Head to head: Are the new mortgage rules a good thing?
Yes, says Hugh Linehan. No, argues Conor Pope, in an Irish Times online debate
The new Central Bank rules on mortgage lending have divided opinion. Hugh Linehan and Conor Pope thrash out the pros and cons. Photograph: Daniel O’Connor.
Hugh Linehan: Conor, like you, I’ve been following with interest the debate following the announcement of the Central Bank’s new rules for mortgage lending in Ireland, with their stricter loan-to-value levels, 3.5 times income ceiling and modest provisions for first-time buyers. There is legitimate cause for concern over the impact of the rules on a very specific part of the population – those who bought a first property at the peak of the boom and can’t now access the larger home they need for their growing families – but it seems to me that it should be possible to introduce specific assistance for those people. However, I’m deeply suspicious of the argument being made on behalf of the supposedly oppressed first-time buyer. For the last two decades, this delicate species has been used by vested interests in the property and financial sectors to push successfully for legislative changes and tax reliefs which delivered huge profits to those sectors, with dubious results for the first-time buyers themselves. It seems sensible to me for the Central Bank at this stage to put in place, however belatedly, a regime which is regarded as the norm in many other European countries. Please go ahead and tell me why I’m wrong.
Conor Pope: Hugh – like the Central Bank – you are wrong for many reasons, but let us start at the start. The reality is the bank is introducing laws to deal with a problem that does not exist and has not existed for more than seven years. Mortgage caps are quite effective when it comes to tackling credit-fuelled property bubbles but there is no indication that a price spike recorded over the past 18 months – most notably in Dublin – is as a result of an excess of credit in the market. So this is a knee-jerk reaction by the Central Bank and, in particular its Governor Patrick Honohan.
Some rules on how much a person needs to save before they can buy a home, whether it is their first home or their tenth, are prudent and long overdue – only a fool would argue otherwise. But those outlined by the Central Bank are unnecessarily savage on a particular cohort and at the stroke of a pen they prevent tens of thousands of the most prudent and fiscally responsible people in the State escape from the not-fit-for-purpose homes they bought during the last bubble because they believed the myth, perpetuated by politicians, banks and – it must be said – journalists that property investment was as safe as houses.
Hugh: So, just to be clear, your sole concern is for those people stranded by negative equity in homes which are now inappropriate to their needs?
Conor: No, that is not my sole concern although it is a serious concern and deserves more consideration than your somewhat glib “it should be possible to introduce specific assistance for those people” comment. The problem there is no assistance is proposed for this cohort. But moving on. Other concerns I have are that it addresses a problem – easy credit – that does not exist and ignores problems that are all too real. The reason prices have spiked over the last three months is down to a lack of supply in urban centres. The Central Bank’s solution not only ignores this factor but will most likely exacerbate it by trapping trader-uppers in their not-fit-for-their-purpose homes.
And of course the other problem is the absence of any regulation in the rental sector. What we have in essence then is a three-legged stool made up of credit, supply and rental alternatives. The Central Bank has – to its mind – fixed one of the legs. But stools can’t stand on one leg.
Hugh: I think we can agree on the ergonomics of stools for a start. And it looks like we also both agree that the State needs to take a much more rigorous and interventionist approach to a property market that’s always been rigged in favour of the haves and against the have-nots.
There are a number of ways to address that lack of supply: one is to impose financial penalties on developers who hoard land, along with a “use it or lose it” rule for sites which have been zoned for development. Another is a site tax to replace the current property tax. And another is investment in social housing and support for other forms of housing initiatives such as co-operatives. And yes, absolutely, rental regulation that allows tenants to feel that the place they live is a home rather than a transient resting place subject to the whims or avarice of their landlord is long overdue.
Those are all legitimate aspirations; although some of them are (supposedly) in the pipeline now, the question is why they weren’t introduced years ago.To be fair to Professor Honohan, he doesn’t have a role to play in any of that; he’s playing the cards that he holds as Governor of the Central Bank. If you’re suggesting that he shouldn’t have moved on these rules until he’d achieved some sort of overarching agreement with the Government on supply-side factors – in the 12 months before an election – well, there we’ll have to agree to disagree.
Conor: I like the way you are ignoring my inconvenient truths – wrong solution, wrong time, wrong victims, wrong stool leg – but one thing can’t be ignored. There is empirical evidence that mortgage caps are ineffective at dealing with property problems. There have been three boom and bust cycles in Hong Kong since mortgage caps were introduced. Prices actually went up in Sweden after similar rules were rolled out and our city-living cousins in Canada have to contend with quite ridiculous prices despite the fact that they too have rigid mortgage rules.
And one more thing. A properly functioning property market has turnover over between 3 and 4 per cent a year. In Ireland now less than 2 per cent of homes change hands each year. Is it really a good idea to introduce such radical – and unnecessary – reform when the market is so fragile? Would you have a doctor perform cosmetic surgery on a patient who has just suffered a stroke? No, no you wouldn’t.
Hugh: One at a time, Mr Gore. Why is it the wrong solution to bring in guidelines which are the accepted norm in most countries across the EU? Is it because the recent figures which showed we’re the most indebted people in Europe are something to be proud of and perpetuated for decades to come? Who are these wrong victims you refer to? That implies there are “right” victims out there somewhere. And is it the wrong time because Eurostat’s housing price register shows that last year Ireland’s house prices were rising at 30 times the euro-zone average? Or that they’re predicted to continue rising substantially this year? Are you seriously suggesting that providing easier credit would do anything to solve that problem in 2015/2016?
As to whether radical reform is necessary at “this fragile time” – how often have we heard that exact argument used by special interest lobbyists and craven politicians over the years? And then years later the question is always asked why nobody shouted “Stop”. The introduction by a financial regulatory body which at last is displaying some backbone and independence from commercial interests and short-sighted political pressure, making a decision based on the best economic data available to it, is hugely positive.
Conor: If there are to be right and wrong victims, I would suggest the citizens of this State are the wrong one – maybe the banks which will benefit from this move, the banks that cost us all so dearly should be the right victims. You are correct to say mortgage caps are the norm across Europe – and so they should be here. But rent regulations are the norm across Europe too. As are strictly enforced planning regulations, decent playgrounds for kids – which makes high-density urban living viable. We have none of these things. Must we really be given the stick without so much as a sniff of the carrot?
Hugh: Ah Conor, of course all those things should happen, but that’s exactly the sort of procrastination that got this country into the state it’s in. Have a look with me down the other end of the telescope. Accept this change as rational and necessary. Then let’s hold all the political parties to account on rent reform, planning, services and all the other stuff we both agree on in the run-up to the next election. Let’s do so in the full knowledge of the vested interests representing the banks and the developers (and yes, the media too, along with a lot of the Plain People of Ireland). But if we’re actually serious about real change for the better, then we should accept that this is a sane and serious measure which will have positive long-term effects on Irish society.
Conor: We were in a bad place when craven politicians leapt into bed with developers at the drop of a hard hat and could look no further than the next election when making far reaching policy decisions that impacted on all our lives. No-one wants to return to those bad old days – if, indeed they are gone – but making the wrong move at the wrong time for the wrong reasons is worse than making no moves at all. Sure, the Central Bank and Prof Honohan’s take-no-prisoners approach to lending might play well in Frankfurt and Berlin but at what cost?
The price for this new found fiscal rectitude will be paid by tens of thousands of people who bought during the boom and have spent years assiduously paying down mortgage debt and praying their so-called starter homes would climb out of negative equity. It will be paid by people who have the temerity to dream of putting down roots in urban centres. And unless steps are taken urgently to fix the core issues which have seen prices spike this time round in their totality, it will be paid by our entire society. Conor Pope is Consumer Correspondent and Editor of Pricewatch. Hugh Linehan is Digital Development Editor and presents the Inside Politics podcast