Ireland’s housing market is in trouble – could raising the mortgage limit ease property prices while retaining affordability? Marc Coan discusses
As interest rates rise, residential property prices have come under pressure, but the Central Bank raising the mortgage limit from 3.5 to four times income from the 1 January this year may open up significant new demand and prop up prices longer term.
This will cause concern for some, but are house prices the real issue, or are policymakers and opposition parties missing the point? During a recent webinar, economist Ronan Lyons threw new light on the link between building costs, house prices and supply.
Simply put, the more significant the gap between house prices and costs, the greater the supply of new housing. If a developer can make a tidy profit, they will develop more units until supply eventually catches up with demand and prices fall. In a free market, there are then just two ways to make more houses available:
- Reduce building costs; and
- Increase house prices.
Lyon’s analysis suggests that, for the country to hit anything like the 30,000 completions target in the government’s Housing for All strategy, building costs would have to fall by close to 40 percent.
With rising energy costs recently sending material and labour costs spiralling out of control, this seems unlikely.
Sure, the government can introduce tax reliefs for development to stall rising costs but putting them into reverse seems a very tall order.
So, with cutting costs ruled out as an option, let’s turn instead to increasing house prices to get supply back on track.
The real issue with the housing market isn’t housing prices, it’s housing affordability, which is not quite the same thing. What if we could raise prices in the housing market without reducing affordability?
Although this sounds counterintuitive, there are ways to do it. One is to increase the effective income of house buyers through grants or tax reliefs. This is the thinking behind the First Home scheme.
Yet, there is one other significant weapon to increase housing affordability: credit. Simply loosening the current Central Bank mortgage lending rules increases house prices and developer profits.
In turn, it will likely increase the supply of new homes and housing affordability for many who previously couldn’t buy a home.
This is because the Central Bank mortgage rules have locked out thousands of potential homeowners and trapped them in the rental market. This has driven monthly rents way above monthly mortgage repayments.
By lifting the 3.5 times lending cap imposed by the Central Bank, three things are likely to happen:
- Housing affordability will rise as currently trapped renters move to a monthly mortgage;
- House prices will also rise as renters can now compete with investors for property; and
- Housing supply will increase as developers greenlight projects that didn’t make financial sense previously.
Doesn’t that create a credit-fuelled housing bubble like we had in 2008? That seems unlikely for a couple of reasons.
First, we already know people can afford to pay these mortgages as they pay considerably more monthly rent.
Second, even if you completely removed the Central Bank limits, the barriers to getting a mortgage are still way higher than in 2008. The rules imposed on Irish banks by the European banking regulators post-2008 already prevented Irish banks from engaging in reckless lending.
While it was understandable that the Central Bank would take a safety-first approach post-2008, it put the kibosh on many lower- and middle-income families owning their own homes, trapping them into paying spiralling rent, making them poorer and increasing social inequality.
We should be glad to see the back of the 3.5 limit, property investors will welcome the increased purchasing power it creates in a time of rising interest rates, and the public will welcome the inevitable result: more homes being built.
Mark Coan is Founder of online finance guide moneysherpa.ie. All views are those of the author.
This article was first published on The FM Report.