Construction starts to suffer on new mortgage rules

Kermit.de.frog

This was coming and I fear just how bad this slump could get.

Bad news for the government and the country if we were hoping to get construction workers back in to work (a large cohort of our unemployment rate). Looks like the minimal amount of residential construction that started in the last 2 years could be in the process of being halted.

Has the central bank done us real damage here?

http://www.rte.ie/news/business/2015/0309/685600-construction-pmi/

Or have they done the right thing?

gaius c

It's nonsense. The current bull market topped last spring/early summer and was already in decline well before the new mortgage rules were mooted.

There's also been a decline in commercial which is untouched by the new rules.

The bull market got too frothy and it's rolling back now. Nothing else to see here.

Jim2007

Kermit.de.frog wrote: »

Bad news for the government and the country if we were hoping to get construction workers back in to work (a large cohort of our unemployment rate). Looks like the minimal amount of residential construction that started in the last 2 years could be in the process of being halted.

Has the central bank done us real damage here?

Or have they done the right thing?

Of course they have! You can't build a stable economy on top a cyclical industry by encouraging people to borrow more money than they are likely to be able to repay. We already have the evidence of this.

Kermit.de.frog

That is all well and good but if the rules are too strict (which I think they are) then it is no longer feasible for developers to build houses and so we could see another surge in construction sites halting and more being put out of work.

Commercial property should be ok. There are big projects about to start in Dublin for example but i'd worry on the residential side.

gaius c

Kermit.de.frog wrote: »

That is all well and good but if the rules are too strict (which I think they are) then it is no longer feasible for developers to build houses and so we could see another surge in construction sites halting and more being put out of work.

Commercial property should be ok. There are big projects about to start in Dublin for example but i'd worry on the residential side.

Buyers have a limited amount of cash to spend. If you want to help builders, tackle the mental land prices.

Idbatterim

typical ireland, one extreme to another, 20% is OTT, 15% maximum IMO...

BoJack Horseman

The central bank haven't done anything.

Didn't the government ignore their advise re: 20% deposits?

Kermit.de.frog

gaius c wrote: »

Buyers have a limited amount of cash to spend.

Isn't that the point? The central bank may have gone too far as said to the other extreme. Hope not but I think that may be the case.

Chips Lovell

I'd take the long term stability of better regulated mortgage lending over a short term slump in construction any day.

It's all about supply and demand. As long as there's a pool of people willing to buy houses for above the cost of construction, developers will emerge address that market.

Restrictions on LTV and earnings multiples didn't stop people buying houses back in the seventies. They aren't going to now.

Idbatterim

I'd take the long term stability of better regulated mortgage lending over a short term slump in construction any day.

It's all about supply and demand. As long as there's a pool of people willing to buy houses for above the cost of construction, developers will emerge address that market.

Restrictions on LTV and earnings multiples didn't stop people buying houses back in the seventies. They aren't going to now.

yeah but the issue now is affordability, I wasnt around in the seventies, but the issue now is sky high prices AND now a proposed 20% deposit...

Outkast_IRE

Idbatterim wrote: »

yeah but the issue now is affordability, I wasnt around in the seventies, but the issue now is sky high prices AND now a proposed 20% deposit...

Supply and demand will kick in and will find a natural equilibrium.

If less people are buying houses then sellers will need to lower the price in order to attract them.

Chips Lovell

Letting people borrow more money doesn't address affordability. The average price of a house will reflect the amount of money the average person can raise.

So, if easing mortgage lending restrictions allows the average person to raise €220,000 compared to €180,000 previously, then house prices will rise to reflect that.

While house price to disposable income ratio shot up during the boom, it has since gone back down below the long term average (see page 20).

Long story short, houses are about as affordable as they were in the seventies.

Kensington

Kermit.de.frog wrote: »

This was coming and I fear just how bad this slump could get.

Bad news for the government and the country if we were hoping to get construction workers back in to work (a large cohort of our unemployment rate). Looks like the minimal amount of residential construction that started in the last 2 years could be in the process of being halted.

Has the central bank done us real damage here?

http://www.rte.ie/news/business/2015/0309/685600-construction-pmi/

Or have they done the right thing?

Right thing of course.

It was absolute lunacy the way things were going a few years ago, 90pc+ mortgages being handed out to people absolutely stretched to the max trying to repay it.

There will always be a period between these new deposit rules having come into place and the market reacting to the reality of the adjusted buying power of people. I suspect we're in the middle of that period right now hence the lull.

You can see this already in motion somewhat with rental prices going up, people choosing to rent, or continue renting for longer, whereas previously they would have locked themselves into a massive mortgage, net result of which has bumped up demand for rental property and in turn prices.

Eventually there'll be a happy medium where the price of property will fall back within attainable levels and those saving will have saved for the additional deposit requirements in the extra time taken and we should see a stable return to growth in property once again.

Sleepy

Isn't the main issue now holding back development the costs associated with it?

Higher building regulation standards are pushing development costs upwards and, AFAIK, the REA for Construction Industry Wages is still in place which is interfering with the supply and demand for labour (which accounts for the vast majority of the cost of house building)?

johnnyskeleton

Mod: Constructive posts only please

sock puppet

Idbatterim wrote: »

typical ireland, one extreme to another, 20% is OTT, 15% maximum IMO...

for the majority of homes it is under 15%

andrew

An alternative headline could be 'Construction starts continue to suffer under extant and onerous government policy"

Jim2007

Kermit.de.frog wrote: »

That is all well and good but if the rules are too strict (which I think they are) then it is no longer feasible for developers to build houses and so we could see another surge in construction sites halting and more being put out of work.

The rules are very reasonable and fully in line with those in other Euroland countries. There is no justification for encouraging people to borrow more money that they can realistically expect to be able pay back, just to fuel another bubble.

What is needed is a proper housing policy which is not based on encouraging people to over extend themselves financial in order to find somewhere to live. Other countries are much closer to the solution than we are so it's time we started seek new answers too.

Jim2007

Idbatterim wrote: »

typical ireland, one extreme to another, 20% is OTT, 15% maximum IMO...

No 20% is not unreasonable, if you can't save the deposit, then what chance do you have of paying the balance off within a reasonable time?

If fact if I compare it to my own situation here is Switzerland it is very lax in comparison, here:

- 20% deposit from saving activities (no gifts from granny or uncle Mick)
- Monthly repayment not to exceed 20% - 25% of net income per month
- 80% of loan must be cleared before reaching retirement age

Worthwhile reading on macrorpudential measures to curb real-estate asset bubbles, published by the IMF in 2013, see pp.21-25; p.31

http://www.imf.org/external/np/pp/eng/2013/061013C.pdf

The credit-related restrictions recommended by the Iirsh Central Bank do seem draconian based on what we're used to in Ireland, but their form as a prudential tool is convincing.

Much of the economic literature on asset bubbles is unscientific quackery, but there is a basis for believing that investors, like impalas sloshing around in crocodile-crowded waters, have very short memories. As soon as they get bitten, they prepare their comeback instead of running away. This appears to be particularly true of real-estate investors. For this reason alone it seems difficult to disagree with the debt-to-income limit in principle.

The big problem with an LTI/DTI limit is the prohibitive effect on first-time home buyers. The IMF proposes some novel & imaginative ways of mitigating this drawback which might be of benefit in Ireland.

One interesting suggestion is the Korean template of varying the ratio depending on the location of the property. Property in 'speculative zones' would attract tighter DTI ratios. In Singapore they adjusted the LTV ratio to the purchaser in proportion to his outstanding debt obligations. Meanwhile, Hong Kong went down a different route, and applied a higher stamp duty to properties resold within 2 years of the purchase. Some interesting anti-speculation mechanisms worth considering here.

Tighter regulation of landlords would also have the effect of clamping down on the amount of amateur landlords buying residential properties as pension investments. It doesn't all have to be about credit-related prudential tools.

Jim2007

andrew wrote: »

An alternative headline could be 'Construction starts continue to suffer under extant and onerous government policy"

A better headline would be: Construction starts continue to suffer due the lack of a national housing policy!

We need to get over this idea that the only way to ensure adequate housing is for everyone to risk financial disastor by borrowing large sums of money to buy a house!

I live in a country where the majority of people consider it a really dumb idea to go buying a house! The attitude is to spend as little as you can on accommodation - about 20% of your monthly salary and rent if at all possible. Of course we've experienced had times here too over the past few years, but the big difference I see is that people are not held down by large financial debts.

househero

The danger to the Irish homeowner (and housing related economy) will be double digit interest rates.

1. The us will soon raise interest rates (6months)
2. The ecb will stop QE (3years)
3. The EU will raise interest rates (3years)
4. The banks will be forced to raise interest rates way above the ecb rate to maintain profits and compensate for all the repossessions

5.ww3 hahahaha

Idbatterim

No 20% is not unreasonable, if you can't save the deposit, then what chance do you have of paying the balance off within a reasonable time?

in Ireland we have ridiculous rates of marginal tax at a low income, high rent costs and ridiculous childcare costs, you can be on a "high income" and still be struggling to save money towards a deposit unless you get it from a parent or make major lifestyle sacrifices...

4. The banks will be forced to raise interest rates way above the ecb rate to maintain profits and compensate for all the repossessions

1. The credit unions plan on entering the mortgage market 2. If this was the case new banks would come in here, if there was that kind of killing to be made 3. Why whack up the rates to such an extent that people would struggle to pay the mortgage or stop making payments? Or even stop them borrowing at all, if interest rates were whacked up to where you suggest, combined with the 20% deposit, housing would be as good as unaffordable for the majority of the population...

femur61

Idbatterim wrote: »

typical ireland, one extreme to another, 20% is OTT, 15% maximum IMO...

Is it an age thing or have people forgotten the strict rules of the 90's. I am in my mid 40's and when I took out my mortgage first 20 years ago I had to have 25% deposit in my account. I was told I could only apply for a mortgage if my earnings added to my wife's equaled 2.5 times the price of the house. We upgraded and luckily didn't have to increase mortgage so never had a debt problem when the recession hit. So maybe, just maybe the rules are a good thing, to put it in childish terms the banks are not just being mean they are going it for your own good.

nice_guy80

Indeed.
People in the 80s and 90s had to save, save, save before they could afford to take out a mortgage

People nowadays expect to walk in and get a mortgage.

Jim2007

Idbatterim wrote: »

in Ireland we have ridiculous rates of marginal tax at a low income, high rent costs and ridiculous childcare costs, you can be on a "high income" and still be struggling to save money towards a deposit unless you get it from a parent or make major lifestyle sacrifices...

Take a look at the min., max, and effective tax rates, you have more or less the same as the rest of Europe.

Irish ideas of major lifestyle sacrifices are normal in most other European countries.... Both my kids made their first communion and confirmation here, the total cost was about 50 Euros in each case - that was 25 for the cleaning of the standard white robe supplied by the church and 25 for the appero afterwards and that was it - no splashing out money you do not have... I've been to many wedding over here and I have yet to go to one held in a hotel - the community hall and self-catering is the norm and if you spend more than a months salary on the whole thing including the honeymoon, you're considered an idiot.... Go into any household and you'll find most of the furniture was bought in the local second-hand shop and so on.

Idbatterim wrote: »

Or even stop them borrowing at all, if interest rates were whacked up to where you suggest, combined with the 20% deposit, housing would be as good as unaffordable for the majority of the population...

Why go lending to people that can afford it, we already know that that does not work! Interests rates are very low now and in about three or four years when the get pushed back up, may of today's borrowers will not be able to carry on making payments.

We need to stop repeating the mistakes of the past and start looking for alternative solutions.

Sheldons Brain

There is lot in this thread that is well off course. The housing "boom" of last summer wasn't driven by people with 90%+ mortgages, there was a large amount of cash involved. The new restrictions only limit people to 20% on more expensive houses as mentioned above.

I think that the problem may be more about the structure of finance for developers as the structure of finance for purchasers.

femur61

Sheldons Brain wrote: »

There is lot in this thread that is well off course. The housing "boom" of last summer wasn't driven by people with 90%+ mortgages, there was a large amount of cash involved. The new restrictions only limit people to 20% on more expensive houses as mentioned above.

I think that the problem may be more about the structure of finance for developers as the structure of finance for purchasers.

I know for a fact a lot of the houses bought last year were paid for in cash, it was investors to get the 7 years capital gains tax free.

mjv2ydratu679c

femur61 wrote: »

I know for a fact a lot of the houses bought last year were paid for in cash, it was investors to get the 7 years capital gains tax free.

Citation then please if it's a fact.

hmmm

Instead of trying to allow people to get into even more debt, how about turning the attention to the real problems - the massive chunk of change that various public bodies charge as "levies" on every new build, and the hoarding of development land that is sitting idle.

There is also the social housing obligations, which are now being enforced, that means that people who are buying houses in new build estates have no idea who is going to be living alongside them.

femur61

Juelz Long Thief wrote: »

Citation then please if it's a fact.

http://www.independent.ie/regionals/wicklowpeople/news/capital-gains-tax-exemption-to-end-30813530.html

It would be very easy for you to have typed this into Google yourself.

Greyian

femur61 wrote: »

http://www.independent.ie/regionals/wicklowpeople/news/capital-gains-tax-exemption-to-end-30813530.html

It would be very easy for you to have typed this into Google yourself.

He didn't ask for a citation showing the end of the capital gains, he asked for a citation showing that "lot of the houses bought last year were paid for in cash, it was investors to get the 7 years capital gains tax free".

You haven't provided any evidence that it was investors, or people paying with cash. While I personally believe that a lot of the gains last year were driven by investors, you haven't actually provided any evidence whatsoever that it is true.

mjv2ydratu679c

Greyian wrote: »

He didn't ask for a citation showing the end of the capital gains, he asked for a citation showing that "lot of the houses bought last year were paid for in cash, it was investors to get the 7 years capital gains tax free".

You haven't provided any evidence that it was investors, or people paying with cash. While I personally believe that a lot of the gains last year were driven by investors, you haven't actually provided any evidence whatsoever that it is true.

Thanks Greyian - couldn't have put it any better myself.

RichardAnd

Idbatterim wrote: »

yeah but the issue now is affordability, I wasnt around in the seventies, but the issue now is sky high prices AND now a proposed 20% deposit...

This is quite a common criticism  of the new mortgage rules, and it’s one I have heard from more than one person.  Taken on face value, it seems to be a cogent line of thought, but it fails to consider two pertinent questions; why are prices so high, and what impact will a requisite 20% deposit have thereon?  I will address each of these in turn.

 

Houses are expensive, and there is no doubt about it.  Presently, a house near my parent’s home in Dublin 5 would set me back around 350k, if I were of a mind to buy one.  But wait.  Why does it cost so much?  Well certainly, the mechanisms of supply and demand come into play.  A lot of people want to live in Dublin 5, so it makes sense that the house price has risen in recent years.  However, I don’t have 350k sitting in my account, and I don’t think many people living in Dublin 5 do either, so how can I buy such a house?  Well I need a mortgage, but if I were to employ a lesson from our good friend Socrates, I would answer that question with another question.  Why do I need a mortgage?

 

The answer is that I need a mortgage because mortgages exist.  As paradoxical as that sounds, consider the following.  If there were no mortgages in Ireland (imagine that...), and I wanted to buy a house, I could only pay what I have saved.  As mentioned above, not many people have 350k, so will that house cost that much?  Of course it won’t.  The simple rule of a free market is that something cannot cost what people do not have.  Thus, houses could not cost hundreds of thousands of euros to buy.  Mortgages change the rules entirely.  By flooding the market with credit, the money supply is vastly expanded and that causes inflation.  House prices are now so expensive because of credit that the only way the average proletariat can attain one is to take on a loan!

 

So then, what effect will the need for a 20% deposit have?  The immediate effect will be that many will be unable to afford houses, and what happens when a lot of people can’t afford to buy a product?  The price falls. 

 

In the longer term, a 20% deposit will mean that 20% of the cost of a house will have to be “real” money.  By that I mean that the buy will have to earn and save 20% of the cost of the house, thus the load will be smaller.  This limits the amount of fiat-based, monopoly money that can be created somewhat, which will at least slow the expansion of the money supply.

 

Of course, the 20% deposit rule only affects houses over 220k, and I have even heard talk of some sort of mechanism to allow parents to borrow the deposit for their children or other such ways to circumvent the rule.   I’m not attempting to belittle anyone when I say this, and I don’t aim this at the quoted poster, but I think that the this whole situation highlights the growing inability of the population to critically think.  Debt is like a shackle.  It drastically limits the ability of an individual to further themselves, and it is a poison to the economic and social well-being of a society.   

seamus

RichardAnd wrote: »

Debt is like a shackle.  It drastically limits the ability of an individual to further themselves, and it is a poison to the economic and social well-being of a society.   

I disagree entirely. Debt in itself is neither positive nor negative. It becomes good or bad based on how it's used.

Inability to access credit and get oneself into debt can also drastically limit the ability of an individual to further themselves. Speak to anyone who has gone to the US and started out with no credit rating. You end up being able to interact with nothing. Paying for every utility upfront. And if you don't have the cash, tough.

Take the example of someone with a small but revolutionary idea. But no cash. He can save up for the next ten years for enough capital to launch it, build up what he's doing, and hope that nobody else gets there before him.
Or he can go to the bank to get a business loan and get himself to market now.

Used properly, debt allows the individual more freedom to do what they want to do. Used improperly it can severely limit one's freedoms.

If nobody could access credit, the world would actually be a far more unequal place than it is now, controlled entirely by the tiny proportion of people with independent funds, built up over centuries of inheritance. Like the royals and peasants of old.
Yes, that kind of inequality still exists, but the availability of credit means that I have the potential to independently better my own circumstances.

Eugene Norman

Jim2007 wrote: »

Take a look at the min., max, and effective tax rates, you have more or less the same as the rest of Europe.

Irish ideas of major lifestyle sacrifices are normal in most other European countries.... Both my kids made their first communion and confirmation here, the total cost was about 50 Euros in each case - that was 25 for the cleaning of the standard white robe supplied by the church and 25 for the appero afterwards and that was it - no splashing out money you do not have... I've been to many wedding over here and I have yet to go to one held in a hotel - the community hall and self-catering is the norm and if you spend more than a months salary on the whole thing including the honeymoon, you're considered an idiot.... Go into any household and you'll find most of the furniture was bought in the local second-hand shop and so on.



Why go lending to people that can afford it, we already know that that does not work! Interests rates are very low now and in about three or four years when the get pushed back up, may of today's borrowers will not be able to carry on making payments.

We need to stop repeating the mistakes of the past and start looking for alternative solutions.

The high wage tax rate in Ireland is one of the highest in the world and comes in at the lowest income.

Jim2007

Eugene Norman wrote: »

The high wage tax rate in Ireland is one of the highest in the world and comes in at the lowest income.

The stats say otherwise!

Greyian

Jim2007 wrote: »

The stats say otherwise!

Whenever these kind of threads come up, involving discussion of tax rates, I feel they always highlight 2 things:
1) Tax on low-earners in Ireland is very low compared to other European countries.
2) A huge number of people are completely ignorant of that fact, despite the evidence being displayed regularly.

Eugene Norman

Jim2007 wrote: »

The stats say otherwise!

Those stats didn't address what I claimed. The tax wedge is not the tax on employees earnings it's the tax on employees and employers. The difference between the cost to the employer of employing someone and what he receives. So it includes employer PRSI and other taxes. In some countries that is very high on employers, here it is mostly employees.

That link is also the wedge on the guy at 66% of average earnings. Tax is low on the lower paid in Ireland and very high at just above the industrial wage.

What I was talking about is the high marginal on employees not employers. I am all for taxing the actual real rich. Capital instead of labour.

I bet this has been pointed out to you before.

Eugene Norman

Greyian wrote: »

Whenever these kind of threads come up, involving discussion of tax rates, I feel they always highlight 2 things:
1) Tax on low-earners in Ireland is very low compared to other European countries.
2) A huge number of people are completely ignorant of that fact, despite the evidence being displayed regularly.

Sure but this discussion is house buyers. So the high marginal tax is important.

Greyian

Eugene Norman wrote: »

Those stats didn't address what I claimed. The tax wedge is not the tax on employees earnings it's the tax on employees and employers. The difference between the cost to the employer of employing someone and what he receives. So it includes employer PRSI and other taxes. In some countries that is very high on employers, here it is mostly employees.

That link is also the wedge on the guy at 66% of average earnings. Tax is low on the lower paid in Ireland and very high at just above the industrial wage.

What I was talking about is the high marginal on employees not employers. I am all for taxing the actual real rich. Capital instead of labour.

I bet this has been pointed out to you before.

The tax the employers have to pay is relevant though. If an employer can afford to pay a total of €50,000 to hire someone for a role, the employee's wage will be affected by the amount of taxes the employer has to pay.
Example: If an employer has to pay 33% in social insurance contributions etc, the maximum they can offer the employee is €37,500, whereas in Ireland the employee has a far higher gross wage, because the employer's contributions are lower.

Eugene Norman wrote: »

Sure but this discussion is house buyers. So the high marginal tax is important.

The marginal tax rate isn't as important as the overall tax rate. If you're on €40,000 per year, the marginal rate is higher in Ireland than Germany, but your total taxes are still lower (because of the lower rates on lower earners). So while the marginal tax rate is higher (though not all that different from many countries in Europe), your actual tax paid is not, so it doesn't hinder people purchasing property.