The limited changes announced – after much speculation – by the Central Bank to its macroprudential rules were both surprising and crafty.
Nobody had predicted that the ceiling on the loan-to-value ratio for first-time buyers would be lifted completely.
Governor Philip Lane has shut down what probably would have been an annual debate about the level of the threshold, particularly in relation to prices in Dublin.
The changes mean that first-time buyers only now require a 10 per cent deposit when seeking a mortgage, regardless of the house price. Previously, it was 10 per cent on the first €220,000 and 20 per cent on the balance.
A number of submissions – including from Sherry FitzGerald, our biggest estate agent, and Banking &Payments Federation Ireland – had called for the ceiling to be lifted to €300,000 to reflect average house prices in the capital.
For second-time and subsequent buyers, the 20 per cent deposit requirement remains in place. However, the Central Bank has given lenders more leeway in terms of offering exemptions to this cohort, with the ceiling on this lifted to 20 per cent.
By comparison, the exemption for first-time buyers has been cut to just 5 per cent. Given that the banks don’t want to breach the exemption ceilings, for fear of enforcement action by the regulator, we can take it that such breaches will be few and far between for first-time buyers in the future.
On the face of it, first-time buyers will be in much better shape in terms of buying a new-build home next year. The Government’s help-to-buy scheme offers tax rebates of up to €20,000 on new homes valued up to €500,000.
When added to the changes in the Central Bank’s deposit rules, first-time buyers eyeing a new-build worth €400,000 will now need a deposit of €20,000 compared with €58,000 previously.
Income volatility
To help keep the market in check, the Central Bank has left the loan-to-income ratio unchanged at 3.5 times, amid calls from those in the housing and construction sector to move it up to 4.5 times, a level that applies in the UK.
Lane argues that Ireland’s economy is more open than that of the UK and therefore more prone to shocks and income volatility. So he has erred on the side of caution, which is no bad thing.
So the first-time buyers eyeing that €400,000 newly built home will need combined earnings of about €114,000. It’s a substantial figure.
Will the changes lead to an increase in prices next year? Stockbrokers Davy and Investec have suggested as much but Lane played down talk of sharp price rises. And he signalled that the bank would step in if prices start bubbling again.
“If we see that there’s a perverse unwelcome interaction between excessively rapid lending and excessively rapid increases in house prices, then we can intervene,” he said.
What’s certain is that the changes announced yesterday will do little to aid those on low incomes, particularly in Dublin, who want to buy their own homes rather than pay exorbitant rents to landlords.
Lane said some geographical tweaks to the rules could be made in the future, something that has been applied in New Zealand.
The changes also do nothing to alter the many high input costs that make up such a large part of Irish house prices, and are part of the reason why supply is depressed at present. This is a problem that requires action from the Government rather than the Central Bank.
