Banks ‘may be unwilling to lend to ease housing crisis’
A CONFIDENTIAL internal Central Bank report has warned that Irish banks may be unwilling to lend enough cash to developers to solve the housing crisis if the economy grows as predicted.
The risk-analysis report also warns that, since the 2008 crash, the banking sector’s ability to predict the size of bank loan funding gaps has been “obscured” by the growth of cash buyers in the residential market and by the use of non-bank lenders by residential developers.
“The landscape for development finance has changed significantly” since 2008, the report’s authors note.
Residential development loans amount to just 1pc of total Irish loans, but experts in the Central Bank’s risk-analysis team have predicted a scenario where loan demand could grow to 3pc.
If this scenario is accurate, Irish lenders may be unwilling to meet the demand for vital development funding, the report warns. “Given the highly-concentrated nature of development lending, historic loss experience and associated capital intensity, this level of exposure may not be within the banks’ risk appetite.” The risk analysis report, entitled Scenario Analysis: What is the Impact of Higher Housing Output on the Banking Sector?, was circulated to Central Bank chiefs at a meeting of its governing board on January 23.
The report examines the impact on the economy of an increase in housing output driven by higher demand. It was commissioned to assess the domestic banks’ “funding capacity” and “sustainability” in the event that housing output levels reach 30,000 between now and 2024, compared with a current annual rate of 23,000.
A key finding of the report is that cash is still king for many Irish property buyers. Cash buyers account for about 60pc of all transactions and this trend will remain strong, with cash buyers making up at least 40pc of all home purchases between now and 2019. The report notes: “It is assumed that the level of cash buyers in the market will normalise in the coming years and a reduction to 40pc cash transactions assumption has been applied.”
Furthermore, self-builds accounted for 50pc of total completions in 2015 and the report forecasts only “a conservative reduction” in this rate in the new few years. The financing of residential schemes for developers has changed dramatically too, fuelling greater uncertainty about future funding models.
“The financing of new housing output is a key element in facilitating the banks to maintain and grow their mortgage portfolios. However, the current funding model for the financing of land and development for residential property is complex and fragmented,” said the report.
“The landscape for development finance has changed significantly such that there are a number of non-bank lenders in the market. They range from developers listed on the stock exchange, to private equity funds, Nama and the State in various forms.”