Unfair advantage for first-time buyers

EARLIER this week, the Central Bank announced its changes to the mortgage rules introduced earlier last year. The main change of substance is that first-time buyers will no longer need to have a 20pc deposit for any amount greater than €220,000. In other words, the rules from 2017 will make it easier for first-time buyers to borrow more.

The obvious effect of this will be to push up prices. Economic theory is unambiguous on this: if you “shift out credit supply” — as economists describe it — you effectively give first-time buyers more credit to bid against each other. Combined with the tax rebate announced in the recent Budget, this makes it significantly easier for wealthy first-time buyers to access large amounts of credit.

What economic theory is silent on, though, is why firsttime buyers should be treated so differently to other buyers. For a house costing €400,000, to take one example, first-time buyers will need a deposit of €40,000, while anyone else buying the home to live in will need a deposit of €80,000. And if the dwelling is newly built, the first-time buyers will need a deposit of just €20,000, factoring in their new rebate. What is the rationale for such a huge gap?

To see why this is particularly problematic in Ireland right now, we just need to remember our recent economic history and, in particular, think of the negative equity generation.

Take two families, identical in almost every respect. Both families have a gross income of €80,000 a year and both are looking to buy a family home in the greater Dublin area for €400,000. In one family, though, the husband had bought a one-bedroom apartment in 2005, which subsequently fell in value by 60pc. Apartments have not recovered nearly as much in value as houses and so it is still 40pc below what he paid for it.

But, after many long years of paying back the mortgage, the husband finally got back in the black and sold the home on. The family now rent and want to buy a family home. The rules mean, however, that they will need to save a deposit of €80,000. Their almost-identical peers — who differ only in what they did not buy in 2005 — need a deposit of just €20,000. Does that seem right?

I have seen Central Bank researchers present analysis which seems to show that first-time buyers are indeed a lower risk than other borrowers. However, I have yet to hear a good explanation for this. This research is based off analysing hundreds of thousands of loans in Ireland, in particular during the period 2000-2010. However, the problem with “big data” is that it throws up spurious links all the time. This is why theory is so important.

Without theory to understand links thrown up by big data, researchers are left with story-telling. “Perhaps,” they say, “first-time buyers are just more afraid of losing their home and so pay the mortgage regardless.” Is that enough evidence to make a pretty major decision in terms of public policy? It is possible to come up with a number of other plausible stories consistent with the link between first-time buyers and fewer defaults thrown up in the Central Bank research.

What is perhaps even more puzzling is that the changes will have the biggest upward pressure on prices for the most expensive and therefore riskiest types of properties. For a property costing €250,000, the deposit requirement for first-time buyers has fallen by €3,000 to €25,000. But take a property costing €750,000 — one where the borrower and lender face a much greater risk of a fall in value of €100,000. Here, the deposit requirement has fallen over 40pc, from €128,000 to €75,000.

In introducing the rules back at the start of 2015, the Central Bank was effectively declaring: “The housing market would not be safe if people were allowed to borrow more than five times their savings.” They did make an allowance for first-time buyers — but it was a small one and one that dwindled as the price (and thus risk) of the property got larger.

It seems they have now changed their mind. With first-time buyers accounting for roughly half the market and thus acting as price-setters for housing, the Central Bank has effectively admitted: “The housing market is safe even if people are allowed to borrow anything up to 10 times their savings.”

The crucial caveat to that admission, though, is this has only been allowed for first-time buyers. But is there anything fundamentally different between a 40-year-old accountant and a 38-year-old teacher who earn €80,000 a year and who have never bought property before, and the same couple but who have?

If you think the answer to that question is no, then the logical next step is a 10pc deposit for all. Ronan Lyons is assistant professor of Economics at Trinity College Dublin and author of the Daft.ie Report. In the interests of disclosure, he is neither a would-be first-time buyer, nor a member of the ‘negative equity’ generation.