IMF suggest mortgage rules change to Debt-to-income ratio

Dardania

Intersting suggestion here: http://www.rte.ie/news/business/2016/0930/820395-today-in-the-press/

IMF WARNS MORTGAGE LIMITS MUST STAY IN PLACE - The Central Bank s mortgage lending rules should be maintained to help head off the boom-bust economic cycles that have plagued Ireland and brought the country to its knees during the recession, the IMF has warned.
The US-based organisation said there is evidence the lending limits, which require borrowers to provide a 20% deposit and which caps home loans at 3.5 times gross income, are working, says the Irish Examiner. Despite calls from prospective homebuyers and industry lobby groups for the loan-to-value (LTV) and loan-to-income (LTI) rules to be relaxed, the IMF has cautioned against doing so; saying more information is needed before any attempts are made at refining the limits. In time however, the Central Bank should consider transforming the loan-to-income requirement into a debt-to-income limit. The IMF suggested this should be done once the Central Bank has established a database of personal and credit information known as the Central Credit Register which is set to come into effect in 2018.

Ineresting approach for sure - which seems to look at people's monthly outgoings in a ratio to their income, rather than the house value. I suspect the mortgage lenders do that themselves on their side of the calculation, but making it more transparent to people would help them make their own decisions...

dzwx

Correct me if I'm wrong but lending rules were introduced to avoid another crash by not allowing prices to rise to astronomical levels right?
All I can see is prices are rising despite rules and all that rules make is not allowing people to buy and halting developers to build.

"But recent comments from the bank’s governor Philip Lane suggests a change is unlikely. When asked about the potential for a rule change at a recent Central Bank briefing, Lane said that change would “require a high evidence threshold”.

What high evidence is this man looking for?
Here there's one: "Housing supply at worst level for 50 years as prices exceed boomtime levels" which I believe rules are one of the main reasons.
Don't let me start about rents in Dublin being at sky rocket levels.
I'm not saying that rules have to go all the way, they need to be accordingly adjusted because right now it's a mess
Sorry a bit of rant over and before anyone ask yes I'm a ftb affected by lti rule

Michael D Not Higgins

dzwx wrote: »

Correct me if I'm wrong but lending rules were introduced to avoid another crash by not allowing prices to rise to astronomical levels right?
All I can see is prices are rising despite rules and all that rules make is not allowing people to buy and halting developers to build.

"But recent comments from the bank’s governor Philip Lane suggests a change is unlikely. When asked about the potential for a rule change at a recent Central Bank briefing, Lane said that change would “require a high evidence threshold”.

What high evidence is this man looking for?
Here there's one: "Housing supply at worst level for 50 years as prices exceed boomtime levels" which I believe rules are one of the main reasons.
Don't let me start about rents in Dublin being at sky rocket levels.
I'm not saying that rules have to go all the way, they need to be accordingly adjusted because right now it's a mess
Sorry a bit of rant over and before anyone ask yes I'm a ftb affected by ltv rule

The rules were not brought in to have any effect on prices. It was to limit the amount of money people could borrow and banks could lend to a sustainable level. Just because prices are rising doesn't mean the rules aren't working.

How do you see the rules as they stand increasing the price of housing? If you got rid of them altogether and went back to boomtime 4.5-5 LTI and 95-100% LTV, everyone would have more money to spend and prices would rise faster.

Case in point, Dublin prices were rising at 20% in 2015 before the rules and 1% after.

dzwx

The way I see it if people can't buy because they are limited by rules developers can't build any new houses.
Any shortage will draw prices up

"Fewer houses will be built due to the mortgage lending limits introduced by the Central Bank, a leading think-tank says.

The rules restrict the amount that can be borrowed for a mortgage - and now the ESRI is warning that it is having a knock-on effect on the dire supply of family homes"

"The findings have emerged against a backdrop of a chronic shortage of homes to buy, which is pushing up prices and has sent rents to levels even higher than before the crash."

From independents article, sorry can't post links yet

All in all situation is very bad and something has to be done.

Michael D Not Higgins

Yes, something must be done, about the supply side. Giving people more money gets them into more unsustainable debt and lines the pockets of developers. The focus should be on reducing the build costs, not increasing the lending.

Idbatterim

All in all situation is very bad and something has to be done.

yeah and it shouldnt be to hang people with more debt which the government and banks would love. Simple solution that costs nothing and would get a lot more building going. I would propose reducing building standards in certain aspects and increasing (concrete dividing walls and sound insulation being my key proposal on this front) them in others. I.e. allow a lot more cheaper apartments to be built, say they reduce or get rid of the dual aspect ratio, reduce outdoor space and lift ratio. If this resulted in a 20% build cost reduction, it could mean a lot more demand for these units, which builders would supply. It means not messing around with CB rules...

It could get a lot of professionals and students out of family homes...

dzwx

Michael D Not Higgins wrote: »

Yes, something must be done, about the supply side. Giving people more money gets them into more unsustainable debt and lines the pockets of developers. The focus should be on reducing the build costs, not increasing the lending.

Yes correct, but that's up to government so won't happen likely

Idbatterim

the density is down to councils, but they are total vested interests, should be out of their hands if possible...

One of the key things they will get elected on, is stopping as much development as possible in an area. They couldnt care about much else. Not much good for the rest of us, the country as a whole or our competitiveness, or sustainability...

Cuddlesworth

Idbatterim wrote: »

yeah and it shouldnt be to hang people with more debt which the government and banks would love. Simple solution that costs nothing and would get a lot more building going. I would propose reducing building standards in certain aspects and increasing (concrete dividing walls and sound insulation being my key proposal on this front) them in others. I.e. allow a lot more cheaper apartments to be built, say they reduce or get rid of the dual aspect ratio, reduce outdoor space and lift ratio. If this resulted in a 20% build cost reduction, it could mean a lot more demand for these units, which builders would supply. It means not messing around with CB rules...

It could get a lot of professionals and students out of family homes...

Having looked at the chartered surveyors of Ireland's report, loan interest, labour, fees and various forms of taxation are the largest cost barriers. None of the above would make any real difference.

Plus things like dual aspect are important and I don't even want to go into the Irish thing of moaning about sound insulation while most have ****ty wooden flooring in their apartments.

Cuddlesworth

dzwx wrote: »

"Fewer houses will be built due to the mortgage lending limits introduced by the Central Bank, a leading think-tank says

Think-tank is a tabloid word to give justification to what could be anything from a actual expert, a heavily biased lobby group or a couple of blokes in the pub.

bleary

The esri report was a slightly strange one, it was written by someone who used to work in the central bank in 2006.
his findings were that the rules would restrict the growth in house prices and developer profit and this would mean builders would build less. Even if profits are less than a notional amount that they might be with unrestricted lending that doesn't mean they aren't still profits
, I can see some argument if there were other places for developers to go but with site tax hopefully coming down the line why would they not build and make a profit now rather than pay tax on a dormant site in a couple of years. Restriction of growth in house prices is a good thing for all FTB. Stable house market is a good thing for everyone. 20% growth in house prices benefits developers and banks , no one else

dennyk

Dardania wrote: »

Ineresting approach for sure - which seems to look at people's monthly outgoings in a ratio to their income, rather than the house value. I suspect the mortgage lenders do that themselves on their side of the calculation, but making it more transparent to people would help them make their own decisions...

They're not talking about scrapping the loan-to-value limits (e.g. the required 10%/20% deposits on a home), they're talking about taking other existing loans into account when considering the 3.5x-gross-income loan limit. For example, if you make 50k a year, today a bank can give you a 175k mortgage loan regardless of your other outstanding debts. Under the new suggested rules, if you had, say, a 25k car loan and a 10k credit card balance at the time you applied for a mortgage, then the most the bank could legally give you would be a 140k mortgage loan.

Taking total debt into consideration is the norm in the US, where centralized credit reporting agencies that track all types of loans and debt on individuals have been around for ages (although the US has no laws restricting mortgage loan amounts based on income or finances, so it's up to the discretion of the lenders). I guess Ireland doesn't yet have any such thing, though apparently it's coming soon, per that article. In practice, it will reduce the amount of money available to people for mortgages on average, unless the 3.5x-income limit is increased as well.

markpb

dzwx wrote:

Correct me if I'm wrong but lending rules were introduced to avoid another crash by not allowing prices to rise to astronomical levels right? All I can see is prices are rising despite rules and all that rules make is not allowing people to buy and halting developers to build.

Isn't there's a contradiction in what you just said? If the rules were stopping people from buying, why would the prices be rising? Surely with no market, the prices would fall.

And if prices are rising but developers aren't building, is the problem that they're not rising fast enough? If we we relax the rules and let prices skyrocket so developers build, will people be able to afford the mortgage they'd need to take out.

Lumen

dennyk wrote: »

They're not talking about scrapping the loan-to-value limits (e.g. the required 10%/20% deposits on a home), they're talking about taking other existing loans into account when considering the 3.5x-gross-income loan limit. For example, if you make 50k a year, today a bank can give you a 175k mortgage loan regardless of your other outstanding debts. Under the new suggested rules, if you had, say, a 25k car loan and a 10k credit card balance at the time you applied for a mortgage, then the most the bank could legally give you would be a 140k mortgage loan.

A few points.

1. Banks already take existing loans into account, they're just not required to by the LTI/LTV rules.

2. Because of (1) it is normal practice to avoid splurging on things like debt-financed cars in the run up to securing a mortgage. They just get bought afterwards and there's nothing the bank can do about it.

3. Other debts are unsecured and so rank below the mortgage. So why would a bank care, as long as they can repossess? But...

4. Repossession is extremely difficult in Ireland. This is one of the major reasons why our interest rates are so high.

I can't see this proposal as anything but a minor tweak and a distraction from the real issues in the Irish housing and banking markets.

No doubt it will be seized on as something significant by people looking to deflect attention from the real issues.

OTOH maybe the credit register will work the other way round by stopping people with low NDI getting into trouble with unsecured debt, or perhaps better differentiate interest rates by actual risk.

I like the idea of people getting an mortgage interest rate reduction for living within their means.

dzwx

markpb wrote: »

Isn't there's a contradiction in what you just said? If the rules were stopping people from buying, why would the prices be rising? Surely with no market, the prices would fall.

If people are not buying then developers are not building or building very little which creates a shortage.
Any shortage will put a prices up imo

"A shortage, according to the Experimental Economics Center, occurs when demand outstrips supply. This shortage puts upward pressure on the price of the good or service sold. The price continues to rise until customer demand falls to meet the level of supply or until production increases to meet the present demand. The opposite is true of surpluses. When there is a surplus, prices drop until demand grows to meet the supply or production reduces to the level of actual demand. In both cases, the new point at which demand and supply are equal is known as the market equilibrium."

Dardania

Lumen wrote: »

dennyk wrote: »

They're not talking about scrapping the loan-to-value limits (e.g. the required 10%/20% deposits on a home), they're talking about taking other existing loans into account when considering the 3.5x-gross-income loan limit. For example, if you make 50k a year, today a bank can give you a 175k mortgage loan regardless of your other outstanding debts. Under the new suggested rules, if you had, say, a 25k car loan and a 10k credit card balance at the time you applied for a mortgage, then the most the bank could legally give you would be a 140k mortgage loan.

A few points.

1. Banks already take existing loans into account, they're just not required to by the LTI/LTV rules.

2. Because of (1) it is normal practice to avoid splurging on things like debt-financed cars in the run up to securing a mortgage. They just get bought afterwards and there's nothing the bank can do about it.

3. Other debts are unsecured and so rank below the mortgage. So why would a bank care, as long as they can repossess? But...

4. Repossession is extremely difficult in Ireland. This is one of the major reasons why our interest rates are so high.

I can't see this proposal as anything but a minor tweak and a distraction from the real issues in the Irish housing and banking markets.

No doubt it will be seized on as something significant by people looking to deflect attention from the real issues.

OTOH maybe the credit register will work the other way round by stopping people with low NDI getting into trouble with unsecured debt, or perhaps better differentiate interest rates by actual risk.

I like the idea of people getting an mortgage interest rate reduction for living within their means.

The credit risk register idea could help big time

Saipanne

dzwx wrote: »

Correct me if I'm wrong but lending rules were introduced to avoid another crash by not allowing prices to rise to astronomical levels right?
All I can see is prices are rising despite rules and all that rules make is not allowing people to buy and halting developers to build.

"But recent comments from the bank’s governor Philip Lane suggests a change is unlikely. When asked about the potential for a rule change at a recent Central Bank briefing, Lane said that change would “require a high evidence threshold”.

What high evidence is this man looking for?
Here there's one: "Housing supply at worst level for 50 years as prices exceed boomtime levels" which I believe rules are one of the main reasons.
Don't let me start about rents in Dublin being at sky rocket levels.
I'm not saying that rules have to go all the way, they need to be accordingly adjusted because right now it's a mess
Sorry a bit of rant over and before anyone ask yes I'm a ftb affected by ltv rule

If you can't raise the money under the current rules it means you probably shouldn't be buying a property as you couldn't afford to service the debt throughout the economic cycle.

dzwx

Saipanne wrote: »

If you can't raise the money under the current rules it means you probably shouldn't be buying a property as you couldn't afford to service the debt throughout the economic cycle.

It's loan to invcome rule that's stopping me personally to buy, sorry I think I made a mistake in my first post, apologies, my deposit is well and sorted.
One third of my income comes from commission which can be backed by p60 every year yet banks are unlikely to consider into account

Villa05

dzwx wrote:

If people are not buying then developers are not building or building very little which creates a shortage. Any shortage will put a prices up imo

Are prices in Dublin in or around 2005 levels. If so the prices did not stop building back then.

The lending rules are best in class on a world scale

Everything else in the irish property market is amongst the worst. Solutions can be found there. The lending rules are fine

Harvey Normal

dzwx wrote: »

If people are not buying then developers are not building or building very little which creates a shortage.
Any shortage will put a prices up imo

"A shortage, according to the Experimental Economics Center, occurs when demand outstrips supply. This shortage puts upward pressure on the price of the good or service sold. The price continues to rise until customer demand falls to meet the level of supply or until production increases to meet the present demand. The opposite is true of surpluses. When there is a surplus, prices drop until demand grows to meet the supply or production reduces to the level of actual demand. In both cases, the new point at which demand and supply are equal is known as the market equilibrium."

You are basically saying house prices have to rise to solve the problem. Thafwoukd hardly help first time buyers. These simple economic theories apply only to fully competitive markets.

Harvey Normal

dzwx wrote: »

It's loan to invcome rule that's stopping me personally to buy, sorry I think I made a mistake in my first post, apologies, my deposit is well and sorted.
One third of my income comes from commission which can be backed by p60 every year yet banks are unlikely to consider into account

What's stopping you buying is that other people can out compete you for any house. This will be true if loan to income were 5-1 or 10-1 because the other people competing will have the same LTI.

I think banks will take consistent commission earnings into account.

dzwx

Harvey Normal wrote: »

You are basically saying house prices have to rise to solve the problem. Thafwoukd hardly help first time buyers. These simple economic theories apply only to fully competitive markets.

No, supply have to rise to solve the problem,
With current lending rules it's unlikely to happen

Unless developers got some reliefs to build cheaper houses

Harvey Normal

dzwx wrote: »

No, supply have to rise to solve the problem,
With current lending rules it's likely to happen

Unless developers got some reliefs to build cheaper houses

You've basically swallowed the developer line. You are saying you want everybody and you personally to get into higher debt to finance more expensive houses. Since prices are 2005 levels now you want them back to peak boom prices.

dzwx

Harvey Normal wrote: »

You've basically swallowed the developer line. You are saying you want everybody and you personally to get into higher debt to finance more expensive houses. Since prices are 2005 levels now you want them back to peak boom prices.

No ,never said anything about more expensive houses.
Cheaper houses, yes but then you would not need such restricted lending rules at first place

Will23

The biggest developer in the country is the state, they are the ones we need to start building. The state is better placed, financially, than anyone else to build in the most cost effective way.

They don't have have to include the following in their costings
- land prices (20%?)
- VAT (13.5%)
- developer's profit (15%)

They can borrow money cheaper than anyone in the private sector.

There are c. 100,000 on housing lists and many, many more in private rented accommodation. Remove these folk from the private housing market, and reduce demand that way.

So why are they not building? Our councils and local government are a basket case. There is very little practical expertise or experience left in councils and local government. LG is effectively an overstaffed administration office. LG is reliant on private sector professionals to deliver housing for them, who have little interesting in doing it as it turns into a red tape nightmare most of the time.

IMO the state needs to roll out a cost effective, affordable house building programme as a matter of urgency.

Harvey Normal

dzwx wrote: »

No ,never said anything about more expensive houses.
Cheaper houses, yes but then you would not need such restricted lending rules at first place

You clearly said developers need to up supply and won't do it until prices increase.

dzwx

Harvey Normal wrote: »

You clearly said developers need to up supply and won't do it until prices increase.

I ment cheaper supply, apologies if you got me wrong.

jimmycrackcorm

Will23 wrote:

There are c. 100,000 on housing lists and many, many more in private rented accommodation. Remove these folk from the private housing market, and reduce demand that way.

Apart from the unfairness of 100,000 people getting free gaffes, the private renters would replace higher rents with higher taxes to pay for those free gaffes.

Harvey Normal

jimmycrackcorm wrote: »

Apart from the unfairness of 100,000 people getting free gaffes, the private renters would replace higher rents with higher taxes to pay for those free gaffes.

No they wouldn't. The cost would be the repayment of the debt. The savings would be the removal of the private rental subsidy which keeps a floor of rents and is an ongoing cost. And state owned housing generates revenue since it isn't rent free. Once the capital stock is paid off its a revenue generator not a cost.

thierry14

jimmycrackcorm wrote: »

Apart from the unfairness of 100,000 people getting free gaffes, the private renters would replace higher rents with higher taxes to pay for those free gaffes.

Exactly

It's a free market and the government should stay out of it.

They have no business building houses, running transport companies etc.

What good will come out of building social houses?

How is it going to help the middle classes ( more like working class now )on 45k a year with mortgages and renting privately, just getting by and will pay for all these social houses through taxes.

How is the building of all these social houses going to help us?

athtrasna

Since when is this thread about social housing?

Harvey Normal

thierry14 wrote: »

Exactly

It's a free market and the government should stay out of it.

It's a free market until banks need to be bailed out and Nama gets to own huge property portfolios when the free market fails.

They have no business building houses, running transport companies etc.

Most uk citizens would disagree on private transport having experienced it.

What good will come out of building social houses?

Social housing is designed to give people who can't ever get a mortgage a house - for which they pay rent but should never own. They also get security of tenure.

How is it going to help the middle classes ( more like working class now )on 45k a year with mortgages and renting privately, just getting by and will pay for all these social houses through taxes.

How is the building of all these social houses going to help us?

It's not designed to specifically help you. However it doesn't cost anymore than subsidising private rental income and it reduces the number of people competing for private sector rent.

riclad

The landing rules we have now are fine, the main problem is lack of supply in urban area ,s where people want to live and work .
Changing lending rules does not increase the no of houses ,
unless we go to the madness of the celtic tiger,
Where anyone could borrow 150k to buy a house in cavan.

Lumen

thierry14 wrote: »

It's a free market

Housing is absolutely NOT a free market.

If it were there would be no zoning, no building regulations, and no system of planning permission.

riclad

ITS not a free market in that 20 plus per cent of the cost of a house goes on tax,s ,the council sets limits where you can build, how high buildings can go.But the lack of house building means there is a major problem
somewhere .

Harvey Normal

riclad wrote: »

ITS not a free market in that 20 plus per cent of the cost of a house goes on tax,s ,the council sets limits where you can build, how high buildings can go.But the lack of house building means there is a major problem
somewhere .

If having to pay taxes means that industry is not a free then no industry is free. There has to be zoning laws.

Villa05

Harvey Normal wrote:

If having to pay taxes means that industry is not a free then no industry is free. There has to be zoning laws.

There are countless posts on this forum correctly pointing out how the housing market is not a free market and is almost completely rigged to ensure price increases. The vast majority of the reasons are government interference.

Harvey Normal

Villa05 wrote: »

There are countless posts on this forum correctly pointing out how the housing market is not a free market and is almost completely rigged to ensure price increases. The vast majority of the reasons are government interference.

Yes I agree with that but it's not taxes or zoning. It's Nama. It's banks not calling in debts.

Also I doubt that a proper free market would reduce prices.

Will23

thierry14 wrote: »

Exactly

It's a free market and the government should stay out of it.

They have no business building houses, running transport companies etc.

What good will come out of building social houses?

How is it going to help the middle classes ( more like working class now )on 45k a year with mortgages and renting privately, just getting by and will pay for all these social houses through taxes.

How is the building of all these social houses going to help us?

Our taxes are already paying for the rent allowance, etc on private sector housing. Say the state is paying 1000 a month to house someone/ a family in private rented accomm. That's 12k a year, 120k over 10 years not allowing for inflation.

Now say the state can build a house for 150k because it doesn't have to pay for land, vat and profit. And it's gets an income on the rental of the house once completed. The payback is somewhere between 10-15 years, far exceeding the lifetime of the person/family in question.

Moral questions about whether the state should pay for housing the less well off or not is another argument, they do and will continue to do so in a fair society.

This thread is about the CB rules, but as I see it, this issue is having a much bigger effect on the 'market' than the limits. Remember the CB are trying to protect you from yourself as experience has shown most people need it!