Property buyers borrow too much yet again

Home-buyers are once again overstretching themselves with outsized mortgages in the fresh frenzy to get on the property ladder.

In echoes of the recklessness that preceded the crash, some banks are lending up to 4.5 times combined income when a maximum of three to four times is considered prudent.

Experts say any increase in interest rates could leave many new mortgage holders unable to repay their loans, and they have called on the Central Bank to intervene to ensure loans do not exceed 80% the value of a property and that lenders carry out proper stress tests.

The warnings come from analysts at Davy’s Stockbrokers in one of four new reports published today that point to growing pressure in the property market.

Davy’s say that while residential property costs five times average income now compared to nine times at the peak, houses can no longer be considered cheap.

“If anything, they already look marginally expensive relative to the UK, which has an average price to income ratio of 4.9 times.”

The average mortgage interest rate is now 4.5%, close to its lowest in the past 40 years, which means rises are inevitable. “We are concerned that over the course of a 25- to 35-year mortgage, homeowners may not be able to meet their repayments as interest rates rise.

“Taking the example of an average three-bed semi-detached house in south county Dublin valued at €441,000 and paying the average 4.5% variable interest rate, a 2% increase would add €518 per month.”

A separate report from myhome.ie shows asking prices continued to grow in the last three months, by 1.4% nationally and by 3% in Dublin, bringing the increases over the past 12 months to 1.1% and 9.6%. The average asking price nationally is now €193,000 and €263,000 in Dublin.

However, transaction prices — the actual price at which a home sold based on the draw-down of mortgages — soared 16.5% nationally and 25% in Dublin.

Economist Caroline Kelleher said the shortage of homes was particularly acute in Dublin where just 500 new dwellings were completed in the first three months of the year.

“Given that the Housing Agency has forecast a requirement of 5,700 units in Dublin alone this year, it is clear the current rate of completions falls significantly short,” she said. “As a result, our expectation is that prices will continue to rise.”

Myhome.ie managing director Angela Keegan said it was essential for the Government to follow through on proposals to scrap the capital gains tax exemption for property investors in the budget.

“We don’t want to see investors competing with first-time buyers when there is already a shortage of stock in the market,” she said.

A third report confirms that while there has been a surge in market activity, it remains far short of normal.

According to GeoDirectory, just 3,640 dwellings were under construction in June this year, and the average turnover rate of housing stock was 1.4% compared to 4%-5% considered normal — adding to demand.

Another report, by Aviva Insurance, found many couples who could not find the property or finance to trade up, were delaying having children because of a lack of space.