The banks will need to radically change their interest rate margins if buy-to-let investors are to return to the market

IRELAND’S RESIDENTIAL investment market has taken an even greater hit than the new homes sector as banks struggle to repair their stretched finances.

Whatever limited funds are being channelled to first-time buyers, the banks seem to be shunning the investor sector by reducing the loan-to-value in most cases and then charging a hefty premium over the average residential mortgage.

When the investment market was at its height 18 to 24 months ago, mortgage premiums were a mere 30 basis points above the average residential rate.

That gap has now jumped to 125 basis points and, in many cases, it is substantially more. With the recession deepening and the property market in tatters, fewer borrowers seem to be approaching the banks and many of those who go to the bother seem less creditworthy.

Lending is just as constrained by demand as by the credit crunch.

This is hardly surprising because we all seem to have heard of instances where the banks have failed to facilitate relatively well-off investors.

One long-standing customer anxious to avail of the lower prices to buy a few apartments in Dublin for €1.5 million had €1 million ready to put into the deal and sought the balance of the money from his bank.

The bank’s initial response was that it could not run with the deal because of the scarcity of funds but, when the client indicated that he then planned to transfer his savings elsewhere, hey presto, the €500,000 was suddenly available.

However, there was a catch. The bank would be charging 3 per cent over the standard mortgage rate because of the cost of borrowing on the international market. End of deal.

This is a far cry from the mayhem in the investment market two years ago when the banks threw money at all comers, even clients on very modest salaries who thought they could make a killing in the short term.

By now these unfortunates must surely understand the uncertainties of lettings in a recession, as well as the implications of negative equity.

They will also have come to the realisation that, unlike stocks, equities and some bonds, property cannot be shifted in a dormant market and, once mortgage repayments are not being met, repossession becomes a real possibility.

Some of the banks will also have learned a lesson from the property crash, not least Bank of Scotland (Ireland), which was the first to offer interest-only loans and, in some cases, this generous facility was allowed to run the full term of the mortgage.

The bank is now paying the price for such extravagance. It has withdrawn completely from the residential investment market in Ireland.

So also has Permanent TSB and, with neither Irish Nationwide nor Halifax publicly listing rates or criteria for investors any more, it must be assumed that they have also exited the investment market.

All these problems have arisen well after a three-year buying frenzy when the number of rental properties in Dublin city and county increased to over 100,000.

At the end of last January, 85,226 were registered with the fusspots in the Private Residential Tenancies Board. With an increasing number of job losses forcing overseas workers to return home, the vacancy rate has naturally risen in recent months but selling agents believe that, as soon as we get over the present economic problems, the rental market will grow again.

Ken MacDonald of agent Hooke MacDonald, who has sold most of the residential investments in Dublin, says we need to change the whole mindset about the role of the private investor and the supply of rental accommodation.

He argues that this sector is an essential part of the economy affecting job mobility, inward investment, personal pensions and social needs.

The Government, he says, cannot and will not fund the rental sector so they have a responsibility to ensure that the private sector can do so “without hindrance, disincentive or uncertainty”.

Matt Gallagher, a former chairman of the Irish Housebuilders Association, says that property prices at the moment are low and unlikely to fall much further.

He, nevertheless, accepts that the property market behaves irrationally – people are reluctant to buy when prices are low and everyone wants to buy when prices are rising, further accelerating the rate of house price increases.

In the long term, he believes that buying now in the right location is a “rock solid investment”.

True, prices are back as much as 40 per cent and interest rates are at their lowest ever level.

But Frank Conway of Irish Mortgage Corporation argues that interest rate margins will need to drop if investing is to return to sustainable levels. How true.