Tightened mortgage rules provide some relief for first-time buyers

With immediate limits on credit excess, the loan caps aim to steady the market

Supply and demand: precise loan-to-value limits  on bank loans for property purchases are to be applied as and from now.  Photograph: Aidan Crawley

Supply and demand: precise loan-to-value limits on bank loans for property purchases are to be applied as and from now. Photograph: Aidan Crawley

 

The rushed release of new Central Bank mortgage caps ends prolonged uncertainty over the force of its effort to prevent another property bubble.

Amid anxiety over rapidly rising prices in Dublin, Central Bank governor Patrick Honohan moved in October to damp down the market by seeking 20 per cent deposits across the board. Alongside other restrictions, he also sought a limit of 3.5 times income on the loan amount.

The basic objective was to avert any repeat of the runaway property market of the boom and the crash which followed in its wake, magnifying recession and leading to a crippling public rescue of the banking system. If there is no doubting the sense in all that, Honohan’s proposal ran into a storm of resistance. This centred on the interests of first-time buyers, young adults in the main, who were seeking to settle down in a home of their own.

Loan to value

The case was made that a blanket 80 per cent loan-to-value limit would make it next to impossible for such people to save enough for a deposit. All the more so with rents at an elevated level and the price of houses and apartment on the rise.

Other questions arose. Young peoples’ income tends to be lower than later in life. Concern was raised too that people from outside Dublin would find it difficult to establish themselves in the capital if they had no option but to rent first.

The Department of Finance came to the fore in the clamour to rework the plan. Ann Nolan, its second secretary-general, told a conference last week that the Dame Street plan was not socially acceptable. “I don’t think it should be a position where the only people who get on the property ladder are those who have parents who can give them a big lump sum.”

Some kind of a compromise was already in play. Still, a ranking European Central Bank official told the very same conference the proposal should go ahead. This reflected concern, expressed quietly in Dublin in some quarters, that the Central Bank should not cave in to the pressure to dilute the plan.

After all, Central Bank weakness was a big factor in the crash. In the face of a resurgent market in Dublin and with the recovery of both the national economy and the commercial banks still a work in progress, any failure to assert control over the situation would not bode well. Instead of demonstrating that a sorry lesson was well-learned, the signal would go out that little really had changed.

This was the essential backdrop to yesterday’s decision, which kept the 3.5 times income cap intact.

 

Phasing-in rejected

The Central Bank Commission, its controlling board, discussed a number of proposals to rework the initiative. One of those, embracing special measures for first-time buyers, was accepted. Another, which involved the phasing-in of the new 80 per cent loan limit, was rejected.

 

The irony here was that the department had advanced the notion of a phased-in approach. At a press conference yesterday in Dublin, however, the International Monetary Fund pointed to risk in such a departure. “We can see there’s very widespread expectations of price increases,” said IMF mission chief to Ireland Craig Beaumont.

“If you know that, in future, it’ll be difficult to obtain lending or a larger deposit will be needed, there’d be a significant incentive to try and bring that forward. And that lumpiness of borrowing and mortgage transactions could lead to inappropriate risk evaluation, including not only by banks but also by borrowers.”

While Beaumont did not publicly resist special measures for first-time borrowers, his latest report on Ireland indicated that such steps “should be kept under review based on default experience”.

The new plan takes effect immediately. We will know soon enough whether it is sufficient.