House builder pushes for end to loan-to-income mortgage rules

Cairn Homes chief Michael Stanley writes to Central Bank that ‘dynamic approach’ would alleviate crisis

Michael Stanley of Cairn. Photograph: Cyril Byrne

Michael Stanley of Cairn. Photograph: Cyril Byrne

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Cairn Homes chief executive Michael Stanley has written to Central Bank governor Gabriel Makhlouf calling for a switch from enforcing “blunt” loan-to-income restrictions for mortgages to a debt-servicing ratio, in order to help alleviate the “accommodation crisis” in the State.

It comes as the regulator is carrying out a review of the framework of mortgage rules, introduced in 2015. It is expected that the public debate over the rules will grow louder as the review carries into next year.

Mr Stanley argued in the letter, dated September 15th and seen by The Irish Times, that limiting most mortgages to no more than 3½ times household income has effectively become more restrictive for households over time as interest costs have come down over the period.

This, he said, had served to “totally disenfranchise” low- and middle-income families, pushing them into long-term rental, where average monthly costs are typically more expensive than a mortgage on an equivalent property.

The letter gives 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 the 3½ loan-to-income (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 about 21 per cent of net monthly income.

If the debt-servicing ratio remained at 25 per cent, however, it would have allowed the maximum loan for the same borrower to rise to €312,407, allowing the borrower 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.

“A recent report by the [Residential Tenancies Board for 2020] found that on average renters are paying 36 per cent of their net monthly income in rent, with a significant cohort of renters paying up to 50 per cent,” Mr Stanley noted, adding that was making it “extremely difficult for people to save for a new home or contribute to a pension.”

Societal impact

Cairn highlighted in a presentation for analysts this month that the average three-bed Dublin suburban house it sold in the first half of the year, for €372,000, costs a first-time buyer almost €1,300 a month in mortgage payments. The market rent for an equivalent house in Lucan, Co Dublin, is €2,350.

“We absolutely support prudent lending rules that protect Irish consumers and underpin a more sustainable housing market,” Mr Stanley wrote in the letter.

However, he added: “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 the period.

“The rules should have taken into account the changes to purchasers’ ability to meet their mortgage payments over the past six years and the broader societal impacts. Now is the time for the Central Bank to reconsider its approach to affordability, debt servicing capacity and the manner in which this is currently measured.”

The heads of Cairn and fellow Dublin-listed Glenveagh Properties, which account for a combined 10 per cent of annual new homes delivery in the State, have argued in the past month that the LTI rules have hit industry output, as smaller, debt-reliant builders, in particular, have had to question whether they would be able to sell homes to people with limited access to mortgages.

Mr Stanley said there was “a lot of misinformation in the public domain” that high land costs and profits within the house-building industry were behind the State’s housing crisis.

He said Cairn’s average housing plot cost was €30,000, while its average net profit margin in the past five years was 4.9 per cent and average return on shareholders’ equity was 2.7 per cent.

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