New Homes: All eyes watching demand-side initiatives, while supply side lags behind

The Central Bank admits that initiatives like their mortgage measures "have both benefits and costs to society"

The impacts of the relaxing of mortgage lending to four times the salary of first-time buyers, effective since January 2023, will be closely watched in the following months,

There is much delicate balancing to be done in any housing market, and no more so than in Ireland’s case where relieving the strain on one side can cause unexpected or even ‘expected’ outcomes on the other.

No-one is more aware of this than the Central Bank, which last October loosened the tap of finance into the mortgage housing sector, which it had tightened up on back in 2015 when house price inflation was once again picking up, as was housing supply.

The lending restrictions, capped for the most part at 3.5 times salary since 2015 (with scope for banks to make allowances for higher ratios in 15% of cases, with justification), were among the strictest in Europe and did indeed serve to keep some sort of lid on price hikes: there was no repeat over over-eager lending as had been the norm in the Celtic Tiger times.

However, as construction costs and house price inflation continued (albeit at a lower inflationary pace than had the Central Bank not introduced those so-called ‘macro-prudential a rules) another gulf opened up, between what it cost to build houses, and what people could properly borrow.

The widened gap also contrasted with the Catch-22 situation where home-hunters were paying more in sky-rocketed rents for a place to live than they’d have to pay back on a mortgage for a comparable property.

Some builders such as the likes of Glenveagh and Carin Homes had lobbied Government that lending rules were affecting the viability of projects, especially as funding costs to the sector had gone up.

Thus, there was a very real risk that builders and their lenders whether mainstream banks or ‘alternative’ and with already consequent higher charges, would pull back from construction of badly needed houses and apartments, exacerbating the shortage at a time when demand had really ramped up.

So, the relaxing lending moving to four times salary for first-time buyers was announced, and came into effect in January 2023, with its impacts being closely watched in the following months, as will how it interacts with other demand side supports and initiatives such as the Help to Buy Scheme, and the First Home/Shared Equity scheme, with the latter now finding more momentum and interest among home-hunters supports.

Also agreed was raising the loan to value limit for those buying for the second time, to 90% from 80%, and thus on a par with FTBs.

Although independent of Government, the Central Bank was aware of the various anomalies, and when it finally acted it admitted it was aware that the move to address growing build costs could also in itself be inflationary and drive-up house prices, as more people had access to more credit, typically €30,000 to €40,000 in borrowing power.

There’s broad approval for the Central Bank’s oversight to date, and its continuing role, an online survey it had conducted showed 70% support for its permanent role in the mortgage/lending market.

Gabriel Makhlouf, Central Bank Governor, who has introduced significant changes to the Irish mortgage market.

Central Bank Governor Gabriel Makhlouf accepted charges from some commentators and opposition politicians that the changes would impact on the demand side, while not increasing supply and admitted there may be “a modest increase” ' in prices but said there were many other issues also to balance noting last autumn that “while not always immediately visible to people in their daily lives, the benefits of the measures are long-term," he said.  

Affordability and access to housing are key challenges, he said, but stressed “at the core of these challenges is the need to increase the supply of housing.” 

The adjustments were targeted and proportioned, Mr Makhlouf said in advance of the January 2023 moves, adding their review showed the measure up to now “have increased the resilience of borrowers, lenders and the broader economy.” 

“However, we are acutely aware that like all policy interventions, the mortgage measures have both benefits and costs to society. A lot has changed since the measures were first introduced.”