Sign in. It’s quick, free and it’s up to you.
An account is an optional way to support the work we do. Find out more.
BUYING A HOUSE is the biggest financial decision that most people will make in their lives. It typically comes with a substantial amount of borrowing, lasting for decades. Such a long-term financial commitment can feel daunting.
In considering whether to buy a house and if we can afford it, we often contemplate various scenarios. What if our incomes or house prices fall? What if we want to expand our family? What if we need to move? A tussle between head and heart can emerge.
Precisely because housing decisions are so important for individuals and families, what happens in the housing and mortgage markets is also extremely important for the economy as a whole.
From boom to bust
Housing is the single most important asset of households in the country, while mortgages are the largest form of debt owed by households and the biggest lending exposure on banks’ balance sheets. Developments in the housing and mortgage market can affect every single one of us. Whether we rent or we own. Whether we have a mortgage or not.
History offers many lessons on how things can go wrong. In the 2000s, Ireland experienced an unsustainable, credit-fuelled housing boom. Lending standards became too loose and mortgage borrowing too high. When that boom turned to bust, the costs for society – the human costs – were enormous.
Close to one in five mortgagors were in arrears in 2013. The banking system faced losses it could not absorb. The economy went into a large and protracted recession, with jobs lost and livelihoods shattered.
The impact of the financial crisis was particularly acute for young people – many of whom had not even engaged with the mortgage market by that point in their life.
Around 30% of younger people were unemployed in 2012; thousands emigrated, and wages fell sharply for graduates and new hires. Indeed, the costs of the housing boom and bust of the 2000s are still being felt today.
Housing construction fell sharply during the financial crisis and, in more recent years, the growth in demand for housing has outstripped supply. This has increased affordability pressures both for those renting and those looking to buy a house, affecting younger generations most.
Much needed regulations
Learning the lessons from our past, the Central Bank introduced in 2015 a set of measures that guard against excessively loose lending standards in the mortgage market. While not always understood as such, the measures are essential to our mission of safeguarding stability and protecting consumers.
We know that borrowers with high levels of debt relative to their income or to the value of their house are more likely to face financial difficulties in challenging economic times.
By limiting how much lending banks can extend at high loan-to-income and loan-to-value ratios, the measures guard against the risk of widespread financial distress due to high levels of debt.
We also know that excessively loose lending standards in ‘good times’ can feed unsustainable house price increases, with large costs to society when that reverses in ‘bad times’.
By constraining lending standards, the mortgage measures guard against the risk that a credit-fuelled house price boom like the one we saw in the 2000s re-emerges in future.
Room for manoeuvre
Similar policies were introduced across a number of countries in the decade following the financial crisis. But these are relatively new interventions, with direct and tangible effects on people, especially prospective homeowners.
With that in mind, the mortgage measures have been designed with significant flexibility. The measures limit how much lending can happen at higher levels of indebtedness across the economy, but do not ban that type of lending altogether.
That flexibility enables lenders to take into account individual borrowers’ circumstances when making lending decisions. The measures are also more flexible for first-time buyers than for those who already own a home and are looking to move or buy another property. For example, around one in eight mortgages to first-time buyers were extended above the loan-to-income limit last year.
Lending in Covid
Precisely because the measures can have a direct impact on people, the Central Bank reviews its effectiveness every year. This year’s review was conducted in the context of the unprecedented shock stemming from Covid-19.
Although the pandemic has had a severe impact on the economy, we entered this shock in a much less fragile position compared to a decade ago. Unlike the period preceding the financial crisis, we have not had an unsustainable, credit-fuelled housing boom.
Households have much less debt than going into the financial crisis. Lenders are in a better position to absorb the shock associated with the pandemic. The combination of these factors means that, as a country, we are in a better position to recover from this extraordinary, pandemic-related shock than we would have been over a decade ago.
The benefits of having had the mortgage measures in place since 2015 are most evident in times like these when economic conditions are challenging.
Still, there is no question that the current state of the Irish housing market poses real challenges for people, especially younger couples and families. Affordability pressures are evident in the level of rents and house prices relative to incomes, especially in urban areas.
In 2019, 21,000 new homes were built in Ireland, approximately half of what was built on average each year in the second half of the 1990s. Yet house prices – adjusted for inflation – are now close to 90 per cent higher than what they were then. In a market where housing supply is constrained, additional debt will not help potential homeowners.
It will only lead to more money being spent chasing a limited amount of properties, pushing up prices and adding to affordability pressures. The focus needs to be on tackling the underlying issues around the volume and composition of housing supply.
The lessons from our own history and from other countries are clear: if lending standards get too loose, the subsequent costs to society can be very large. The mortgage measures guard against that, protecting the economy and consumers.
At the Central Bank, we will continue to consider the operation and calibration of the measures very carefully, to ensure that they continue to safeguard the welfare of the people of Ireland.
Vasileios Madouros is Director of Financial Stability at the Central Bank of Ireland. He is responsible for the Central Bank’s work to monitor threats to financial stability and provides advice on the use of macro-prudential tools, or other policy interventions, to mitigate those risks.
To embed this post, copy the code below on your site
Your credit union has been saved to the tune of over €50m (to be paid for by the rest of us) when it should have been allowed to sink like any other unprofitable business….. Stfu and stop complaining, you got lucky.
Luckiest workers in Ireland , especially the mgt that messed it up, and still keep their perks,
The size of the building is outrageous. It is like a national corporate HQ not a local Credit Union. Who ever signed off on that at board level played a large part in destroying the Credit Union. The person that signed off on the 3 million loan should hang their head in shame and that should frankly be investigated.
It would not have been out of line if the Govt. had wound it down and let the depositors go swing.
Siptu now there’s a laugh what a useless union. Where I work we are waiting 5 1/2 months for meeting with our rep.
Credit union giving unsecured loans to property developers…..whose responsible….board of the credit union…shut up complaining and let them go to the wall…….they do not deserve to be bailed out….
Got it in one Tony. Its an unfortunate fact of commercial life. Sink or swim, that’s how the market balances itself out. If we keep propping up certain unprofitable entities we will have a disequilibrium in the market which negatively impacts the market as a whole.
Fact is, some business decisions are very profitable but some decisions turn around and bite you in the donkey – giving unsecured loans to local property developers is a prime example of the latter. I just don’t see why we should bail them out in light of the fact that they are NOT a bank and have built their whole business model around not being a bank.
One was a 3mn Euro loan according to the News. I know the pressure would have been on from FF members to look after the developers but that is outrageous for a Credit Union of that size.
Board of Directors screwed up and instead of the business being let go to the wall and the depositors burnt they are rescued but some are still complaining. They should be thanking God.
They gave out a loan of over 1 million euro, most other credit unions make their shareholders jump through hoops to borrow a few measley euros
It was 3 million & I believe it was to the then chairman !
Wonder is he working with PTSB now.
Probably
Furthermore, why should average level staff get a say on how the business is being run? If kpmg are taken over by Pac in the morning do you think the kpmg staff will have the opportunity to say no??
* PWC
Spot on colin. What would those average level staff know? Only senior execs like David Drumm, Seanie Fitzpatrick, Michael Fingelton, and Eugene Sheehy should get a say on how the business is run. That should keep things are on a sound footing.
Yes Coddler, those with the experience and qualifications to actually run the business as opposed to those with the experience of working for a business. Those who are legally elected to the board of directors rightly have the discretion to determine the future plans of any business. With respect to the average counter worker in the credit union, they are not exactly qualified to determine the future economic and financial performance strategy of a company operating in the financial sector and I mean no disrespect in saying that, matter of factly they do not hold the qualification, much the same way I’m not qualified wither.
Please don’t bring up Drumm Fitzpatrick etc as if they represent the average CEO. They are criminals who engaged in fraud.
If I open a business and employ you Coddler, why should you all of a sudden start telling me what to do with my business unless you’re a shareholder??
I understand what you’re saying colin but chances are the staff are shareholders in this instance. The members themselves are shareholders and it would seem they weren’t consulted.
Well the members elected the board who gambled away a 60 million euro hole in the books. There’s no other option really it’s either liquidate or ingratiate.
Also if a company goes bust like Newbridge CU did, the shareholders actually have no choice in what happens.
Nicola
I think you’ll find that staff consultations would have caused an immediate run on the Credit Union and therefor a complete collapse would have occurred before the rescue was put in place.
Fair enough Colin. The failure of all of the Irish bank senior executives was just an aberration and doesn’t represent the average CEO. We should look instead to the financial giants who ran Lehmans, Bear Sterns, RBS, Fannie May, Freddie Mac, Northern Rock and Lloyds to name a few. We counter staff can only gaze in awe at such business acumen.
Could you use a slightly smaller violin there coddler? What about all the normal hard working directors? You’re simply pointing out specific instances of misconduct. By that logic we could say that because some Italian football clubs were engaged in match fixing then all football clubs worldwide are so involved.
Surely you can see my point? How would someone who worked at a counter have the knowledge and experience to dictate a business strategy as complex as one needed for the financial sector??
I’m not being derogatory or insulting merely stating a fact. I don’t have the knowledge therefore I wouldn’t expect to be consulted if the company I work for needed a bail out.
Also sarcasm doesn’t further your point. Please provide an alternative business model with does not need a board of directors who are responsible for business decisions
How many more specific examples do you need before you begin to see the pattern? A cooperative is an alternative business model which the credit unions generally operate. This has proven to be far more robust than the shareholder, board and executives structure employed by the banks, all of which collapsed into an insolvent heap in 2008. 5 years into the worst recession in the history of the state only one CU from hundreds has gone bust.
At a stretch I can appreciate the ignorance of local people in their emotional response to the takeover of what they perceive to be “their” Credit Union but the involvement of SIPTU when they know full well that the Transfer of Undertakings Act fully protects their Member employees is interference of the highest order and could change the situation from a rescue to a collapse.
Get your sticky fingers out SIPTU and don’t make a bad situation worse!
Agreed… the less SIPTU are on this, the better for the staff.
As soon as the beards show up all credibility is lost
What’s to discuss siptu? Deal is done get over it!
Siptu have met and decided they will setup a special facebook page. SIPTU respectfully ask that all members keep liking the page until something is done. One SIPTU offiicial was quoted as saying “We’re going to like the sh**e out of it” so there.
Correct me if im wrong. This C U gave out loans big ones small ones etc. And now there is a huge hole in its finances. So how did this appear? The loans weren’t/aren’t being paid back. Where has the hole come from? Have their member s just defaulted on their loans. This is confusing ptsb are suddenly the bogey men why?
Whats new all workers are treated like shit in ireland weldone sickmore and all the labour crap
Nice rant…. not quite true though.
Anyways, Im prettry sure existing Ts&Cs of employment are retained by the new owner.
You just know that the loans to developers involve members of FF getting pressure put on the Credit Union Management by the then Govt. to throw the rules out the window for party friends.
Well if if u pay a “Special manager ” €375/hour what do u expect.. Credit Union’s ‘special manager’ has wages cut – to €375 an hour (via @thejournal_ie) http://jrnl.ie/352758
Don’t let the banks take over. Empty your accounts and put your money in another credit union or post office.
Why are the Credit Union members getting a dividend even though this Credit Union is in the red to 60mn+. How is that justifiable.
So Mr Murphy you say you need €3 million for household renovation purposes and your going to pay it back at €50 per week plus €10 to your shares. And I see you’ve already got your mother to sign as guarantor – great. Now you do realise that the €100 you’ve got in shares will be held as collateral until such time as the €3m ıs paid off?
Now that the precedent has been set watch as the CU movement as a whole is “integrated” (taken over) into the banking system…. This is the excuse the banks (with the assistance of the government) were waiting for to muscle into a multi-billion euro business.
How exactly will that happen William?
This is a broken Credit Union. The choice was to either close it and burn the depositors or give it to someone else to run.
Overall Credit Unions are well run, much better than Irish Banks. This was a massive exception.
Yes EM I agree this CU is broken….. and close it they should have! The depositors would not have been burned (gov guarantee up to 100k) and any saver in CU with more than that should not be allowed anyway. The Irish approach to capitalism seems to be privatise profits but socialise debts… wrong, wrong wrong!
@Justin, there is a national asset grab going on in Ireland as we speak. Any assets owned by the state are been prepped for privatisation (usually acquired by the friends of those in government). An industry (if I may call CU’s that) worth several billion is a target worth pursuing by the unscrupulous and given the acquisence of this gov and the last one it’s only a matter of time and application and the assets of CUs will find their way into the banks. No government in their right mind guarantees depositors to the tune of 100k unless it marks a phase in a longer term plan, in this case the acquisition of the CU movement.
The buck stops with the board here……….not the staff, central bank or anyone else. Where are they now
The C U have a much nicer approach to their customers than a bank could ever have, with the T S B doing this job in New Bridge what is coming out now is they were reckless in some of their lending T S B have a foot inside the door and yes the they will change the rules maybe not today but further down the road. A very sad day for the C U customers and employees
A very sad day – customer’s deposits are safe and staff contracts will be honoured. Very sad indeed.
If TSB didn’t step in then the everyone there would have lost all deposits and all jobs.
The Board seems to have ran it in to the ground.
Attention Sickto it’s over the deal done,Yet another hand ringing exercise.
They should have been put to the wall, let them fail! Rubbish management, rubbish unions!
Typical capitalist sell outs. The state should nationalise all wealth.
^^^Like that’s ever worked before
It did in a country called Russia if you’ve ever heard of it.
Go back to Siberia please Bo
Ah Russia. The good old days.
Irony is wasted on these idiots they are the very people they are holding placards about. No wonder it went bust with these fools running the place. Carries about as much weight as Gerry Adams at a peace convention – none
And yet another financial institute bailed out……. When will it stop… They should be left go bankrupt.
I think the true story here can’t come out the directors are gagged central bank of where exactly?? The central bank is just another non Irish commercial entity.
It’s time to ban these evil unions. I refuse to employ anyone who ever was in a union
Protesters are trying to protect money they’ve lost. Did they go to their AGM over the years?
have your say