‘Affordability’ and mortgage lending rules
Sir, – The new governor of the Central Bank faces increased pressure to relax mortgage lending rules. The current narrative is that they are stalling housing output by constraining “affordability”. This attempt to equate affordability with access to credit is disingenuous and a throwback to the housing bubble mentality of facilitating price escalation through increased borrowing.
Affordability is determined by the relationship between prices and income, not ease of access to credit. A report last June by EY-DKM (“Just how affordable is housing for Ireland’s first-time buyers?“) indicated that a mortgage of 3.5 times the average first-time buyer household income is generally considered the cut-off level for affordability. The report revealed that this threshold has been far exceeded in areas such as Dublin with a ratio of 4.9, which relaxation of the Central Bank rules would be likely to worsen.
In the three years following the introduction of the Central Bank rules, Dublin house prices increased by 26 per cent compared with 56 per cent in the preceding three years, suggesting that they were beneficial. Nonetheless, the average cost has risen by some €200,000 in Dublin since 2012. This financial burden, not percentages, is what matters to buyers and it is what has undermined affordability.
Enabling enabling households to take on higher debt, with inflationary effects, is not a key to increasing housing supply. Crucially, the debt burden, with vulnerability to possible future downturn, is unlikely to be eased by inflation in the foreseeable future as it was for previous generations. The priority now should be to address cost factors that discourage development such as land cost, taxation, and percentage charges that compound cost. – Yours, etc,