The Irish Case for LTV and LTI Caps on New Mortgage Lending

The proposed measures have two declared aims, improving the ‘resilience’ of Irish banks and mitigating whatever house price bubble may be emerging.

Some Irish lenders used to insure the first tranche of mortgage loan losses with UK and other insurers (mortgage indemnity insurance), usually the tranche from 90% down to 75%, charging the borrower for this cover. The lenders appear to have ceased doing this, with exquisite timing, around 2002/2003. It is surprising that there has been no discussion of this aspect of lender exposure. Is this kind of cover available anymore? If the CB could insist on cover, this improves resilience.

So would more equity, readily achieved through a ban on dividends or share buybacks. If the banks start to earn profits again, will they be allowed to resume dividend payments regardless of leverage ratios? Remember AIB declared a dividend in August 2008.

House price appreciation remains exempt from Capital Gains Tax, the Flippers’ Charter. This potential contribution to the next bubble could be removed in the upcoming budget, applying CGT to appreciation from the next transaction onwards.

Meanwhile the 80% LTV limit is hard to argue with. There are deeper issues about leveraged retail banks leveraging households to ‘own’ residential property, and not just for Ireland. In the distressed Eurozone countries the missing equity is being provided free by Treasuries with no fiscal headroom and no central bank.

“This potential contribution to the next bubble could be removed in the upcoming budget, applying CGT to appreciation from the next transaction onwards.”

Even partial CGT on gains for property, e.g. charged at 10% rate for PPR, would make a difference. Doesn’t need to be all or nothing.

The government position seems to be, in and around Dublin at least:

a) there is a property supply shortage fuelling rapid price rises
b) more supply is required to stop property getting even more expensive – Nama should get involved
c) property prices are too low and need to be increased a bit, because:
d) currently property is so cheap that it isn’t worth developers building giiven the limited potential profit

I’m sure government response to the CBI proposals will be clear and coherent.

A home represents a highly leveraged exposure to a single,stationery plot of property-one of the riskiest assets one can imagine.

” Perhaps since construction costs are so high in Ireland, we need to allow unusually risky mortgage lending to compensate for high construction costs? It seems a bad idea to sacrifice prudential financial regulation to encourage property price trends or as a bulwark against high construction costs.”

That seems to be where we are at. Unwilling to confront the fundamental issues affecting house cost (mostly not those of the labour or material costs), the country is forced to go higher and higher in terms of LTV and LTI. Otherwise larger and larger swathes of the middle class will live their lives as “tenants-at-will”, a status that has a nasty historical resonance in Ireland; regardless of who the landlord was, English or Irish.

But lets look in more detail at the high construction cost.

Site cost: 50,000 per unit= Approx 800,000 per acre for the land. At least 40,000 per unit super profit on land.
Development levy =10,000 [Fingal €76.13 / sq mtr]= Tax on FTB.
Part V: Social Housing Levy= 20% of site cost=10,000= Tax on FTB
VAT at 13.5% of 300,000 = 40500 VAT on sale.

So on a house that sells for 340,500. We have land profits and taxes as follows:
Land holder profit 40,000.
Dev levy 10,000
Part V 10,000
VAT Tax (Gross) 40, 500

Total 100,500

The State could tackle housing costs if it wished but the State does not want to. There are too many snouts in the trough, most State snouts, including the snouts of people making all the relevant decisions.

PS: Perhaps the Minister for Housing could sort it out, if we had a Minister for Housing.

Housing Agency wants smaller units:

http://www.irishtimes.com/news/environment/housing-agency-calls-for-smaller-apartments-in-dublin-1.1951580

Prefabs to house homeless from Dublin City Council, and now large butter boxes to suit a ““young mobile workforce” from the Housing Agency.

This new Quango, the Housing Agency, is even beginning to make the Fiscal Advisory Council, looks good.

Who are the Housing Agency. Is it not time to arrive them before a Dail Committee to establish what relevance they have to the solution of Housing Crisis No 3 (not enough housing), even as Housing Crisis No 1 (too many houses) and Housing Crisis No 2 (Free Mortgages particularly for BLT landlords), remain very much with us.
Omni-shambles does not begin to describe the government handing of housing needs.

@ Joseph Ryan

Greater London with an area of 1,600 square kilometres had a population of 8.2m in 2011, up from 7.3m in 2001 while Greater Dublin (county) with an area of 950 square kilometres had a population of 1.27m in 2011 and 1.12m in 2002 – – while the area of County Dublin comprises 92,200 hectares, 40,200 hectares are farmed. So the urban density is higher than the 1,336 persons per sq. km suggested by the data. This compares with London’s density of 5,125 persons.

In 2011 at the nadir of the recession, Dublin’s population rose by 83,000 from 2006, the peak of the bubble: +19,000 in Dublin City; +33,000 in Fingal (North) and +31,000 in Dublin South.

Nimbyism and aversion to high rise as the wrong lessons were learned from the social disaster of the Ballymun towers in the 1960s, has resulted in this proposal for Tokyo-style rabbit hutches.

Imagine how much storage space there would be in these places!

Just when you thought some smidgen of sanity might be beginning to percolate through the nanopores of some folks’ crania — we are afflicted with this piece of vacuous, idiotic, bureaucratic b*ll*cks!

“Build smaller apartments to tackle shortage, says Housing Agency chief”

And this is supported by CIF (they would, wouldn’t they!) and RIAI – which if true of the latter, is actually an act of betrayal of the citizens of this city.

Wisely? – the City Council planners seem to have given the proposal short shrift, but the mere fact that such a appalling proposal was even made is deeply worrying.

Mr Enda promptly gave the Agincourt Salute to the Fiscal Council’s recent budget proposals – will Mr John fetch the same? He really should.

I do not have data for the population that reside within the Nth. and Sth Circulars – I guess its pathetically small by European urban standards. I reckon, with enlightened and enthusiastic local government, we might be able to house an extra 100,000 using the existing housing stocks – and I expressly mean lots and lots of families, in spacious apartments – 170 sqm, with utility areas built-in. Any chance of this? I know. I know ……

Mind you, the longer the current useful idiots pfaff about with the residential housing matter (its not a crisis – yet), the more likelihood of a nasty political backlash. Its just the sort of stuff that could be exploited by an entrepreneurial politician.

and this … (h/t JR above)

So on a house that sells for 340,500. We have land profits and taxes as follows: Land holder profit 40,000: Dev levy 10,000; Part V 10,000
VAT Tax (Gross) 40, 500

Total 100,500

You mean the unfortunate purchasers of new residential properties will have to pay this amount of ‘property tax’ – once they sign, and before they even move in? Better keep that under wraps, its “Blood to a vampire!”

I raised this on a previous thread but will mention it again. We all know that some assets belonging to Nama, in the possession of banks, or acting as the security on loans sitting on Irish bank’s balance sheets, consist on undeveloped land. That provides a ‘reason to try to keep land prices as high as possible while the above are in public ownership to one extent or another.

That is shore up their balance sheets.

If you leave that aside as a slightly grubby rationale for policy affecting something so fundamental as a country’s ability to have its housing economics actually provide housing for its people, then you have to ask the question: why is it a good idea to have the price of land on which the owner may build houses multiples higher than land economically used for agriculture?

It seems particularly odd, given that agricultural land prices are already artificially inflated by the Common Agricultural Policy payments schemes!

Does anybody think this is a good idea, and if so, why?

Ben Bernanke, former Fed chairman, said this week that his bank had refused to refinace his mortgage.

More precisely, the bank’s computer system had rejected him because his employment status had switched from a steady job to a freelance status.

In Ireland given the difficulty of repossession, banks would unlikley be motivated to even cut the LTV for people with non-permanent employment.

On the rent side, in France Hollande’s first government introduced rent restrictions but they are now being eased because construction fell.

Irish banks shouldn’t of course be allowed revert to the bubble days.

Accountancy firms and employers routinely lied about clients’ net worth and employee earnings.

That can be easily fixed via the Finance Bill with penalties in respect of verifying a previous year’s tax return for a business owner and an employeee’s P60.

@Michael Hennigan

“In the US land accounted for 20% of the total cost of a house. In Denmark the figure was similar while in Portugal the land factor dropped to 15%.”

It is important that you keep shining a light in places that the Irish establishment would like to keep hidden; hidden to the benefit of the insider circle.

@BWS

“How did our residential property prices increase by 350% from 1995 until 2007? Material costs did not increase by that amount. Neither did labour costs. Neither did incomes. So what element/s did increase? Land prices? Levies? What? And why?”

A far more important set of questions that the bank investigation is likely to pose or answer.

re: Latest mantra: There is no bubble?

http://www.independent.ie/business/personal-finance/property-mortgages/terenure-gentility-30633652.html

People should look at this 1510 sq ft Terenure terraced house with no back garden (just a paved area), going for a ‘song’ at €750000. Any builder will build for €250,000 (excl site), giving a ’embedded’ site cost €500,000 for probably less than 1/10 of an acre, giving a per acre site value of about €5,000,000.
But there is no bubble!!!

Apart from protecting the banks, I would see such limits as also protecting borrowers to a certain extent -from their own recklessness and from runaway house price increases. This would be the obvious political response to any exchanges in the media along the lines of your Family A and Family B example.

However, I think it would be acceptable to allow first time buyers to have a slightly higher cap than everyone else. Just to help them get started, I think the State and indeed they themselves can assume a little extra risk for the first few years of their first loan. But keeping the majority of loans on a tighter cap, would curtail the bubble and protect the banks from future crisis.

I actually don’t think it will change who secures a house at all. In your example of Family A and B competing for a house, I would anticipate Family A would reduce their maximum bid in line with the reduced expectation of future price increases. Family B would end up with the house as before, but at a lowered price.

@ tull

the bar over at the other thread is closed but we can get a drink here. Re the Axis powers

http://www.theguardian.com/commentisfree/2014/oct/05/catalonia-independence-more-than-nationalism

@ Gav: “I think it would be acceptable to allow first time buyers to have a slightly higher cap than everyone else. Just to help them get started, I think the State and indeed they themselves can assume a little extra risk for the first few years of their first loan.”

Gav, this is the sort of wistful commentary that is, I think, not quite helpful. First time buyers are virgins – you know, nil experience! Whereas the lenders are prostitutes – they do it for a living. Crude analogy – but it seems to fit.

A home purchase is a mighty big financial undertaking, and God help the unfortunate borrower who gets into difficulty with their repayments. Not only are they likely to lose home, but the lender can pursue them indefinitely – and relentlessly, for all or some of the outstanding loan. And if that was insufficient, the lenders lard up charges, penalties and usurious interest rates. Its an utter nightmare.

Now there might be some solace if residential property prices trended up by about 3% (compounding) each year, so that a distressed borrower would be able, at worse, to sell the property and repay the loan+ all those obscene charges and penalties. But if we are in a property downturn (and we indeed are), then its a serious political problem. A problem our politicians have every intention of making worse. You could hardly make this stuff up.

If the residential lenders are not going to impose voluntary limits on mortgage lending on themselves – then what?

LTV: 80% or less. And NO loan for transaction costs.

LTI: NEVER more than x2* one salary.

Whichever of these is the lesser.

These will make ALL private residential property ‘affordable’. And yes, it will cause a -60% drop for the majority of South Dublin property values! But we are talking ‘affordability here? Oh! – one last matter. Folk on fixed-time contracts? There’s a nasty one for ye!

Make those two lending metrics the protocol for private residential mortgages and I guarantee you that mortgage defaults will always be < 1% of the loan-book. Not 20% as we now have.

The voluntary adoption (or forcible imposition) of these two borrowing limits will not 'suit' the lenders. Nor politicians. Nor estate agents. Nor developers. Nor builders. Nor newspapers. But it will ensure an orderly 'market' for the consumer. Some folk really do need to make up their minds on this one.

As an aside. There was an 'interesting' article on mortgage lending by Dan O'Brien in yesterday's Sunday Indo (business section). It was quite cautionary in tone: which I found unusual. Straw in wind?

* This multiple is directly linked to existing – and likely, mortgage interest rates. There are other reasons why only one salary should be used. But I might be accused of 'sexism' if I mentioned them!

@ Seafoid

“If the trackers weren’t losing money rates would be lower”

There seems to be a lot of “if my grandmother had liathroidí she’d be my uncle” about this. Are new mortgage rates ultra low or not? Cos u seemed to imply they were up above.

I just saw in a recent copy of the Sindo that KBC will offer max lending of 90% LTV subject to a maximum of 50% of disposable income.

Would anyone here jump into the market now with a mortgage that sucks half of disposable income, given the macro context ?

@ BEB

How much are the banks bleeding in terms of trackers this year ?
And who was the moron who introduced this product to the market?

Its not a bubble, according to Mr Honohan.

Its a “…..bit of a bang in Dublin”, “its a bounce-back….”, ““It’s a very fast price increase and so this is a regime we want to have in place anyway,”

Bang, bounce-back, very fast price increase; I am so delighted that its not a ‘bubble’. That’s means everybody is doing swimmingly, I suppose.

http://www.irishtimes.com/business/economy/mortgage-restrictions-on-way-to-prevent-new-housing-bubble-1.1954023

BEB,

If it is a 30% ROE then mortgage rates for new biz are not “ultra low” QED. By the way, could 30% be way too low…could it be closer to 50% on new lending? Obviously the back book is below zero.

ergo, the 25-40 year olds are subsidising the 40-60 year olds who were over-excited during the bubble and borrowd post 2005 and pre 2009.

http://www.centralbank.ie/press-area/press-releases/Pages/CentralBankpublishesnewmacro-prudentialmeasuresformortgagelending.aspx

20% deposit even. Not sure 80% would be workable 🙂

Re: Risky Business

Gregory wrote,

Ireland needs to exploit its unusual economic geography, making risky bets in various export-focussed sectors such as in pharma, IT, medical devices, agrifood, but not making risky bets with its indigenous financial sector. The downside is too big and the upside is too small.

Something in what Gregory wrote above, describes the situation of Ireland quite well. Gregory mentioned location, being on the cross-point of various ‘large’ currency areas – Sterling, dollar and euro. Being exposed to the sudden swings that happens in those regions. We are like a very little boat in Ireland, that is always being pushed in one direction or another, by the force of those different tidal currents. You get a kind of a ‘rip tidal’ effect, where it becomes nonsensical almost to build any sort of policy, because it just gets torn apart very quickly, because the environment is so mercurial and can change so dramatically.

Witness the phenomenon, whereby Ireland was looking into an abyss only a very short while ago, . . . and now there is almost an air of un-reality, about the economic climate that we are experiencing.

I.e. The guy who had built a boat, a robust vessel (i.e. a ‘policy’, if you will), a few years ago, designed around the nature of the seas at that time, either it would have gotten ripped to shreds by now, or it would just look stupid.

The only thing that could have been worse for Noah, . . . when he built the ‘ark’, than if the rain had come and the flood had happened, . . . was if the rains hadn’t come, and the flood had not happened.

To a certain extent, the fellow in an Irish context who believes in the idea of building a robust policy vessel, capable of sailing on the ocean, in this part of the world, . . . . is sort of like Noah, and the ‘ark’, . . . where you are left standing there on this beach, with all of these animals in two-by-two’s, . . and the sun is shining.

I notice what happens in Ireland, very quickly indeed, is that the guy who is there with is hammer and his bucket of Weathershield Plus (does exactly what it says on the tin), . . . gets treated a lot like an old testament bloke who have got treated like, if he had gotten his weather forecast wrong.

I do remember something though from the years of the Celtic tiger, and I used to hear some version of this argument at the time, no matter where I went to on the island of Ireland, around ten years ago, or less. I would be told, something like (insert voice of young, over confident person), . . . I like to borrow lots of money, . . . because then I have to go out and work for to pay it back. The logic of the time, amongst people of my age, with education and opportunities and no poor days in sight in Ireland as far as the eye could see, . . . was that leverage was good. Without excessive leverage, life didn’t have that motivational factor, that ‘edge’ that you needed apparently.

I don’t know whether this was just brain washing now, or whether there was some kind of logic behind it. Thinking about that a lot in five or six years however, . . . I did come to a conclusion.

It used to be the case, a long time ago, that you went to work, so that some day, you might be able to borrow money.

That equation all flipped upside-down, around the same time as mobile phone technology came in, and everyone started driving the latest automobiles, . . . you didn’t work in order to borrow. Instead, you were expected to borrow in order to work.

Listening to young people interviewed in the media, who talk about current policy of the Irish central bank, . . it made me realize, that the later argument (depending on whether you agree with the logic or not), is not dead.

And not by a long stretch. Not here, not in Dublin at least. BOH.