The Central Bank finally ruled late last night that their much speculated mortgage cap was going into effect, but with some modifications for first time buyers and investors.
And boy it’s going to create a hell of a crazy market in 2015. Here’s what we predict will happen as a result of these new rules:
Our Expert Predictions
1. More frantic bidding action in the lower price ranges below €250,000 in order to get a home before prices grow even further;
2. More families trapped in their homes unable to move, thereby worsening the shortage of homes for sale and increasing house prices;
3. Middle to higher income earners affected most of all when buying a new home, have to lower expectations or rent for 5 more years;
4. Extending the rent crisis as potential First Time Buyers have to continue to rent, driving up rental prices.
The Central Bank’s New Mortgage Rules
- First Time Buyers will be able to borrow up to 90% of the value of a property, up to a value of €220,000. Above that limit, the 80% rule applies.
- Existing homeowners will be subject to the 80% cap on all property purchases; with the exception of those in negative equity, switching loans or restructuring mortgages in arrears.
- Investors will be subject to a 70% cap when borrowing to purchase buy-to-let properties.
- However, overall a 3.5 times income cap has been applied to all new mortgage applicants.
What It Means For First Time Buyers
Obviously the backlash against the proposed rules was centred around the affect on First Time Buyers struggling to save a deposit for their first house. FTBs are typically the lifeblood or bedrock of a housing market. Cutting them out would have implications across the market.
So the moderations for FTBs are welcome but are they enough? Let’s look at how the rules will affect different First Time Buyers:
Rural or county dwellers will be barely affected at all. The €220,000 limit will rarely apply to most First Time Buyers nationwide, while average house prices are still below this level. Only a few will have the purchasing power or aspirations to be buying a bigger country pile.
Dublin City Mouse
Your typically Dublin couple will just scrape through. With Dublin’s average house prices around €250,000 this should allow the narrow majority of First Time Buyers to purchase their first house or apartment with a 90% mortgage. Outer suburbs and some inner city areas, plus the cheaper apartment market should be largely unaffected. The 3.5x income cap will also have minimal affect. A average working couple with a combined income of €50,000 – €60,000 will still be able to borrow around €200,000.
Professional Couple Mouse
However, the brunt of these rules will hit a not-small part of the population. Last year we saw plenty of first time buyers shopping for their first property in the €400,000 to €600,000 range.
These are usually a couple of hard-working young professional, in their early 30s looking to settle down. These buyers missed the last boom and have been working diligently since to save a healthy deposit and top-class credit score.
Now these couples will have to double their deposit from €40,000 – 50,000 to over €100,000. Not only that, but the new 3.5x income cap will limit a fairly successful couple with combined earnings of €100,000 to a mortgage of €350,000. Even with a deposit of €100,000 that locks them completely out of the €500,000+ market.
The upshot of this? More competition in the already desperate €300,000 – €400,000 price range.
What It Means For Existing Homeowners
Existing homeowners will be subject to the 80% cap and the 3.5x earnings rule. That means if you are thinking about moving home and seeking a larger mortgage, you will be severely curtailed as to how much bigger you can go. This is the real affect of these rules:
More homeowners trapped in their existing homes because they can’t get a larger mortgage to move. And that means a further shortage of supply of homes.
Fortunately the Central Bank have allowed for exceptions for households in negative equity. It’s only been in the last 18 months that the banks have even started allowing negative-equity house moves. This is quite a substantial part of the population and it’s crucial to keeping housing supply levels high enough for the Dublin market not to lose it’s reason!
Restructuring loans and switcher mortgages are also exempt which is a necessary loophole.
The big concern here is 80% is still a sizeable amount for any household. The typical homeowner looking to trade up will have already paid down some of their existing mortgage, perhaps to 60 – 70% of the value of their current home. They then trade up by applying for the loan to be increased to a percentage of the value of their new home. Previously that could be 90% but now at 80% it will be barely any increase and hardly worth the move.
Only families who have paid down over 50% of their mortgage will be in a good position to trade up. Many will just stay put and improve or just live with their existing home. This is a potential disaster for the supply of middle-tier homes for starter familes, and will only increase house price inflation, not decrease it.
What It Means For Investors
Investors also get a mention and singled out for special treatment. A 70% cap applies to them, and seemingly the 3.5x income cap. Buy-to-let loans used to be based solely on the rental income of the property but now the banks do require the borrower can afford the property based on their own personal income.
This part of the rule probably has the best reason to exist, to prevent rampant speculative investment we’ve seen in the past.
However it’s a few years premature. There are few fledgling property investors putting a little money down to start their portfolio. Instead most buy-to-let purchasers are mature or professional investors, either paying in cash or with more significant deposits and only using limited finance to top up their cash.
This will have little affect on the investors in the market, and although the spectre of the cash-buyer has all but disappeared, they will be looking to clean up while First Time Buyers are hit harder by these rules.
What It Means For House Prices
As we’ve discussed above, below €250,000 there will be little effect, albeit that figure now sets a ceiling that will be reached soon enough. Here’s what we see happening across the markets:
Outside of Dublin the 80-90% cap will have little affect but the 3.5x earnings might make more of a difference.
Actually the country might be a winner here (as the Central Bank probably hoped) as demand filters out to towns outside Dublin where there is more value to be sought. Expect South Wicklow, Kildare and Meath to improve.
Within Dublin, cheaper suburbs and inner city areas will see increasing competition as First Time Buyers frantically try to buyer below the cap before prices rise above it.
The mid-tier market in Dublin, typical 3 to 4 bed family homes between €300,000 to €400,000 will be conflicted. While some First Time Buyers will be locked out, the supply shortage problem will continue to drive prices up over the next 12 months.
There are still plenty of non-First Time Buyers in the market to keep us moving along at these low volumes. Downsizers are busy selling 5-6 bed piles and buying 3-4 bed townhouses and apartments with all-cash offers. While people will continue to move for work or location reasons.
Hopefully once the dust settles from today we will get a clearer picture of market sentiment from all corners. However, it feels like the nation has been holding it’s breath – and I foresee thousands of First Time Buyers rushing to get their mortgage applications completed and bids in on their first home, before it’s too late!