EVERY NOW AND again we need unelected, unaccountable apparatchiks like Patrick Honohan and his gang at the Central Bank to come along and make unpopular decisions for our own good. This week we have seen the Central Bankers douse themselves in petrol and light the match for the sake of the nation by proposing strict new lending criteria for mortgages.
The rules are indeed a very firm kick in the teeth to first time buyers trying to get onto the property ladder. Though there is room for some exceptions, the Central Bank is saying that most borrowers will be restricted to a mortgage amount of 3.5 times their salaries. This is harsher than the UK rules, which propose a 4.5 times limit.
The even harder pill for people to swallow is the rule that will see deposits required of 20%, which is up from the standard 8-10% banks have been looking for post-crash. It is a world away from the 110% mortgages thrown around during the boom for houses that are now worth less than half what they were going for at the time.
That boom and the bust that followed it is precisely why the Central Bank is proposing these draconian-seeming rules on mortgage lending. The very simple fact of the matter is that had these restrictions been in place from the early 2000s, the post-2008 recession probably wouldn’t have managed to take the entire country down in such spectacular fashion.
Left unchecked, it would happen again
To go over now ancient history, when Lehman Brothers went down and all that bad contagion finally spread through the financial markets, Irish banks were completely screwed because of the property market. We were buying and selling property at some of the highest per square foot prices in the world. When it all fell apart, the State had to step in – and so the whole show collapsed into the abyss of an IMF bailout.
It is worth pausing to remember that Ireland, a country of 4.5 million people let’s not forget, had the single largest economic boom and bust in modern history. Anywhere. And it was fuelled by property prices that boomed to the stratosphere and beyond; it dragged down many people who got leveraged up to the eyeballs and, to this day and for many years to come, it has left many underwater to pay down debts on a property worth a fraction of what they bought it for.
The Central Bank has stepped in now in recognition of a simple fact: left unchecked, it will happen again.
New first time buyers can and will complain that it is not fair. It’s not their fault that any of this happened, as many were still in school when all this last happened. They’re right, this isn’t fair to them now. But what they’re not seeing is that the Central Bank is also protecting them from a future economic shock that has seen so many lives ruined and left so many in negative equity and worse.
If not now, when?
The property market in Dublin, in particular, is only starting to pick itself back up off the floor; the current price rises aren’t credit-fuelled and some will argue that the Central Bank could leave this sort of regulation a few years. The fact is, when we get a few years down the line the tendency will be to call for another delay as we delude ourselves into thinking it’s all perfectly normal once again to have a mad property market. Soft landings and all that will follow, we assure you.
The time to start applying the breaks is when you spot something well down the road, not when you’re right on top of it. We know precisely the playbook of what happens when the property market takes off. We have to try to restrain it.
A lot of folks will complain bitterly about the restrictions on the price of home they can afford and the length of time it will take them to get a deposit together. This thrift, however, will become a market force by itself. House prices will not get to rise into the stratosphere because eventually you run out of rich people to sell them to as cash buyers.
There is a massive market for people who will be buying houses in the sub-€150-350,000 range. This represents couples with individual incomes from not far above minimum wage, €21,500 per year, up to €50,000. Houses will be built and priced to match.
House prices are a funny thing. During the boom I saw people in houses they’d bought in the 1980s for less than the price of a modern deposit find themselves sitting atop a half a million worth of an asset. The house was the same size, it was in the same place and largely of the same configuration. The increased value came from the demand and the supply of cheap credit, not from any tangible improvement.
With these rules in place, property prices will be far more restricted in their movement and be tied to incomes. Houses will be supplied to fit the market.
It’s an unpopular but necessary move
We also assume that everyone will buy a house at the upper end of what mortgage they will get approval for. Perhaps these rules, with the incumbent deposit requirement, might get people to pause and consider whether or not they really want to take on the maximum amount of debt? When you ‘buy’ a house with a mortgage, you’re going into huge debt.
Indeed, a higher deposit will save you quite a bit of money in the long run; because even an additional €10k you contribute yourself will save thousands in interest repayments over the lifetime of a mortgage.
Folks will just have to swallow the pill and save as much as they can, and then purchase a house they can really afford. I know it’s deeply unpopular, but that’s why we have officials like those in the Central Bank. We let populist politicians dictate much of these policies for us and it ended in mass emigration, unemployment, debt and misery.
This is short-term pain, but it is very much to our long term benefit. I don’t know about you, but I don’t care to ever go through that sort of a recession ever again.
Aaron McKenna is a businessman and a columnist for TheJournal.ie. He is also involved in activism in his local area. You can find out more about him at aaronmckenna.com or follow him on Twitter @aaronmckenna. To read more columns by Aaron click here.
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