A coherent housing policy needed

In his excellent memoir, Stress Test, Timothy Geithner, the former Secretary of the US Treasury, had a lot to say about housing that resonates strongly in an Irish context, writes Jim Power.

His overall perspective on the residential housing market is that “housing was an impossibly complex issue that didn’t lend itself to simple solutions, and the limitations of our housing programs were a lot easier to identify than they were to fix”. He concluded that eventually “Congress will have to make some tough choices about the mortgage market — not just to reduce the Government’s dominant role, but how to balance the trade-off between safety and accessibility”.

He believes mortgage lenders should require substantial down payments from borrowers, which would make it harder for some families to become home-owners, but would help reduce the risks of the terrible collapse that occurred during the crisis, and he believes higher down payments would act as a shock absorber in the system. However, he was also sensible enough to recognise such change would be a challenge because “powerful real estate and financial interests tend to align with progressive consumer advocates to fight measures that would make mortgage lending more conservative and mortgage credit less affordable”.

These observations sound uncannily like the debate in Ireland. Earlier this week, the Central Bank announced its new guidelines for mortgage lending, which it will seek to put into law over the coming weeks.

The key elements are as follows: For non-first time buyers of private dwelling houses (PDHs) a limit of 80% loan to value (LTV) will apply to new mortgage lending. For first-time buyers, a limit of 90% LTV will apply on the first €220,000 of the value of a residential property, and a limit of 80% LTV on any value of the property above that level. The LTV limits do not apply to borrowers in negative equity applying for a mortgage for a new property. Furthermore, the total value of new lending for PDH mortgages above these LTV limits cannot exceed 15% of the value of all PDH mortgages in a calendar year.

For buy-to-let mortgages, a LTV limit of 70% will apply, which should be exceeded by no more than 10% of the value of all housing loans for buy-to-let purposes. In addition, a loan to income (LTI) limit of 3.5 times gross annual income will apply to all new lending for principal-dwelling homes. This limit will not be allowed exceed 20% of the euro value of all housing loans for PDH purposes. The LTI limits do apply to borrowers in negative equity applying for a mortgage for a new property, but they do not apply to buy to let mortgages.

From the perspective of prudential lending behaviour, these measures make sense. In an environment where Dublin house prices in particular are starting to climb strongly, restricting the amount of money borrowers can pay, should take some of the heat out of prices. In addition, by getting banks to behave more prudently, we might just avoid the banking excesses that threw the country into such misery over the past seven years.

Earlier this week, I commended the Central Bank plans and have got a very negative reaction from some quarters. The arguments I have heard are that this will make it near impossible for first-time buyers to enter the Dublin market, pushing them into an already stretched rental market or out to the commuter belt.

I have also been informed banks are now behaving prudently and such restrictions are not necessary. The banks may be prudent now but, once market competition starts to heat up, they will revert to type and become reckless again. It is what has happened in every cycle and there is an onus on the Central Bank to avoid the taxpayer ever again having to pick up the tab for reckless lending.

I don’t trust the lending ability of bankers, and believe they need to be stringently regulated. On the other objections, policy makers need to ensure supply is ramped up in dramatic fashion in the right areas, and a properly regulated rental market is engineered. A coherent housing policy is needed and we do not have one at the moment.

* Jim Power