Central Bank can’t tackle house affordability crisis
It’s the Government’s job to address widening gulf between earnings and property prices, writes Colm McCarthy
WHEN a policy problem gets too big to solve, the policymakers can sometimes avoid, or at least postpone, the admission of failure and the need for reform.
The most dramatic example is a dysfunctional housing market that fails to deliver affordable properties.
Excessive house prices get embedded in the balance sheets of banks and households through long-term mortgage contracts.
A sharp reduction in house prices, back to somewhere around the economic cost of provision, would suddenly produce losses for lenders and for speculators in zoned land, but also negative equity for recent borrowers.
If the asset side of bank balance sheets is dominated by mortgage assets, and it is, an early pursuit of housing policy reform threatens bank solvency. But if cheap finance can somehow be made available, an attractive soft option is to finance the problem rather than address it.
Faced with unaffordable home ownership, the alternative chosen during the housing bubble was to lend people far more money than was prudent, to pay multiples of economic value for homes.
Ireland was not the only country to press the wrong button but we pressed it with exceptional vigour and disastrous consequences.
Financing unaffordable house prices, rather than dealing with the root causes, remains popular with legions of beneficiaries, including owners of overpriced homes and development land, and their political representatives. Early last year, the Central Bank, alarmed that the price recovery from the market collapse was getting too brisk, put the brakes on mortgage lending. The policy was a success in that the price recovery was moderated.
Lending limits protect both banks and borrowers from the consequences of dud mortgage loans, but the mortgage lending caps quickly attracted the opposition of landowners, builders and politicians.
The new rules announced last Wednesday represent, on the face of it, a relaxation of the lending limits and, accordingly, a move in the wrong direction.
Fortunately, it is a small change, so little damage will be done and the Central Bank has signalled a willingness to reverse engines should house prices begin to accelerate again. It did not say so, but the Central Bank may feel that an economic slowdown is on the way, combined with higher interest rates, and thus the risk of another house price bubble is limited.
Housing policy is the responsibility of the Government, not of the Central Bank, which is concerned with keeping borrowers and banks out of trouble with loan defaults.
The total amount of mortgage debt outstanding in the country is not rising (repayment of old loans exceeds new issuance), bank balance sheets are not growing too fast, and the banks are earning profits even though their books are still saddled with non-performing loans.
Renewed profitability means the Central Bank should be able to build a stronger capital base, especially if it resists the temptation to resume dividend payouts prematurely. In all of these circumstances, and given the success of the mortgage caps to date, the Central Bank must have been tempted to do nothing.
It has done less than meets the eye. The headlines were all about the removal, for first-time buyers only, of the threshold above which the required deposit increases from 10pc.
Under the regime now abandoned, the deposit was still below 15pc even at a house price of €400,000. Starter homes, new or second-hand, are readily available in many parts of Ireland at one-third of this figure.
Only in Dublin and a few other small geographic areas are young people faced with ridiculous prices, multiples of attainable construction cost, for starter homes.
This problem has been created through 40 years of policy failure, not by the Central Bank but by the Department of the Environment, the planning authorities, and their political masters.
The elimination of the €220,000 cut-off point above which the deposit requirement rose to 20pc means that the Central Bank no longer needs to adjudicate annually on what it feels to be a reasonable average house price — the €220,000 figure was loosely reflective of typical prices in outer Dublin suburbs about two years ago when the new rules were drafted.
With a uniform 10pc deposit required of first-time buyers, there is no need for periodic adjustments to this threshold, increases in which would appear to imply Central Bank benediction on whatever price increases were thrown up in the utterly dysfunctional Dublin market.
The Central Bank, despite pressure from housebuilders, has declined to relax the loan-to-income cap. Borrowers can take out loans for properties costing no more than 3.5 times income. This is the binding constraint for many wouldbe buyers and will continue as before.
For the first-time buyers ,there had been an exemption to the mortgage caps: 15pc of lending by each bank could be devoted to loans above the limits. This exemption has now been cut to 5pc. Those taking out a second or subsequent mortgage must still find a 20pc deposit.
So the relaxation in the rules will make borrowing easier for quite a small group of potential borrowers, essentially those buying more expensive homes for the first time and unconstrained by the income cap. Think of them as younger, better-paid Dubs.
Beneficiaries of the deposit relaxation, if they are buying a newly built home and have been paying income tax for a few years, will also get a present from the Government equal to 5pc of the home value, reducing the deposit requirement further.
This is an even smaller group. The Central Bank has chosen to ignore the source of help with the deposit — it does not care if you saved the money, cadged it from your parents or if it fell off the back of a lorry belonging to the Exchequer.
On RTE radio last Thursday, Sinn Fein TD Pearse Doherty questioned whether the rationale for the Government’s scheme remains intact, given the Central Bank decision. He had a point.
The justification for the Government’s initiative was precisely that the deposit requirement became oner- ous as the cost of homes rose above the €220,000 threshold. Deputy Doherty suggested that the €50m this scheme will cost could be better spent funding local authorities addressing the backlog of zoned but unserviced land lying derelict around Dublin. It could indeed.
To bring down the cost of housing in and around the capital requires that more land be zoned, that existing zoned land be serviced and that planning permission be granted quickly and freely for residential development, without interference from local politicians in alliance with Nimby homeowners.
Pursued consistently for long enough, this is the policy package that will make mortgages, and rents, affordable for those people who are on typical incomes.
The Central Statistics Office released figures on Friday which showed average incomes from employment are around €36,600 per annum. Multiply this figure by 3.5 and you have the cap for a mortgage for the average single person (€128,000), and double it for a couple both earning (€256,000).
This is what can be afforded on average earnings: a sizeable portion of the employed workforce earns lower amounts, considerably lower in many cases.
The housing crisis, largely confined to Dublin and a few other centres, as the Housing Agency continually points out, is a crisis of affordability. Only political action, not the Central Bank, can fix it.
‘The relaxation in the rules will make it easier to borrow for a small group’