fallen from 78.1 per cent in 2007 to 68.7 per cent in 2019, according to data from Eurostat, the European Union statistics office. Average rents across the State have surged by 54 per cent to €1,320 in the six years to the end of March, the latest Residential Tenancies Board (RTB) data shows. There are currently fewer than 1,800 properties for rent in the State, according to property website Daft.ie, compared with an average of 9,300 over the past 15 years.
Stanley’s letter gave an example of a household on a gross income of €75,000 in 2015, which would have qualified for a mortgage of €265,500 based on LTI cap. This would have equated to monthly payments of €1,237 – or 25 per cent of net monthly income – based on an average mortgage rate of 3.89 per cent in the market at the time.
However, a reduction in average mortgage rates since then, to 2.79 per cent, has reduced the payments to €1,077, or 21 per cent of net monthly income.
If the debt-servicing ratio had remained at 25 per cent, it would have allowed the maximum loan for the same borrower to rise to €312,407, allowing them to buy a house worth €347,119, based on the Central Bank’s 90 per cent loan-to-value limit for most first-time buyers. That’s just shy of the median price of a new home in the Republic last year, according to the CSO.
A survey published in July by the RTB indicated that, on average, tenants in Ireland spend almost 36 per cent of their monthly net income on rent. A fifth of the 1,038 people surveyed said they were renting because they could not get a mortgage.
While the Housing for All plan envisages a shared-equity scheme to help people buy 2,000 home a year, Stanley said it “will never be able to scale quickly enough to provide permanent housing solutions for the 175,000 households, comprising over 270,000 adults, with incomes between €60,000 and €90,000”. A minimum gross income of €90,000 is currently needed under the LTI rule to buy a house for €350,000.
Mortgage approvals
A sharp rebound in housebuilding and mortgage activity this year, following the Covid-19 shock, saw lenders approve 14,248 mortgage applications, at a total value of €3.52 billion, during the three months to June, according to BPFI data. However, a dearth of supply resulted in just €2.23 billion of mortgage drawdowns, albeit up more than 50 per cent on the year, by 9,625 borrowers.
"Our pipeline of approvals is the highest it's been since the financial crisis," said Permanent TSB chief executive Eamonn Crowley told The Irish Times last month.
“They’ve been approved under the macroprudential rules. There [is an undersupply of houses] for them to buy. So, there’s no point in changing the rules in order to bring in another group of mortgage-approved customers, because that might drive on prices again.”
Elsewhere, Bank of Ireland chief executive Francesca McDonagh said in a recent interview that the issue was not the mortgage rules but the gap between supply and demand, which hasn’t been helped by two industry shutdowns during the Covid-19 pandemic.
“There is no point in increasing mortgage lending in a way that is unsustainable for Irish homeowners, first-time buyers and the broader economy. I understand the rationale [of the rules],” she said.
AIB chief Colin Hunt courted pushback from regulators when he raised his head above the parapet in October 2019 to call for a relaxation of the restrictions, at a time when house-price inflation looked contained. He became the target of a thinly-veiled barb the following month when Central Bank deputy governor Ed Sibley warned "we need to beware the return of hubris" among banks internationally, including Irish bank heads lobbying for an easing of the lending rules.
When asked about Hunt’s current views, a spokesman said: “AIB supports the macroprudential mortgage measures, as we have always done, and we await the publication of the review.”
Karl Deeter, founder of Onlineapplication.io, a new software system being used by many of largest brokers in the State, said there is a disconnect between the mortgage rules and the wider monetary policy of the European Central Bank's governing council, where the Irish Central Bank head has a seat at the table.
“The single biggest indictment of central-bank policy is that you have a euro-zone zero-interest-rate policy effectively pushing institutional money into the property market to get any kind of investment yield,” Deeter said. “And, on the other hand, the Central Bank lending rules keeping huge numbers of would-be borrowers out of the market.”
Overseas institutions, mainly pension funds, have spent more than €6 billion buying Irish apartments, including pre-funding deals with developers, since 2018, according to property consultants JLL Ireland.
“To be clear, I think international money coming into the market is a good thing, as they fund developments and increase supply,” said Deeter. “But when this happens to the detriment of regular people who want to own a home, it gets me angry.”
Survey
A Central Bank online survey in July on the rules is understood to have prompted submissions running to the low thousands – underscoring how emotive the issue is.
“We asked the public and other stakeholders to share views and experiences on the functioning of the mortgage measures, as well as perspectives on what a sustainable mortgage market looks like,” a spokesman said. “We will review the responses to the survey, analyse feedback from the listening events, and then use this information to inform our overarching review.”
The assessment may be finalised by the middle of next year, according to some sources.
Meanwhile, few hold out any expectation that the bank will tweak the rules in the interim as part of its latest annual review, due to be completed at the end of November.
Back on the outskirts of Zurich, Gerlach is clear in his views. “I don’t think the Central Bank should loosen the mortgage rules because the politicians [haven’t been able to] get their act together to increase supply. You are ending up with a second-best solution by relaxing the criteria,” he says. “A fundamental problem in Ireland is that the rental market is completely undeveloped.”
