Mortgage repayments are rising but first-time buyers remain determined to escape the rental market
Since July last year, the European Central Bank (ECB) has raised interest rates 4% from record lows with more increases expected to come down the line.
Despite rising interest rates and home prices that now sit above the Celtic Tiger peak, first-time buyers are still flocking to buy at increased rates as they struggle with high rents and uncertainty of tenure.
Figures this week from the Banking and Payments Federation of Ireland (BPFI) show that while the number of mortgage approvals has dropped when compared to last year, the volume of first-time buyers getting approval has increased and is propping up the market after a collapse in switching activity.
First-time buyers are traditionally the largest cohort of mortgage approvals year-on-year and as a result will often just have to swallow the interest rate increases that come down. However, mortgage brokers have said that it is not the most important factor for applicants as long as they can afford the repayments.
Since July last year, the European Central Bank (ECB) has raised interest rates 4% from record lows with more increases expected to come down the line.
Martina Hennessy, chief executive of mortgage broker Doddl, said the first-time buyers market remains strong and the increasing interest rates have not appeared to dampen demand among this segment of the market.
“That is just pure demand. The labour market is strong, demand for housing is strong. Also, even though interest rates have increased, it is not a deterrent for people to buy because the rental market is so strong,” she said.
Ms Hennessy pointed out that even though interest rates are increasing monthly repayments, first-time buyers would often be paying more in rent each month.
According to BPFI figures, between March and May, the number of mortgage approvals across all categories has been declining when compared to the same period in 2022. However, the increasing number of first-time buyers getting approvals has propped up the market and stopped it from falling off a cliff.
The figures for May show that the number of mortgage approvals dropped 8% overall compared to May 2022. Remortgaging and switching activity dropped a massive 72% while mortgages for residential letting dropped 33.6%.
Approvals for mover-purchasers dropped 4.5%.
Despite the declines in all these categories, approvals for first-time buyers increased by 20.1% to 3,170. The only other category to see an increase was top-up mortgages but this only accounted for 300 of the total 4,928 mortgages approved in May.
The total value of all mortgage approvals in May was close to €1.4bn of which first-time buyers accounted for €926m.
Similar trends were seen in April and March where approvals for first-time buyers increased by 5.3% and 15.7% respectively compared to 2022.
Based on the latest figures from the BPFI, the value of the average mortgage approval for first-time buyers was €292,113. Taking an average 4.5% five-year fixed rate over 30 years, repayments would come to €1,480 per month.
This is compared to an average market rent nationwide for the first three months of the year of €1,750 per month.
“It is still cheaper to buy than to actually rent,” Ms Hennessy said pointing to these figures.
According to the latest figures from Daft, published earlier this week, house prices fell during the second quarter of this year compared to the same period in 2022 marking the first year-on-year decline in three years.
The average price of a home nationally stood at €309,648 but prices remain higher than the Celtic Tiger peak and more than double the low reached in early 2013.
Daragh Cassidy, of mortgage broker Bonkers.ie, said there are a number of reasons why house prices remain so high, chief among them was the chronic lack of supply in the market but also the new mortgage rules introduced by the Central Bank of Ireland at the start of the year.
“Now people can borrow four times their income as opposed to 3.5 times their income. That was always going to support prices a little bit as well.”
Ms Hennessy added that while approvals are up, it could still take people up to six months to secure a home — at which point they will be subject to the new interest rates at drawdown — but buyers aren’t really considering future interest rate increases when it comes to applying for a mortgage.
Trevor Grant, chairperson of the Association of Irish Mortgage Advisors, said along with the resilient economy, another consideration is that the average age of a first-time buyer is now mid-30s.
“The economy has been quite resilient over the last 12 to 18 months. The average age of a first-time buyer now is mid-30s, it used to be less than 30 at one point.”
The typical first-time buyer now is someone who has been working for over a decade with a higher earning capacity than in previous years.
“Their problem is, and the reason I think you are seeing the surge, renting a property and finding a property to rent is extremely difficult,” Mr Grant said.
“If they are struggling to rent, or they feel vulnerable renting, because the landlords are leaving in droves, buying a home is the answer. That is why I think the number of applications is increasing,” he said.
“In many cases, their monthly repayments are lower than the rent. Even borrowing at 4% now, versus 2.5% and 2.75% last year, the payments are still cheaper than the rent they are paying.” David Hall, of the Irish Mortgage Holders Organisation, echoed this saying that underpinning the demand in the housing sector is that tenants have a lot of uncertainty when it comes to their rental property and that is why they are looking to buy.
“Nobody can say with any semblance of certainty that they are going to be in the rented property they are in in five years’ time.
“Don’t underestimate the certainty, it’s not just the financial consideration with landlords selling at the rate they are selling at the moment. Anyone could be next,” he said.
Mr Grant also cited the introduction of the First Home Scheme as a reason why the number of first-time buyers is increasing.
The First Home Scheme allows for the Government to take a share in the value of a new house of up to 30%, to be paid back separately and at a very low-interest rate and interest-free for the first five years.
It effectively means a significant price reduction up front, allowing new home buyers a foot in the door of their own home.
During the first three months of the year, there were 1,627 applications submitted under the scheme of which 1,336 were approved.
“It is not for everyone, not everybody qualifies, not every lender offers it as an option, but it is certainly having an impact because for many first-time buyers it is increasing their capacity to borrow,” Mr Grant said.
Since July last year, the European Central Bank (ECB) has increased interest rates by 4% with another rate increase of 0.25% increase expected soon. Earlier this week, Philip Lane, chief economist at the ECB, said, barring a material change in the current outlook, another rate hike “looks reasonable for July”. Mr Lane said it is too early to decide whether a rate hike in September is needed.
However, further increases beyond July have not been ruled out with the ECB remaining coy about whether hikes will end soon. Christine Lagarde, president of the ECB, has said that it won’t declare an end to this historical cycle of interest rate hikes any time soon.
“It is unlikely that in the near future, the central bank will be able to state with full confidence that the peak rates have been reached,” she told the ECB’s annual retreat in Portugal earlier this week.
Even if interest rate hikes were to be paused, the ECB is expected to keep them high for an extended period of time as it aims to get back to its goal of 2% inflation per year.
The next ECB meeting on monetary policy is scheduled for July 27.
Mr Cassidy said it is good to see the “first-time buyers market is still relatively healthy” but it still could be a while before the true impact of ECB rate hikes is felt as the three pillar banks have not passed on all the rate increases yet.
“The ECB has hiked rates by 4%, the main banks have only hiked their rates by around 1.5% to 2% and even then some of those hikes only came in recently,” he said.
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