Six years after the property market fell off the cliff, the Central Bank has finally published a set of rules to limit the amounts that people can borrow for home loans. They are designed to ensure prudent lending as the property market here begins to improve.
In essence, all bar 15 per cent of the value of new mortgages written will have to involve a deposit of at least 20 per cent.
In parallel with this, an upper limit of 3½ times income will be imposed in all but 20 per cent of new home loans.
On the buy-to-let side, no more than a 10th of all mortgages can have a loan-to- value (LTV) ratio of more than 70 per cent. In other words, the investor will need a deposit of 30 per cent. It will be at the discretion of the banks as to which individual loans are allowed to exceed the limits.
Stefan Gerlach, deputy governor of the Central Bank, said the new limits would boost the resilience of the banking sector to another property crash while dampening the rate of price rises currently being experienced in the marketplace. But he doesn't believe it will reduce the current level of house prices.
This is bad news for first-time buyers on the double. The old rule of thumb was that they needed a deposit of 10 per cent of the house price to get a mortgage. The Central Bank has now doubled that figure.
With Myhome.ie, which is owned by The Irish Times Ltd, putting average house prices in Dublin at €263,000 in the third quarter of this year, that means first-time buyers in the capital need €52,600 to get a foot on the property ladder. How many individuals or young couples do you know with that kind of loot under the mattress?
If Gerlach’s prediction comes to pass there isn’t even the consolation of a drop in house prices to soften the blow. So they will most likely have to bide their time renting, lower their expectations on what property they can buy or move to the sticks in search of better value, with all the knock-on consequences that can create.
Ironically, some first-time buyers might be able go to their local credit union to top up their deposit without the banks necessarily knowing about it. This is because we don’t have a functioning central credit register.Such a register has been in the offing for the past few years but the Central Bank said yesterday that it won’t be operational until “early 2016”.
There are other potential consequences from the Central Bank’s intervention. By all accounts
a number of potential non- bank lenders are looking at coming into the Irish market and offering mortgages. This is something John Moran, the former secretary general of the Department of Finance, had been trying to encourage.
These new rules are sure to give the new entrants some pause for thought.
However, this is Ireland and rules are seldom set in stone. There is a consultation process that will run to December 8th. Some political pushback seems inevitable, especially once the budget is out of the way next week and the focus switches away from water charges.
First-time buyers might not be as well organised a pressure group as the poverty industry but there will be some vigorous lobbying of politicians around the State to water down these proposals. Let’s not forget there will be a general election in the spring of 2016 at the latest and first-time buyers are engaged voters.
The income ratio is probably pitched at about the right level, given that 23 per cent of mortgages last year were above the 3½ times limit being proposed. That’s just three points higher than the Central Bank’s new rules.
By contrast, 44 per cent of home loans last year were above the 80 per cent LTV now being proposed. Deputy governor Cyril Roux said this probably meant there was "some"risky lending in there.
Privately, bankers question the veracity of the Central Bank's LTV data. Merrion Capital noted yesterday that Bank of Ireland's average LTV in the first half of this year was just 67 per cent while AIB's was 72 per cent for 2013. And they probably account for 70 per cent of the market.
At a media briefing yesterday, Gerlach and Roux sounded as if they were not for turning. So the banking lobby has eight weeks to produce some convincing data that will change their minds or first-time buyers will face a less than happy start to the new year.