Proposed financial regulator mortgage code = price meltdown

petergdub

I thought the 3 coming budgets (April '09, December '09 and who knows '10) billed as "the toughest in living memory" was bad enough.
If this proposed thrice salary (or combined salaries) rule is introduced it will force a revaluation across the board.

In my own case I have an existing very manageable mortgage and had been tempted to upscale.
I've recently been given pre-approval of 5 times combined (me + wife) salary.
If this rule is brought in it will reduce credit availability by hundred of thousands.

Essentially they are saying they want people to buy houses with relatively small mortgages.
This would cause houses in the 600->800K bracket to drop 200K.

seamus

Link?

petergdub

Seamus, I read it in either the I Times or the Indo over the weekend.
It was only a proposal at that stage

ntlbell

petergdub wrote: »

I thought the 3 coming budgets (April '09, December '09 and who knows '10) billed as "the toughest in living memory" was bad enough.
If this proposed thrice salary (or combined salaries) rule is introduced it will force a revaluation across the board.

In my own case I have an existing very manageable mortgage and had been tempted to upscale.
I've recently been given pre-approval of 5 times combined (me + wife) salary.
If this rule is brought in it will reduce credit availability by hundred of thousands.

Essentially they are saying they want people to buy houses with relatively small mortgages.
This would cause houses in the 600->800K bracket to drop 200K.

have you a question? or are you just commenting on it?

SOD's Lovechild

In the long run it would be the right thing to do. Major pain for those of us who bought at the peak of the market but for the country as a whole this needs to happen.

The_Conductor

petergdub wrote: »

I thought the 3 coming budgets (April '09, December '09 and who knows '10) billed as "the toughest in living memory" was bad enough.
If this proposed thrice salary (or combined salaries) rule is introduced it will force a revaluation across the board.

In my own case I have an existing very manageable mortgage and had been tempted to upscale.
I've recently been given pre-approval of 5 times combined (me + wife) salary.
If this rule is brought in it will reduce credit availability by hundred of thousands.

Essentially they are saying they want people to buy houses with relatively small mortgages.
This would cause houses in the 600->800K bracket to drop 200K.

The proposal is to return to guidelines which were in place for over 20 years up to 2000- whereby mortgages were considered as a multiple of 3 times the primary salary and 1.5 times the secondary salary. They are also proposing that mortgages will be a *maximum* of 80% of the purchase price- which means people will have to save sizeable deposits.

This is a return to normal lending practices- it is by no means a departure- and in practice is a good business model both for the lending institutions, but also for borrowers- as they are less likely to overly stretch themselves.

Certainly the availability of finance is a major deciding factor in determining house prices- however when you factor that the OECD considered our residential houses to be overpriced by ~20% in 2000- and then extrapolate the rises since then, against inflation- to suggest houses in the 600-800k range have 200k to fall, is actually very optimistic- personally I think they have far further to fall than this.

The government have signalled that they are bringing in a raft of indirect taxation- as to increase the tax bands by sufficient amounts to bring in the extra revenue they need would be simply psychologically a nightmare- and impossible to sell to the public. Aside from anything else- people have far less money- and are going to have even less as time goes by. Houses are a commodity like any other, and their price is determined by supply and demand. At present there is ample supply at all price points- though it might be argued that 1 and 2 bed apartments at ~150-160k in Dublin are becoming affordable again.

Until such time as people can afford to buy given the reimposition of normal lending criterion and their lowered available income- the market will continue to fall. Looking at broad fundamentals- it has far futher to fall yet.......

TheCityManager

smccarrick wrote: »

to suggest houses in the 600-800k range have 200k to fall, is actually very optimistic- personally I think they have far further to fall than this.

I actually miss read this and thought it read that 600-800k range would fall to 200k.....This actually might happen yet I suppose :eek:

smccarrick wrote: »

Until such time as people can afford to buy given the reimposition of normal lending criterion and their lowered available income- the market will continue to fall.Looking at broad fundamentals- it has far futher to fall yet.......

Totally agree............

Duckjob

It's widely accepted that one of the main factors that sent property prices rocketing was the loosening of lending restrictions and the subsequent availability of cheap and easy credit to all that wanted it. So It makes logical sense that a re-tightening of lending criteria will therefore drive prices down.

As to how big an effect it would have, that's anyones guess. but anybody who thinks high prices can exist in a vacuum is codding themselves...They will adjust to find the buyers, at whatever price level they exist.

seamus

The only problem with such rigid budgetary requirements is that it doesn't take interest rates into account. I was only leaving school in 2000, so buying a house was the last thing on my mind at the time, and I don't know the history.

But I imagine the reasoning behind the relaxing of the rules was because the drop in interest rates made larger mortgages more affordable but the banks couldn't lend out more simply because the rules said they couldn't.

I think we need to find the balance tbh. There's no point in artificially stifling the market if people's salaries can handle it, but at the same time it shouldn't be allowed go completely unchecked.

I'm sure someone can come with some kind of effective formula which is indicative of what people should be able to borrow based on the old "30% of your salary" metric which seems to be accepted as the line between an affordable mortgage and an excessive one.

quozl

That's ludicrous, Seamus. Interest rates over a 25 year mortgage will vary!

And interests rates can (will!) go up. Once the recovery comes, and it will, inflation will probably show up and interest rates will rise.

Whether or not Ireland has actually dragged itself out from under the mass of property speculation debt that is currently crushing it, as long as the european powerhouses have, then interest rates will rise.

The size of mortgages offered was because of vast amounts of cheap credit available to the banks. The more they lent the more they made, and debts were treated as being almost as good as actual wealth, so the more they length, the bigger they short-term 'gains' and hence bonuses.

Can you please explain to me what benefit there is to the country as a whole from people paying more for the same property, and hence having to spend more of their lifetime paying the debt of?

What is the advantage in houses instead of costing X, costing 2X?

This is exactly the situation we are currently recovering from.

Pete4779

I would say there is an optimism among some that what were once fancy red bricks in posh Dublin suburbs will drop to 200k, it's unlikely to actually happen.

800k in Ranelagh will drop to 500k. 800k in Tallaght will drop to 200k. it's all what the location is worth, and as ever, some areas are worth more than others for a variety of reasons.

ntlbell

Pete4779 wrote: »

800k in Ranelagh will drop to 500k.

Amazing, there some seriously exact figures.

can you explain how you got to these?

seamus

quozl wrote: »

That's ludicrous, Seamus. Interest rates over a 25 year mortgage will vary!

Of course they will, which is why the cap is also ludicrous.

Can you please explain to me what benefit there is to the country as a whole from people paying more for the same property, and hence having to spend more of their lifetime paying the debt of?

A properly ticking over mortgage business should benefit the economy as it pumps money through the banks. It's also effectively just another commodity business - people want land and homes therefore it should stand to reason that the price of both will increase in line with inflation whether we want them to or not.
If you stifle mortgage availability, then you leave the door open for speculators to literally take over in boom time - buy as many properties as they can, push the price up and price the ordinary Joe out of the market. If you let mortgage availability run riot....well we now know how that ends. So there has to be a happy medium; a way to maintain a healthy property market which can benefit from periods of low interest rates without going nuts.

The problem is keeping a reign on house prices and avoiding the speculation madness that we had. We need to push property as a long-term investment - an addition to someone's pension that you can slowly squirrel away until the kids have moved out and you can downsize and cash in what you've squirrelled away, plus a few % per year interest.

quozl

seamus wrote: »

it should stand to reason that the price of both will increase in line with inflation whether we want them to or not.

I agree, and it would. Wages generally move inline with inflation, so a multiplier of them would also.

I also agree that a healthy mortgage market is a good thing. I believe this is a step in the right direction towards attaining that.

I think we'd both agree that people should not be lent as much as they'd be willing to borrow. That's how we ended up where we are. I suggest that returning to internationally tried and tested standards for measuring what they should be lent is more likely to work than some random irish idea.

If you stifle mortgage availability, then you leave the door open for speculators to literally take over in boom time - buy as many properties as they can, push the price up and price the ordinary Joe out of the market.

I don't agree. Investors will need a healthy return on their investment so as rents would not spiral would not do this.
Speculators might try it, but would have trouble pushing up a bubble to anything approaching this without normal purchasers as well. Plus they'd get a terrible return on investment in the form of rent for their over-inflated properties and would lose all their money in the next correction.

I don't find that plausible tbh.

So there has to be a happy medium; a way to maintain a healthy property market which can benefit from periods of low interest rates without going nuts.

Exactly. And historically that has been around the 3+1 1/2 times multipliers.

If someone was to stop working and build a house themselves, I think < 4.5 years isn't a ridiculous measure of how long it would take.
That's divison of labour. You pay for someone else to do the work with the money you earn by doing your own work.

We need to push property as a long-term investment - an addition to someone's pension that you can slowly squirrel away until the kids have moved out and you can downsize and cash in what you've squirrelled away, plus a few % per year interest.

Why?
We don't need to push it as an investment at all. When the market reaches a sensible level then investors will return naturally. If yearly rents are 8% of property value there is sense in it as an investment. If they're <4%, there's not.
If we had some kind of shortage of rental properties then it might make sense to try and push property investment, but we're definitely not in that situation

petergdub

> have you a question? or are you just commenting on it?

Do you see a question mark in the OP ?

Because it is traditional in the English language to use a question mark when one is posing a question.

Further it is also considered grammatically correct to intersperse a space between said question and question mark.

The_Conductor

seamus wrote: »

The only problem with such rigid budgetary requirements is that it doesn't take interest rates into account. I was only leaving school in 2000, so buying a house was the last thing on my mind at the time, and I don't know the history.

But I imagine the reasoning behind the relaxing of the rules was because the drop in interest rates made larger mortgages more affordable but the banks couldn't lend out more simply because the rules said they couldn't.

I think we need to find the balance tbh. There's no point in artificially stifling the market if people's salaries can handle it, but at the same time it shouldn't be allowed go completely unchecked.

I'm sure someone can come with some kind of effective formula which is indicative of what people should be able to borrow based on the old "30% of your salary" metric which seems to be accepted as the line between an affordable mortgage and an excessive one.

The rigid budgetary requirements are actually the norm almost everywhere. Ireland was very much an analmoly with our tracker mortgages- the norm on the continent is a fixed rate mortgage for the term of the mortgage. So- while you may think 4% is a lot to pay in the current context- as ECB rates normalise- its actually quite reasonable.

A regular misconception is that the ECB rate somehow has an impact on the cost that is normally associated to a financial institution to borrow capital to fund its lending activities. It doesn't. Most regular institutions package their debt into bonds which they sell onto third parties to raise funds.

Ireland has also experienced historically low rates of taxation over the past 15 years. This has translated into a much higher level of disposable after tax income than in other countries from similar gross salaries. Thus an Irish person on an income of 40k could comfortably afford a mortgage of perhaps up to 7 or 8 times gross salary- where a German (read citizen of any country exercising prudent financial policies here) would tend to pay a much higher portion of its gross income in tax and consequently a more reasonable lending for them would perhaps be 4-5 times gross income.

The biggest problem of all though- in an Irish context- was/is personal debt. Irish people have been on a binge using money like its a game of Monopoly, raising additional loans on the back of their ever increasing house values. Paper wealth has been converted into actual cash- on the misplaced assumption that it was as good as banking the 'inherent' value in asset value (largely houses). It was recognised that we had a bubble as long ago as 2001- totally aside from Peter Bacon's 3 reports commissioned by the government- international bodies such as the OECD also pontificated on the Irish property market.

So- we've had a 15 year binge, it only got really bad from about 2004 onwards, but even at that stage its a reasonable assumption that Irish house prices were ~55-60% over valued. The vast amounts of cash sloshing around the economy stoked inflation- which in turn created an expectation in people's minds of unending increases in 'value'.

Interest rates were only one element of the equation- government policy, incredulous reporting by the media, a lack of any prudent financial management strategies by vast swathes of the public, corruption, a historic hatred of renting and many many more acts of stupidity all lent to the euphoric sense portrayed in the media- and stoked an inherent 'need' on the part of younger people to 'get on the property ladder'. Private individuals now owe 196% of GDP (a percentage that is rising as our GDP is falling), the bulk of which is accounted for by the 25-40 age group. Demographically the 25-40 age group are least likely to vote, least likely to be represented by the various lobby groups, and least likely to have any say in how their taxes are spent- despite contributing over 85% of all direct taxation. It suited the government, and indeed it continues to suit them, to ignore this group- how likely are they to march on Dail Eireann akin to the pensioners at the slightest hint of hardship? Very unlikely. Yet it is also this group who are also going to be asked to bear the lions share of the burden of rescuing the exchequer come April the 7th........

There is something very rotten in the state of Ireland.......

vbold

petergdub wrote: »

.

In my own case I have an existing very manageable mortgage and had been tempted to upscale.
I've recently been given pre-approval of 5 times combined (me + wife) salary.
If this rule is brought in it will reduce credit availability by hundred of thousands.

Essentially they are saying they want people to buy houses with relatively small mortgages.
This would cause houses in the 600->800K bracket to drop 200K.

Sorry Op but I just don't get what the problem is??

if the new rules were to be introduced - Many traders-uppers would be in the same position as yourself. Thus the reduction in credit would effect the majority of the market and all the houses in that bracket would have to reduce their price to meet the new market/credit price.

so when you go to trade up the house will be cheaper, your mortgage will be smaller and you will pay off your martgage sooner - I really don't get what the down side is????

blast05

Thus an Irish person on an income of 40k could comfortably afford a mortgage of perhaps up to 7 or 8 times gross salary- where a German (read citizen of any country exercising prudent financial policies here) would tend to pay a much higher portion of its gross income in tax and consequently a more reasonable lending for them would perhaps be 4-5 times gross income.

I don't necessarily buy the implication that any country that has its residents paying a similar percentage of gross income as income tax as we do in Ireland is automatically financially careless (or whatever the oppposite to prudent is !!). I'd be happy with the tax rates we currently have and accept that as a conseqeunce we can not be such a welfare state

Stheno

smccarrick wrote: »

The proposal is to return to guidelines which were in place for over 20 years up to 2000- whereby mortgages were considered as a multiple of 3 times the primary salary and 1.5 times the secondary salary. They are also proposing that mortgages will be a *maximum* of 80% of the purchase price- which means people will have to save sizeable deposits.

This is a return to normal lending practices- it is by no means a departure- and in practice is a good business model both for the lending institutions, but also for borrowers- as they are less likely to overly stretch themselves.

+1 I took out my mortgage in 1999 and the criteria used then by my lender were 2.5 - 3 times the principal salary plus 1 times the second, as well as a minimum 10% deposit that was not funded via parents or loans, that's only ten years ago!

I don't necessarily buy the implication that any country that has its residents paying a similar percentage of gross income as income tax as we do in Ireland is automatically financially careless (or whatever the oppposite to prudent is !!). I'd be happy with the tax rates we currently have and accept that as a conseqeunce we can not be such a welfare state

We pay one of the highest rates of unemployment benefit/assistance in the EU! Part of the reason why our Social Fund is rapidly running out.

Also the vast majority of income tax in this country is paid by a very small minority of people.

Personally I'd view a welfare state as any state where one is better off claiming benefits than working full time, and we seem to have that in certain circumstances.