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Central Bank to limit amount banks lend for home purchase

handlemaster

http://www.irishtimes.com/business/sectors/financial-services/central-bank-to-impose-limits-on-home-loans-1.1948176

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El_Dangeroso

In my experience most banks want to lend 3X salary max, and I think I've queried with all the big ones.

mr_seer

handlemaster wrote: »

http://www.irishtimes.com/business/sectors/financial-services/central-bank-to-impose-limits-on-home-loans-1.1948176

With annual house price inflation in Dublin of 25% plus, it is about time they intervened. Anyone who is in the "not a bubble" camp should take note

handlemaster

Buyers might also rush in before new rule takes hold

Lucy B

Great. Typical!! That is ridiculous. 3 times my husbands salary would not be enough for the house we want, we wouldn't want a huge mortgage, and would be able to easily repay the amount we want, but with this new rule we would be short about 40k. Will this really come in as a new rule soon??? Or would they base it on your affordability to repay? That makes more sense surely, not just a loose 3x or 4x your income, surely each case is unique?

mr_seer

handlemaster wrote: »

Buyers might also rush in before new rule takes hold

These measures will burst the Dublin bubble. Rushing in would seem to be pretty foolish

mr_seer

Lucy B wrote: »

Great. Typical!! That is ridiculous. 3 times my husbands salary would not be enough for the house we want, we wouldn't want a huge mortgage, and would be able to easily repay the amount we want, but with this new rule we would be short about 40k. Will this really come in as a new rule soon??? Or would they base it on your affordability to repay? That makes more sense surely, not just a loose 3x or 4x your income, surely each case is unique?

These measures could well reduce the price of the house you want by more than EUR 40k. If so you are significantly better off than over borrowing. People believe that generous bank lending benefits them but all it does is push house prices up

jimmycrackcorm

There would not have been a bubble had the banks stuck to the traditional 2.5 times main salary plus 1 x second

hmmm

About blooming time, what has taken them so long? Massive over-lending was one of the key abuses of the property boom.

Lucy B

mr_seer wrote: »

These measures could well reduce the price of the house you want by more than EUR 40k. If so you are significantly better off than over borrowing. People believe that generous bank lending benefits them but all it does is push house prices up

Wouldn't that lead to something else though? As in all the house prices dropping? More people again would be looking to buy as prices would be cheaper, but people who own homes would be less likely to put their homes on the market as they wouldn't get the price they want for it??
Which would lead to more lack of supply? Vicious circle. Why can't they just leave things be? Finish off ghost estates, lend to builders/developers? Something positive?

Mongfinder General

Lucy B wrote: »

Wouldn't that lead to something else though? As in all the house prices dropping? More people again would be looking to buy as prices would be cheaper, but people who own homes would be less likely to put their homes on the market as they wouldn't get the price they want for it??
Which would lead to more lack of supply? Vicious circle. Why can't they just leave things be? Finish off ghost estates, lend to builders/developers? Something positive?

Spot on.

I wonder what legislation could be used to introduce a cap/ratio on lending for mortgages

red dave

Mongfinder General wrote: »

Spot on.

I wonder what legislation could be used to introduce a cap/ratio on lending for mortgages

There would have to be a cap on rents also if that were the case because rent prices would sky rocket if cap on lending introduced for mortgages?

mr_seer

Lucy B wrote: »

Wouldn't that lead to something else though? As in all the house prices dropping? More people again would be looking to buy as prices would be cheaper, but people who own homes would be less likely to put their homes on the market as they wouldn't get the price they want for it??
Which would lead to more lack of supply? Vicious circle. Why can't they just leave things be? Finish off ghost estates, lend to builders/developers? Something positive?

I agree completely that they should leave things be. As it stands it is the most manipulated and rigged property market in the world. The Code of Conduct on Mortgage Arrears, NAMA, State owned banks actively keeping supply away from domestic buyers, tax incentives for investors (CGT) and a massively inefficient legal system leading to zero repossessions (despite 25% PDH default levels) all mean that prices have been artificially inflated. If these points were addressed and we had an actual free market house prices would be about 50% lower but we would have a real and sustainable recovery happening by now. As it stands, we are in for another large downward correction IMO and it will bring the banks and possibly the public finances along with it

Victor

A number of rules should apply. In particular, they should look at the cases where people are in serious negative equity and/or behind in payments.

* Loan to value ratio should not exceed about 90-92%, based on the lower of the valuation of the property now and 12 months ago. This includes both buyers and developers.
* Account should be taken for the stage in the economic cycle.
* Repayments should not exceed about 30-40% of income.
* Approximately 2.5 times main salary plus 1 x second.
* Lending should account for the life stage people are at.
* No mortgages longer than 30 years.
* Fixed interest rates for the life of the mortgage should be available.
* Banks staff bonuses and commissions should be based on the performance of the loan over its life or a substantial part thereof.
* Exposure for any one bank to any one lending sector (by various measures) should be limited.
* More critical examinations of borrower income and expenditure need to be taken - lots of stories of falsified applications during the boom
* Banks should not be exposed to both sides of a property development transaction, i.e. lending / investing in the developer and more than a certain percentage of the buyers.
* The construction and property development industries should be separated, such that a business in one area should not be exposed to more than X% of turnover / assets in the other area.
* No one shareholder should be allowed hold more than a certain percentage of the shares of a bank. This should apply in particular to those involved in property development, the construction industry and their supply chains. This affected the Gallagher, Fitzpatrick and Quinn situations and proved to be a serious problem. Similar restrictions should also apply to directors and management.
* Banks should be prohibited from lending (more than a certain amount?) to staff, directors and possibly shareholders (who hold more than a certain percentage of share?).
* There should be a requirement for the periodic change of auditors of businesses, every 3-5 years.
* Vendors should be required to have draft contracts and independent property inspections before advertising the property for sale.
* Bids on property should be in writing and available for public inspection.
* Property tax rates should increase.

Lucy B wrote: »

Finish off ghost estates

Many ghost estates are ghost estates for a reason and should not be 'completed'.

MouseTail

Its just a consultation paper, its a long way from legislation or even self regulation yet. I think this is a cautionary measure in any case. Banks are currently conservative in their lending and would tend to fall at or below those mentioned.

Victor much of what you recommend falls outside the Central Banks remit.

johnp001

mr_seer wrote: »

I agree completely that they should leave things be. As it stands it is the most manipulated and rigged property market in the world. The Code of Conduct on Mortgage Arrears, NAMA, State owned banks actively keeping supply away from domestic buyers, tax incentives for investors (CGT) and a massively inefficient legal system leading to zero repossessions (despite 25% PDH default levels) all mean that prices have been artificially inflated. If these points were addressed and we had an actual free market house prices would be about 50% lower but we would have a real and sustainable recovery happening by now. As it stands, we are in for another large downward correction IMO and it will bring the banks and possibly the public finances along with it

Although a lot of the interventions or manipulations mentioned above have stopped a stable property market from emerging I would be in favour of central bank intervening to limit the amount that the banks can lend because the banks have no reason to limit this themselves as their previous reckless lending was paid for by taxpayer bailout while all the short term profit of the reckless lending was enjoyed by the shareholders and bankers(in the form of bonuses etc)

Frank Lee Midere

Lucy B wrote: »

Great. Typical!! That is ridiculous. 3 times my husbands salary would not be enough for the house we want, we wouldn't want a huge mortgage, and would be able to easily repay the amount we want, but with this new rule we would be short about 40k. Will this really come in as a new rule soon??? Or would they base it on your affordability to repay? That makes more sense surely, not just a loose 3x or 4x your income, surely each case is unique?

You are a good example of why we have bubbles in the first place.

Edit. I was a bit harsh. They will take into account ability to pay. So 3x is an approximation.

It's good though. Unlimited credit and limited supply would be a nightmare.

As for the cost of building - why is it so high here?

Frank Lee Midere

johnp001 wrote: »

Although a lot of the interventions or manipulations mentioned above have stopped a stable property market from emerging I would be in favour of central bank intervening to limit the amount that the banks can lend because the banks have no reason to limit this themselves as their previous reckless lending was paid for by taxpayer bailout while all the short term profit of the reckless lending was enjoyed by the shareholders and bankers(in the form of bonuses etc)

Yeah. The moral hazard from the last bubble was twofold: lenders learning they can lend what they want, and borrowers can borrow what they want.

Lucy B

Frank Lee Midere wrote: »

You are a good example of why we have bubbles in the first place.

Edit. I was a bit harsh. They will take into account ability to pay. So 3x is an approximation.

It's good though. Unlimited credit and limited supply would be a nightmare.

As for the cost of building - why is it so high here?

Yes, lol, a bit harsh!

No just annoyed to read the article as we have been saving hard and doing all the right things to buy the house we have been renting, and are so close now, literally months awY from buying, looking for average mortgage and have no interest in paying a lot for a house. Would rather have extra money to save or pay off mortgage asap. So feel that we are the sensible ones, we were going to buy back in the crazy days but felt it was just too much of an asking price for not so much house and carried on renting.

Anyway, hoping that the market will find some sort of equilibrium soon, it has to. Wonder will there be anything to help from the government in the upcoming budget???

flintash

youre hopeless lads. do you really think the goverment is willing to help honest working Joe to obtain cheap propery? and even if so, would they manage not to screw up?
and look around the world- there is no cheap property anymore.so ireland wont be different.

quadrifoglio verde

As much as I hate state interferance, sadly there are people in society who are too willing to overstretch themselves to buy a property that they can't afford and need protecting from themselves.
One only has to look at the levels of arrears to realise this, there's a lot of people in arrears simply because they borrowed more than they could afford too.

quadrifoglio verde

Victor wrote: »

A number of rules should apply. In particular, they should look at the cases where people are in serious negative equity and/or behind in payments.

* Loan to value ratio should not exceed about 90-92%, based on the lower of the valuation of the property now and 12 months ago. This includes both buyers and developers.
* Account should be taken for the stage in the economic cycle.
* Repayments should not exceed about 30-40% of income.
* Approximately 2.5 times main salary plus 1 x second.
* Lending should account for the life stage people are at.
* No mortgages longer than 30 years.
* Fixed interest rates for the life of the mortgage should be available.
* Banks staff bonuses and commissions should be based on the performance of the loan over its life or a substantial part thereof.
* Exposure for any one bank to any one lending sector (by various measures) should be limited.
* More critical examinations of borrower income and expenditure need to be taken - lots of stories of falsified applications during the boom
* Banks should not be exposed to both sides of a property development transaction, i.e. lending / investing in the developer and more than a certain percentage of the buyers.
* The construction and property development industries should be separated, such that a business in one area should not be exposed to more than X% of turnover / assets in the other area.
* No one shareholder should be allowed hold more than a certain percentage of the shares of a bank. This should apply in particular to those involved in property development, the construction industry and their supply chains. This affected the Gallagher, Fitzpatrick and Quinn situations and proved to be a serious problem. Similar restrictions should also apply to directors and management.
* Banks should be prohibited from lending (more than a certain amount?) to staff, directors and possibly shareholders (who hold more than a certain percentage of share?).
* There should be a requirement for the periodic change of auditors of businesses, every 3-5 years.
* Vendors should be required to have draft contracts and independent property inspections before advertising the property for sale.
* Bids on property should be in writing and available for public inspection.
* Property tax rates should increase.

Many ghost estates are ghost estates for a reason and should not be 'completed'.

I'd add that all couples of child bearing age, should be stress tested as such. Just because your both 26 earning 100k combined and have no children, doesn't mean that in 4 years time you won't have two kids with another on the way and one of the parents staying at home.

Correct me if I'm wrong but as far as I know couples with no kids are stress tested differently to those with kids, which always came across as strange as it only takes 9 months

johnp001

quadrifoglio verde wrote: »

As much as I hate state interferance, sadly there are people in society who are too willing to overstretch themselves to buy a property that they can't afford and need protecting from themselves.
One only has to look at the levels of arrears to realise this, there's a lot of people in arrears simply because they borrowed more than they could afford too.

And society needs protection from them too as most of them are still living in those houses they cannot afford at the expense of the taxpayer via the state-owned banks.
In a functioning, non-corrupt state it would be assumed that effective lending limits should be imposed by the banks themselves. In Ireland, however, the regulator comprehensively failed to regulate and the banks profiteered due to this.
Some sort of limits need to be enforced by some entity with a vested interest in the long term stability of the economy.
The stability of the economy cannot be dependent on trusting that people will borrow responsibly. Particularly now that the effects of borrowing irresponsibly have been shown to be so positive for the individual at the expense of wider society.

The_Conductor

quadrifoglio verde wrote: »

Correct me if I'm wrong but as far as I know couples with no kids are stress tested differently to those with kids, which always came across as strange as it only takes 9 months

Depends on the lender- but some of them reduce recognisable net income by up to 1k per month, per child- so your net income goes down quite rapidly- and when you then have a rule that mortgage payments must equal less than 40% of net income- you see how borrowing capacity rapidly dwindles.

For the record- as a father of 2 young children where both parents try to work- childcare and sundry bills exceed the aforementioned 1k per month. You may get cheaper childcare down the country- but then you may have a lower gross income- or your transport costs may be higher- its all swings and roundabouts.......

Personally- given recent comments from Noonan- I can't see him signing off on the Central Bank proposals- though many of them are in fact elucidating actual practices in place in many lenders........

Also- I'd echo the shrewd comment by a poster a few posts up- who accurately observes that some people need to be protected from themselves. Its almost strange how many people see their maximum borrowing capacity- as a target to be met. Just because you can borrow 400,000 doesn't mean its a good idea to do so........

jmayo

Lucy B wrote: »

Wouldn't that lead to something else though? As in all the house prices dropping? More people again would be looking to buy as prices would be cheaper, but people who own homes would be less likely to put their homes on the market as they wouldn't get the price they want for it??
Which would lead to more lack of supply? Vicious circle. Why can't they just leave things be? Finish off ghost estates, lend to builders/developers? Something positive?

High house prices and rapidly increasing house prices are not good for the economy.
They are great for those already insitu, but for everyone else especially younger generations starting out they are bad.
The one thing that has to be prevented is the availability of high amounts of cheap credit and this idea is exactly to try and prevent that.
I do think that the state of the Irish banks, the lack of foreign banks, the vigilance of the ECB/EU and the lack of cheap worldwide credit will be do this anyway.

Victor wrote: »

A number of rules should apply. In particular, they should look at the cases where people are in serious negative equity and/or behind in payments.

* Loan to value ratio should not exceed about 90-92%, based on the lower of the valuation of the property now and 12 months ago. This includes both buyers and developers.
* Account should be taken for the stage in the economic cycle.
* Repayments should not exceed about 30-40% of income.
* Approximately 2.5 times main salary plus 1 x second.
* Lending should account for the life stage people are at.
* No mortgages longer than 30 years.
* Fixed interest rates for the life of the mortgage should be available.
* Banks staff bonuses and commissions should be based on the performance of the loan over its life or a substantial part thereof.
* Exposure for any one bank to any one lending sector (by various measures) should be limited.
* More critical examinations of borrower income and expenditure need to be taken - lots of stories of falsified applications during the boom
* Banks should not be exposed to both sides of a property development transaction, i.e. lending / investing in the developer and more than a certain percentage of the buyers.
* The construction and property development industries should be separated, such that a business in one area should not be exposed to more than X% of turnover / assets in the other area.
* No one shareholder should be allowed hold more than a certain percentage of the shares of a bank. This should apply in particular to those involved in property development, the construction industry and their supply chains. This affected the Gallagher, Fitzpatrick and Quinn situations and proved to be a serious problem. Similar restrictions should also apply to directors and management.
* Banks should be prohibited from lending (more than a certain amount?) to staff, directors and possibly shareholders (who hold more than a certain percentage of share?).
* There should be a requirement for the periodic change of auditors of businesses, every 3-5 years.
* Vendors should be required to have draft contracts and independent property inspections before advertising the property for sale.
* Bids on property should be in writing and available for public inspection.
* Property tax rates should increase.

Many ghost estates are ghost estates for a reason and should not be 'completed'.

Great ideas Victor, but shag all use if the powers that be (i.e. regulators, Dept of Finance, government) are unwilling to actually implement the rules and regulations.
We actually had rules in place to prevent some things, but the people implementing them were too busy turning a blind eye, probably too interested in ar**licking in order to get their feet under a bank desk or on a bank board.
Dear God does anyone not realise that the first IFRSA cheif actually asked an AIB internal auditor to withdraw his allegations that the bank was overchagring it's own customers.

That would be like the local Garda superintendent asking a witness to withdraw their statement about a crime.

As you alluded to above, we had learnt enough lessons dating back to the 70s with Ken Bates, Patrick Gallagher, joe Moore, etc that we should never have allowed the fitzpatricks or fingletons do what they did.
But we did.

Not for one minute excusing gimps like neary, o'reilly, hurley, but as can be seen by the recent Goldman Sachs Fed tapes, regulators worldwide are still up the holes of the major financial institutions.
How we solve that I don't know.
Prevent regulators quickly getting high paying jobs with banks ?

One of the biggest thing that needs to be overhauled within the banks is the bonus structure.
As long as bankers are rewarded for selling loans and fancy financial instruments they sure as hell will keep doing it.
And I don't think that has changed at all since the bust.
Sometimes I think the only thing that will change things is a complete implosion.

P. Breathnach

Victor wrote: »

A number of rules should apply. In particular, they should look at the cases where people are in serious negative equity and/or behind in payments.

* Loan to value ratio should not exceed about 90-92%, based on the lower of the valuation of the property now and 12 months ago. This includes both buyers and developers.
* Account should be taken for the stage in the economic cycle.
* Repayments should not exceed about 30-40% of income.
* Approximately 2.5 times main salary plus 1 x second.
* Lending should account for the life stage people are at.
* No mortgages longer than 30 years.
* Fixed interest rates for the life of the mortgage should be available.
* Banks staff bonuses and commissions should be based on the performance of the loan over its life or a substantial part thereof.
* Exposure for any one bank to any one lending sector (by various measures) should be limited.
* More critical examinations of borrower income and expenditure need to be taken - lots of stories of falsified applications during the boom
* Banks should not be exposed to both sides of a property development transaction, i.e. lending / investing in the developer and more than a certain percentage of the buyers.
* The construction and property development industries should be separated, such that a business in one area should not be exposed to more than X% of turnover / assets in the other area.
* No one shareholder should be allowed hold more than a certain percentage of the shares of a bank. This should apply in particular to those involved in property development, the construction industry and their supply chains. This affected the Gallagher, Fitzpatrick and Quinn situations and proved to be a serious problem. Similar restrictions should also apply to directors and management.
* Banks should be prohibited from lending (more than a certain amount?) to staff, directors and possibly shareholders (who hold more than a certain percentage of share?).
* There should be a requirement for the periodic change of auditors of businesses, every 3-5 years.
* Vendors should be required to have draft contracts and independent property inspections before advertising the property for sale.
* Bids on property should be in writing and available for public inspection.
* Property tax rates should increase...

Some good ideas there, worth debating. I would not agree with every one of them, but when anybody puts so many ideas out there in one batch, it's unlikely that people will agree with every one of them.

You have touched on the idea of conflict of interest, a matter that has not, in my opinion, received sufficient attention; it is undesirable that a financial institution finance a developer and also finance that developer's customers. The problem is that the banking sector operated like a quasi-cartel: while I do not think there was deliberate co-ordination, the banks as a collective reinforced one another's bad decisions.

My personal idea of a simple fix is to abolish the model of mortgage lending with recourse. If the banks operated in the knowledge that their security was limited to the net proceeds of the sale of a property, they might adopt more prudent policies. [I would allow some recourse if there is evidence of strategic default.]

uli84

Rule, not rule, i only got 2 x my gross salary but then i ve got a baby

mannurse

Cash buyers are a problem. All that money that was lost in the crash wasn't lost. Someone has it. And they are spending it now on property as rents are going up. Population in Dublin is sky rocketing due to inward migration despite large amounts of outward migration. It's the uncontrolled rents that are the problem imo.
Was living near Eccles street, landlord called in one day to up the rent by 200 euro. A poxy multiple apartment converted fire trap. When we said it was not worth it he said that he would get 4 people in there that would pay. Its this attitude that is the problem.

3DataModem

Lucy B wrote: »

and would be able to easily repay the amount we want

I presume you mean at the current unbelievably low interest rates?

GinaI

I keep wondering, when I hear an advice not to buy, where someone who was renting for the whole life, will live when they retire and have no salary to pay their rent anymore? I don't believe pension will be enough to cover rent...so? what is the solution?

Lucy B

3DataModem wrote: »

I presume you mean at the current unbelievably low interest rates?

We will be able to repay our mortgage every month, if rates go up or down or up and up or whatever happens.