A ludicrous situation To f ind the best deal

Borrowers who pay 1 ½ times in rent what their mortgage would cost are not allowed to buy because of the Central Bank’s 3 ½ times income rule

An end to the property boom appears to be in sight. Experts say that property prices will rise by just 2% over the next year and 6% over the next three, which is barely above the rate of inflation. But before we break out the balloons and party hats, let’s pause for thought. The lack of bank credit – due to Central Bank lending restrictions – is the main reason for this slowdown.

The Central Bank has clapped a stopper on the property market by shutting most would-be buyers out of the market.

The bank has certainly prevented another housing bubble. Well-heeled buyers will welcome putting the brake on property prices.

However, property prices are levelling off only because the bank has made buying houses in cities unaffordable for a great many other would-be buyers.

These people are not happy about not being able to buy a home.

And not everyone hates rising property prices. Home owners benefit greatly from rising prices. This is also practically the only way ordinary people acquire wealth.

With a bigger chunk of their loan paid off, relative to their house price, mortgages get cheaper and they are more financially secure.

Many people in negative equity are desperate for prices to rise.

Another unpalatable truth is that house prices are not that high relative to the cost of building.

Until recently, house prices in Dublin were lower than building costs. In most of the country they still are. Not enough homes are being built because it wasn’t worthwhile to do so. This is because the property price crash almost coincided with an increase in building standards that made houses much more expensive to build.

We decided that we wanted new homes to be well-insulated, fire-proofed and be accessible to disabled people. We also wanted more professional oversight.

When VAT is added on to all these costs – as well as rising site prices – the cost of building a house almost doubled.

The Institute of Chartered Surveyors – which authored the house-price survey along with the Central Bank – says it costs €350,000 to put up a three-bedroom home in Dublin.

That’s around the same as what you would pay for one.

As a result, house building is picking up but it is still nowhere near meeting demand.

With house prices now stalling, the pace of home-building will be impacted too.

And so the dysfunctional housing cycle continues.

The Central Bank let the country down badly by not clamping down on lending in the run-up to the financial crash. But is it now overreacting to that by stopping people from buying homes and stalling house prices? Is that what we really need right now?

By all means make sure banks only lend what people can afford to pay back.

But the rule that you cannot bor- row more than 3.5 times your income could surely be eased.

Mortgages are more affordable now than they were when these rules came in.

Interest rates have fallen sharply to as little as 2.3%. Ludicrously, borrowers who are paying one and a half times in rent what they would pay for a mortgage are not allowed to buy a home because of the 3.5 times income rule.

You can also now get fixed rates as low as 2.6% over seven years and 3.5% over 10 years.

Shouldn’t buyers who opt for such long-term rates be spared the onerous ‘stress testing’ of mortgage repayments to measure the impact of interest rate rises?

Now the Government is talking about forcing workers to invest 6% of their income in a mandatory pension from 2022.

This is welcome in some ways – employers would also contribute 6% and the State another 2%.

But incomes would effectively be cut and apparently that would rule out thousands more people from buying a home.

This makes no sense. Owning your home is the best pension around.

Yet this mandatory pension fund will boost our overall wealth. Surely it should be made accessible in an emergency, and then it could be taken into account for mortgage approvals as a positive rather than a negative?

There are many other ways we could help people buy a home.

We could introduce a proper affordable housing scheme.

Our existing scheme – the Local Infrastructure Housing Activation Fund – is a joke.

Developers get millions to help

pay for infrastructure. In return, they are meant to reduce house prices accordingly.

However, as they can set whatever prices they like, they just charge more than they otherwise would have!

Similarly, the Help-To-Buy (HTB) scheme gives up to €20,000 towards house purchase – which is merely added on to the price so it is no help at all.

Britain has a better HTB scheme. It gives 20% of the house price to buyers – but this must be paid back to the State when the house is sold. This is better for buyers and less costly to the State. We could also require – or help – the banks to reduce interest rates.

Irish borrowers pay €2,500 more per year than our EU counterparts.

Mortgage rates here are 3.21% on average, compared to 1.8% across the eurozone.

Fianna Fáil wants controlled interest rates.

Fine Gael MEP Brian Hayes suggests facilitating EU banks to do business here.

Banks say they have to charge more because too many people are not paying their mortgages and there is little they can do about it.

The banks are still burdened with many non-performing mortgages since the 2008 crash.

Whatever we do to reduce interest rates permanently, this would justify easing off on the Central Bank lending restrictions without risk of another housing bubble. In the meantime, the article below has some tips for buyers.