Opinion: Bank rules and building laws adding to house costs

There is unanimous agreement that we have a housing crisis which remains unresolved.

At one extreme, homelessness is rising, while those who would like to buy their own home remain trapped in their desire and right to purchase their first home.

In expressing my views that the Central Bank rules must be amended, I am not advocating a return to the reckless days when banks, not brokers, in their desire to capture market share offered 100% finance and 6/7 times income multiples.

The Central Bank introduced two significant changes at the same time in February this year – a reduction in Loan to Value (LTV) available and, a reduction in Loan to Income (LTI) for first-time Buyers, the Loan to Value is 90% up to a purchase price of € 220,000 and 80% of the difference thereafter.

On a purchase price of €300,000, the maximum loan is €262,000, 87% LTV. For second time buyers, the maximum loan is €240,000, 80% LTV. On Loan to Income, the maximum loan is 3.5 times basic salary.

Taking a purchase price of €300,000, a young couple buying their first home need a deposit of €41,000 to cover their contribution of 13% of the purchase price and €3,000 to cover legal and other costs.

In income terms, they need a combined basic salary of €75,000. A single person needs this salary alone. Let us remember the average industrial wage is €36,000.

It is important to recognise that prior to the amendments introduced, there were very rigid rules in operation which still remain in place following the additional Central Bank guidelines which includes stress testing at 2% above the SVR (Standard Variable Rate) 6.5, ‘Proven Repayment Capacity’ where borrowers have to save or pay rent equivalent to the stressed mortgage repayment over a 6/12 month period and a minimum net income after repayments are made.

We still have over 300,000 existing Tracker Rate mortgage customers. As an incentive for these customers to consider moving house, all banks should allow them transfer the Tracker Rate to the new mortgage over the remaining term.

The new Central Bank rules have exemptions and allow banks lend 15% of their loan book at 90% LTV and 20% of their loan book at greater than 3.5 times income.

However, borrowers cannot qualify for both exemptions and with two months remaining in 2015, AIB, Bank of Ireland and Ulster Bank are closed for any business in 2015 which require an exemption. KBC will only consider income exemptions and PTSB will close for exemptions shortly.

This indicates the rules are not reflective of demand in the market. It creates a difficult problem in 2016 when we have a full year of the new rules and if this trend continues, the exemptions will run out earlier in 2016.

In 2014, 28% of all mortgages were at income levels above 3.5 times salary. I would propose the following changes: 90% finance be allowed on properties up to €300,000 for First Time Buyers; 85% finance be allowed for Second Time Buyers; the exemption levels on LTI (Loan to Income) should be increased to 30%; the exemption levels on LTV (Loan to Value) should be increased to 20%.

A number of economists are arguing that the cost of building a house is the issue not making more credit available.

The purchase price of a new house in Dublin is around €300,000/€325,000. If VAT was reduced to 9% and development levies were abolished, the price would be reduced.

However, one expert in the area has argued that new building regulations have added €30,000 to the cost of constructing a new house.

Builders will argue that a lack of development finance and a requirement to seek secondary funding add to the cost of building that starter home.

We need to build 25,000 new homes per year for the next five years to address this deficit. We must set up a working group representative of those who understand the issues and put a plan in play.

Michael Dowling is chairman of the IBA Mortgage Committee