The Irish Central Bank is scheduled to introduce new macro-prudential risk controls on Irish mortgage lending, with the new regulations taking effect on January 1st or soon thereafter. One of the regulations will limit most new mortgages to an initial loan-to-value ratio of 80% or less. There has been considerable discussion of the effect of loan-to-value limits on potential property purchasers, but the analysis has been very poorly framed.
The budgeting scenario has been described as follows:
“Consider a couple who wish to purchase a €300,000 property. With a LTV limit of 80% this will require that they save €60,000 for the down payment whereas if they were allowed to borrow 85% they would only need savings of €45,000.”
This oft-repeated budgeting scenario misrepresents the nature of market-wide LTV limits imposed by the Central Bank. This budgeting scenario gives the impression that the policy decision is about imposing/not imposing the LTV constraint on only one particular buyer rather than market-wide. It misses the large compositional effects since leveraged property buyers compete with one another for properties. The degree of leverage allowed in the banking system feeds into property prices, and this affects the opportunity set of purchasers.
A dual statement of the constrained household budgeting problem gives a better framework for thinking about the issue:
“Consider a couple who have saved a down payment of €45,000. If they face an LTV limit of 80% they can only pay €225,000 for a property, whereas if they are allowed to borrow 85% they can pay €300,000.”
This dual statement of the constrained budgeting problem is theoretically identical to the first version, but allows price effects to enter the analysis. The amount spent on property goes up as the amount of leverage in the banking system is allowed to increase. Since the LTV limit applies market-wide rather than on a single buyer, there is likely to be a large offsetting price effect. In theory it is possible, in a worst-case scenario, that the couple without the 80% LTV limit will pay €300,000 for the identical property that would have cost them €225,000 with the limit. The only difference from relaxing the constraint in that case is that they have an additional €75,000 of debt to pay, and in a more highly leverage economy. This is a worst-case scenario, but in any reasonable case there is likely to be a large composition effect through prices.
It might be useful to analyze, from the cash-constrained buyer’s perspective, the implicit cost of funds for the extra borrowing if the Central Bank increased the market-wide LTV limit from (say) 80% to 85%. Consider a cash-constrained couple with savings of €45,000 who would like to borrow as much as possible to spend on property. With the 80% LTV limit the couple is constrained to borrow €180,000 and pays €225,000 for a property. If the limit is relaxed to 85% the couple borrows €255,000 and pays €300,000 for a property. Suppose that the market-wide relaxation of the limit increases property prices (in their market segment, where there are many cash-constrained buyers) by 5%. Than the implicit cost of funds for the extra €75,000 borrowing includes a €15,000 cost due to the composition effect on prices.
66 replies on “Composition Effects and Loan-to-Value Limits”
The examples routinely employed in the media are €300,000 or €400,000 houses. In addition to Greg’s point, it is essential to understand that these figures are Dublin figures. €400,000 buys a mansion in most parts of provincial Ireland. €100,000 is enough to buy a decent small semi-d or country cottage in many areas. Anyone who cannot afford a €20,000 deposit in these areas is hardly a viable credit risk.
There is enough empty space around Dublin, the lowest-density urban area in Europe in its size band, to build another city. Opposition to the CB’s proposals is fuelled by an unspoken resistance to facing this issue.
Great post. Can we count on some of the economists here to get this basic story out there?
Opposition is also fuelled by a news media and a government that spin every new report of price increases as a “good news” story and every report of price falls as calamitous.
@ Gregory Connor & Colm McCarthy
Well said. I haven’t seen a headline ‘Relief for first time buyers as highly leveraged bidding wars set to be curtailed’
The nature of our media means we’re going to be fed bleeding heart stories of people who would have just missed out on a property ‘…becasue of the central banks new laws’. And if we see a drop in propertt prices expect the ‘….we’re in negative equity because of the central bank’ story.
We’re already seeing the insurance sector rub their hands with glee at the prospect of getting involved.
I have one genuine yet simple question. Why not make all property loans non-recourse? Full stop. All risk with the bank. Let them price LTV and LTI accordingly. Surely such a move wouldn’t be long focusing minds?
Whether or not price rises are ‘good news’ and price falls ‘bad news’, or vice-versa, depends on what level they are at. It is not a one-way street. Those who say price rises are always good and price falls always bad are plain silly. But, those who say price rises are always bad and price falls are always good are equally silly.
In 2005-2007, prices were too high, so any further rises then would have been bad news, and the subsequent falls that did occur were undoubtedly good news. However, by 2012, prices were far too low. It was unprofitable for builders to build houses. So, the house-building industry effectively closed down, and 150k construction workers were laid off. These laid-off construction workers have rights too. We are now paying the price for that closedown with increasing housing shortages. So, the rebound from the extremely low house price levels of 2012 is undoubtedly good news. It is leading to a resurgence of construction activity. Tens of thousands of construction workers are going back to work (and paying tax as well as no longer being in need of unemployment benefit). I don’t think these re-hired construction workers will take kindly to taxpayer-funded guaranteed-employment academics telling them that the house price rises since 2012 are bad news and that their industry must stay permanently in a depressed state. However, we don’t want these price rises to get out of hand and repeat what occurred in 2005-2007. They are possibly now getting close to that level in Dublin, so a moderation in price rises in Dublin would be beneficial, but they are nowhere near that level outside Dublin, so further price rises there would certainly be good news for construction workers.
Gregory, one tiny flaw: “market”. The so-called market price of residential property is irrelevant – its the actual price of the specific property (or perhaps several properties) that the buyer is interested in. They are NOT INTERESTED in the market!
Another tiny flaw. Borrowers – when it should be the singular, borrower. Why? The massive risk that any borrower is exposed to – and NO, having joint borrowers DOES NOT ‘spread’ the risk. Risk abides!
The lenders are exposed to a miniscule risk – if they are careful. But they are not. They are reckless – they have virtually nothing to lose if a mortgage goes into default. Its the taxpayer who is exposed to the loss.
All residential mortgages (for your PPR) must be made as non-recourse. The lender must deposit 36% of the loan value with the CB. Cash! Now the lenders will be very, very careful about how much they will lend out – not to the market, but to individual borrowers. They have a vested interest in ensuring loans are viable – with a default rate of 96/week. Hmmmm. Reality has a nasty habit of kicking one in ones goolies! No worries! The 25,000 is not a mistake by the way. Think about it!
Looks like res property for PPR is way over-priced – still.
Bad slip up: pesky cursor must have been in wrong location. Mangled the latter part of the last para above – which should finish as:-
They (the lenders) will have a vested interest in ensuring loans are viable – with a default rate of 96/week. Hmmmm. Reality has a nasty habit of kicking one in ones goolies! No worries! The 25,000 is not a mistake by the way. Think about it!
Looks like res property for PPR is way over-priced – still!
@That’s Legal — Mortgages have to be either recourse, or secured, or both. Mortgages cannot be both nonrecourse and unsecured or there is no enforceable claim. Ireland has chosen to limit the security characteristics of Irish mortgage debt rather than choosing non-recourse features. It is too extreme to have both non-recourse and unsecured features imposed on mortgages since then they are unenforceable claims and payment is just voluntary. So I do not think non-recourse mortgages will ever be feasible in Ireland.
Re: Urban expansion
Colm McCarthy wrote,
We tend to forget sometimes, that cities are in flux, and are always different at different points in their history. There are always new opportunities and new threats. The ironic thing, about Dublin city, is that it had expanded to the largest size ever, by the 1980s. But by the 1980s, the portion of Dublin, that we referred to as it’s center, had shrunk to the smallest size it had ever been.
There is such a thing as a multi-centric, or poly-centric, city, which is preferable maybe in the case of Dublin, to the uni-centric concept, that we have been trying to work with for far too long.
London, to give one example, is an example of a city that doesn’t have one stand-out place, which is the center, but contains a great many smaller centers. There are a great many folk who live in Dublin, who use the city in this manner too. People who don’t visit the center, from one end of the year to the next, but live within a very short distance of it. There are some Dublin natives, who have never been in Trinity college.
We haven’t been very well served, at all in Dublin city, by the lack of imagination of our engineering professionals.
In the nineteenth century, the city in Dublin was a lot more compact, in overall size, but it operated more akin to the multi-centric, idea of a city, that is more common throughout Europe. It is really only a recent trend, that what we refer to in Dublin, as ‘the center’, by the 1980’s had shrunk virtually to a narrow strand of pedestrian activity, between the bottom (better), half of O’Connell street, and the top of Grafton street.
Anything, either side of that narrow wisp of city-center urban activity, was almost a no-go area.
A hundred years ago, when we had a functional tram line system, even when it was powered by horses, the ‘center’ of Dublin, really extended from one canal all the ways to the other one. That is the way Dublin operated as a place, at the time of the foundation of the Irish state.
One of the depressing aspects, about how the engineers routed the underground system for Dublin city recently, is how they obediently followed that narrow urban strand of activity, which had started to become solidified in peoples’ imaginations by the 1980s, or six decades after independence.
It’s probably fairer to say, that in a post-Celtic tiger Ireland, the planned underground system for Dublin city, should ‘pop up’, with terminals in places such as the IFSC, Merrion square area, Baggot street and Fitzwilliam square.
It is probably as well to activate some of these new areas, and also relieve some of the pressure off of the conventional ‘top of St. Stephens green’ locations. I don’t know how people feel about it, but definitely Grafton street, is one of those places in Dublin, which can become uncomfortable, and quite frankly annoying, to navigate through as a pedestrian in normal daily movement.
Yet, our engineers, and city managers are entirely wedded to this idea of Dublin as a city, . . . which is more about itself, than being an urban location, that functions in relation to the entire country, and the rest of Europe. We’ve a lot to do, at the moment, in order to become more flexible and sensible in our thinking, about how we grow the urban environment. This begins, more than anything with how we train the youngest generation today, to look differently at their environment, and how we make it function.
There are an awful lot of these sacred cows, that we can get rid of, and benefit from being rid of, . . . including that idea that Ireland’s capital city, will always be un-affordable as a place in which to work and live. The main challenge though, will be to change the mindset of the youngest generations who are growing up today. We can’t condemn our children to a life milking the same sacred cows, and repeating the sins of their fathers. BOH.
Why not just non-recourse. Nothing else. Bank decides what to lend at what LTV and/or LTI and if the borrower walks away the bank gets the house. What is the main reason it’s not considered? The only reason that comes to mind is that bank risk is state risk. Is there another reason? Genuine question, perhaps I should be putting it on IrishUndergradEconomy but as that site doesn’t exist I thought I’d chance my arm and pose it here.
Agreed! Though in the sometimes too hot, sometimes too cold scenario, one still has to define ‘just right’. As in why is the cost of building a property in Ireland that cost? Is that cost too high? If so, why is it too high? And what can be done to make it lower?
@that’s legal — It does not work for Ireland since nonrecourse mortgages require absolute certainty about quick and reliable repossession. That is fundamental to non-recourse mortgages, otherwise they cannot work. That is not the Irish system at all.
Lots of economic decrying but then economics seems to ignore culture.
Asset bubbles appear to be the only way to generate growth under the system that pertains in the EZ and wider afield. No chance of sustainable growth. Look at the UK now house price growth has slowed down.
Pay rises are anathema. Deflation is preferable to inflation.
“The euro was introduced in 1999, the high-water mark of neo-liberal economics. As such, its institutional design embeds neo-liberal monetary theory which in many regards rests on the same economic principles as the gold standard. These principles are that fiscal policy is ineffective; inflation is caused exclusively by money supply growth; and the real economy quickly and automatically returns to full employment in response to negative shocks.
All three principles have been fundamentally discredited by the current recession. Around the world, countries have turned to fiscal policy to offset the collapse of private sector spending, and the recession would have been far deeper absent that fiscal response. Money supplies have risen dramatically almost everywhere without matching increases in inflation, showing that the money – inflation link is highly contingent upon economic factors such as unemployment, capacity utilisation, commodity prices, and business expectations of profits. Finally, rather than rebounding to full employment, the global economy looks set for high unemployment that will last years. This possibility was Keynes’ message in his 1936 General Theory.
Owing to its neo-liberal monetary arrangements euroland has run smack into these economic realities.”
there is a limit to what regulation can do when the system is insane.
Those points about non recourse not being workable in Ireland are very interesting. What in tour opinion would be the best design for mortgages in Ireland given the cultural context ?
Should subprime-ish stuff be even considered ?
@seafoid — Non-recourse would not work in Ireland, but I am not as confident regarding subprime would work or not. Thanks for asking but I have to confess that I do not have a confident opinion about what design would work best for mortgages in Ireland. Sorry for the uninformative response.
It may be useful to refer to the detail of the recent Dáil statement by the Governor of the Central Bank.
“There has been much discussion of the Central Bank’s consultation paper on macro-prudential instruments, the limits being proposed on high loan-to-value and loan-to-income mortgages. The consultation period ends on December 8 and we hope to be able to announce a finalised set of regulations soon after that date, depending on the complexity of the responses received. It may be asked whether the Central Bank thinks that recent property market developments represent a bubble. That is not specifically the driver of these proposals. Instead, what we want to achieve by these measures is to have in place a standing regime which ensures that a credit-driven bubble does not take hold, and that a new generation does not become over indebted. Absent such a regime, sharp price rises in Dublin – and they jumped by 42 per cent in just 18 months – in a thin market, not yet eliciting a sufficient supply response, could sow the seeds of trouble for the future. Our approach seeks to draw on ongoing research being carried out at the Central Bank, on international experience, and of course on matters which may emerge in the consultation. We want to shorten the period of uncertainty as much as possible.
Accordingly, after making any appropriate refinements (for example, in relation to first time buyers, and to the potential future use of private mortgage insurance as floated in the consultation paper), we will move quickly to confirm the parameters of the standing regime.”
The CB’s decision, by any measure, is of the utmost significance in determining whether anything, in fact, has changed in Ireland in institutional and political terms with regard to the management of the economy.
“— It does not work for Ireland since non-recourse mortgages require absolute certainty about quick and reliable repossession.”
“Non-recourse would not work in Ireland,”
Gregory, I completely disagree. Its simply a complete lack of will on the part of legislators. The same bozoes are very, very quick to enact legislation to crucify the taxpayer – so ….??
The whole idea behind a 20% deposit – and non-recourse, is that it absolutely focuses the mind of the lender on ensuring that any loan they make has a >99% probability that it will perform – no? However, they have ABSOLUTELY NO INTEREST WHATSOEVER in achieving this: NONE! Since they now know with 101% certainty that all losses will in future be transferred to the taxpayers.
Achieving a 99%+ rate on residential (PPR) mortgage performance was once (not so long ago) the default status. So what changed? And now the ‘useful idiots’ are out in force and like Snake-oil peddlers are proffering us a new, magic, environmental friendly, green technology, virtual financial square wheel!
And intelligent folk – old enough to have experienced the real thing and understand how (and why) it was successful, may now actually believe that this outrageous financial propaganda may be ‘better’. Its utterly pathetic. Its economically and socially destructive.
A bit off topic, but were the CB to stick to its guns, which remains to be seen, it would be a further advance on the painful route of reform. Klaus Regling is in no doubt as to the success of the approach, especially in relation to Greece in this extensive interview with Die Welt. He also mentions Ireland at various points, especially the country’s success in reducing unemployment.
He also puts France and Italy firmly in the dunce’s corner. Any drama by the ECB in the matter of QE in the immediate future seems more and more unlikely.
Your #14 looks like a keeper. Tell us more about the attractions of deflation.
Non-Recourse mortgages are an excellent idea. Down payment of 20% minimum 30 year term maximum and secured lines of credit on the house including the mortgage not to exceed 70% of valuation. There is nothing culturally unique about the Irish in Ireland other than their penchant for gross exaggeration of minor differences and inability to recognise when they are being bribed with their own tax Euros. Notice of eviction not more than 90 days.
This puts the onus on the banks to act responsibly. Providing of course that legislation is enacted that forbids the Gov’t from “rescuing” banks at taxpayer expense.
Population density in Dublin has to be increased so as Public Transit, water, sewage, gas and electricity can be cost effective. The North American model of 4 homes per acre is fine when a country has ample coal, oil, gas reserves, Ireland has none of these which means urban sprawl is going to bite us in the ass. There is also the issue of agricultural land being eaten by developers in a country that has had disastrous famines. Let us not forget it was not just one famine it was many the last one being 1879 I believe.
@Mickey Hickey — Your proposal for non-recourse and 90 day or less notice of eviction is entirely unrealistic for Ireland. Sorry but it is not a feasible option.
Re: Income Distribution
One can debate at length, about which model, that Ireland should or should not choose for residential mortgages. One can debate at length, about which model Ireland choose or not, for the residential rental market. And so on, and so on.
Philip created a blog entry today I noticed, about distribution of incomes, in Ireland. It is worth placing the conversation all about mortgage solution choice, in the context, of the information contained in Philip’s blog entry.
Philip’s revenue data summary on income, outlines pretty much the constraints inside of which a solution to the challenge of housing must fit. Needless, to say, those constraints, will make apparent the shortage of room there is for a huge amount of choice and innovation, in the dimension of residential mortgage choice.
What Philip’s revenue data summary on income, should also make abundantly clear is how little room there is for making wasteful mistakes, in whatever solution can be developed to house an expanding and increasing diverse Irish population.
We do possess some flexibility of choice and decision making however, in terms of how we go about housing a population, . . . along certain dimensions. Identify areas where some modest flexibility does exist.
In regards to a challenge of housing the population on this island, I am far from being convinced, that most of the flexibility that people hope to gain advantage from, exists in an area of choosing one residential mortgage ‘model’, above another one.
It must be apparent, that here in Ireland, one should debate every aspect of the problem, and every area in which flexibility may exist in a solution. The one dimensional aspect of the problem, which is about finance and residential mortgage type, is certainly the one, which attracts the majority of attention. I am wondering, if indeed, that is destined to lead us all down the same wrong path? BOH.
The distinction that occurs to me that needs to be drawn is between adapting the cost basis of an economy within a monetary union to make it more competitive (by definition with those countries with which one is competing in the market for goods and services) and deflation as it is usually defined.
Klaus Regling inclines evidently to the former as do policymakers from most countries other than the two laggards identified by him.
That I insert a link does not mean that I endorse its contents. If deflation as usually defined takes hold in Germany, it will be a different story, I have no doubt.
Gregory, you will really have to explain this response to MH:
“Your proposal for non-recourse and 90 day or less notice of eviction is entirely unrealistic for Ireland. Sorry but it is not a feasible option.”
That statement is simply incredulous. Nothing, that is not prohibited by our Constitution is legislatively ‘unrealistic’. Our Government is in fact, and Constitutionally, an elected dictatorship and can ram through any legislation it needed to. Non-recourse mortgages (on secured property) would be a legal breeze as would the drafting of water-tight leases, like – nudge, nudge and wink, wink, upward-only rent reviews … eh? Ye see: they CAN do it.
The financials would lose-out – and so they should. They need to be severely restrained or they will do for us again. Bank on it!
DOCM: I thought we had thoroughly filleted PH’s speech. There MUST NOT be any CB proposals which provide any positive financial advantage to any cohort of residential (PPR) purchasers. NONE. This ‘bleedin’ heart’ stuff about first-timers is pathetic stuff. Juvenile.
Look, I’d have some hope if the CEOs and directors of our financial institutions were actually proposing the restructuring of their companies such that any future mortgage lending into the res property (PPR sector) would have, in actuarial terms, a 0.995 probability of being fully repaid. They are not. Why? But we did have this model – for decades: it worked. It was abandoned in favour of a model which was predicted would fail: it failed. So, what’s to learn here. We valet the failed model and put it back into service? GUBU!
Residential property prices are still significantly overvalued and need to come down (30% – 70% – depending on sector and location). That’s the problem – those over-inflated prices. They took 12 years to boom by 350%, and would have in the ordinary course of events, taken 18 years to revert to mean. But times are very un-ordinary. For a stable residential property sector – incomes must be in-line. Must. So which will do the converging: prices or incomes?
@Brian Woods, Snr — It would be feasible to pass and enforce a law for nonrecourse mortgages in Ireland, but 90 day evictions – sorry that is not feasible. It would require a new judicial system not just a law change. Nonrecourse mortgages are tied to tight security on the asset, so that rules them out as well, in practice.
Perhaps there is some very clever way to manage a nonrecourse system but I do not see it. It requires very tight and reliable security on the mortgage.
“The distinction that occurs to me that needs to be drawn is between adapting the cost basis of an economy within a monetary union to make it more competitive (by definition with those countries with which one is competing in the market for goods and services) and deflation as it is usually defined. ”
Sov debt loads in the periphery are already very heavy. Do you think deflation will be good for debt dynamics? Do you think a policy of deflation will be enough to avoid a return of the crisis ?
Do you think the EZ now has the tools to manage a crisis coherently ?
Quite a few cross-cutting but interlinked themes!
I am agnostic on the topic. What interests me is how events are likely to develop. There is no prospect of Berlin shifting its ground IMHO short of a deflationary spiral domestically which, if it shows its head, can be countered by domestic stimulus action. (Now is definitely not the appropriate time for Germany to be seeking a balanced budget! But it is a domestic political imperative, for the moment at least, for the CDU/CSU).
The Governor of the CB explains the thinking behind the approach of his institution. I hope it will be brought to fruition. We share with Germany a common currency or, rather, we participate in a currency union in which Germany is the anchor. It makes sense to follow its approach in the matter of mortgage finance. (The difficulty that officials face in coping with political pressures to do the politically opportune but in the long run mistaken thing is also to be found in the debate about QE. The French representative on the ECB Executive Committee is reliably reported to be strongly opposed to QE).
I was about to post on the other thread on income distribution to the effect that what would be really useful would be data on the amount of tax paid by each income category! That would immediately result in a number of sacred cows being ready for slaughter. Maybe the deputy will pose an appropriate follow-up question! (The cry will undoubtedly meanwhile go up that the relationship between the taxpayer and the Revenue Commissioners is on a par with the secret of the confessional. Why? Are we not all paying into the communal pot for the communal good?).
An S & P contrast between Italy and Ireland as reported from Taipei!
Re: Business Page Today
A report I saw in today’s business pages of Irish newspapers.
Some of those who work in the privately financed (speculative) house building industry, in Ireland are surprised by the scale of the proposed intervention by the Irish state (a figure mentioned was four billion euro investment in construction of housing stock, over ‘x’ number of years).
Sometimes in Ireland, the decisive intervention in housing comes from a private capital source (as we witnessed in the 2000’s). But sometimes, a decisive intervention comes from the public side. The reaction from those engaged in development with privately sourced capital, I think, is telling. The claim was that such a large intervention, may leave no room for private capital to operate.
I do arrive at one conclusion. The Irish residential mortgage market, is compact. The housing stock in Ireland is small, and it has often led to the use of a standard solution, for nearly every customer. Many cities and towns in Ireland, are full of the exact same housing unit, which doesn’t serve those local populations, in every sense. The same thing is frequently offered to everyone who needs to consume housing as a service, no matter how deep or shallow pockets might be.
There is a responsibility on any housing industry, in modern times, to create diversity, within the stock that is made available. The attempt to achieve that, has failed in many parts of Ireland. In the pursuit of the goal to serve more sectors of the market, we may discover, a need for diversity of financial products will grow, out of that process (in both sales and renting), . . . rather than trying to create new financial products, for the sake of invention itself. BOH.
DOCM: You describe Benoit Coure as the ‘French representative’ on the ECB executive council. There are, per the Statute, no ‘representatives’ or am I missing something?
Sorry! The member of the Executive Committee from France!
To quote Jean Monet; “nothing is possible without men (and women) but nothing is lasting without institutions”.
The present member from Germany could take a leaf from the book of the present member from France (and, indeed, from that of her predecessor in the post).
How can you be agnostic on the subject? Deflation is going to bring on Crisis part 2. Germans don’t understand that.
What will one of the big hitters leaving the euro mean for your Euro project ?
@ GC: OK, we are part of the way. Thanks.
@ DOCM: Common currency, sure. But very uncommon laws – esp as regards residential properties. Our political, financial and regulatory boyoes messed up – like real, real bad in respect of res property. Its not like the debris is some inert pieces of metal, glass and plastic. Its human wreckage. And we have this Mother Mo Croi hand waving going on, as if that will fix the matter. Well it most assuredly will not. Our residential lending institutions have to be put under Lock Down for a long time. To protect bot borrowers, and the Irish citizen. Its that serious. Isn’t it?
Loan -to -Value Limits presupposes that the value figure is correct.
Below is the link to the elementary property valuation error that bankrupted the country;
Loan -to -Value Limits presupposes that the value figure is correct.
A property has two prices, the price you can get for it, or the net present value of its future cash flows.If a €5 note was auctioned on Grafton Street and an unwise person bid it up to €20, then a surveyor would value all €5 notes as €20 notes.Likewise if an unwise person paid €2m for a house with a net present value of €0.5m then a surveyor would value all similar houses at €2m. Almost all of the Irish banks’ reckless lending was done using surveyors valuations. These valuations were as good as money. This is the valuation error that created the property bubble and bankrupted the country.
Noonan did the traditional thing in the last Budget by returning land rezoning to being a bonanza for farmers and a stealth tax for everyone else – why work if you have land adjacent to a town with a tax of 33%? They earned 23% or €4.5bn for the national road building budget alone during the bubble.
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.
Still despite the low density the attitude is to provide Tokyo-style rabbit hutches – the quality of apartments built in Dublin during the bubble was poor apart from energy insulation, storage space was limited and regulations on area in the late 1990s reduced the minimum size.
Land is scarce!
Re: Urban Analysis
Michael Hennigan wrote,
What we don’t do in Ireland, is to look at things from a human resources, point of view, and I will explain if I can. And don’t get locked into seeing things from the perspective of individual housing units, individual house prices, and individual mortgage customers. Use a wider angle lens. We should be trying to manage populations, rather than trying to design individual mortgage products.
There are parts of London, which do climb up to the kinds of densities that Michael mentions. London is not uniform in its density, by any means. The key point to remember, is that each London borough consists of a population (not land area mind you), of about a quarter of a million inhabitants, or registered voters. That means, that from a local authority department, point of view, the size of the problem it is tasked with is neither too large, nor too small.
It also means, that human resources talent, from one borough district can easily move to another one (say within the 30 that constitutes London), and land on their feet, and know the territory, in a new job. Some London boroughs, manage to fit that average number of inhabitants into a much smaller area than others. But the population size, from a management point of view, is some way consistent – and for the reasons I outlined.
Some London boroughs do have higher populations than a quarter of a million, but I don’t think there is any London borough, from memory, with as many as half a million people, for example. Dublin is a city that comprises of four local authority areas (that four divisions were only created in very recent history). One of those local authority areas in Dublin, Dublin City Council, is one which does resemble a typical London city borough in some of its characteristics. But the other three local authorities, that exist in Dublin, share very little resemblance to a London city borough.
There are as many as thirty boroughs in London, if memory serves me, even though the land are, is only twice that of Dublin city. Some of the London boroughs which have highest density, are also the most wealthy and most sought after locations to reside in. In Dublin’s central local authority area, we don’t think of it as being devoid of wealthy inhabitants. Some of the more expensive addresses are there.
We can only go so far, in terms of comparisons between Dublin and London, and how I have described it above, is one way to do it. What planning professionals prefer to do, is they try to match like with like. Find examples of cities, around Europe that share characteristics with Dublin. There are lessons though, that we can derive from a place such as London (London being an older city, than most throughout Europe). Berlin, I think was much smaller, than London at the time of the second world war.
An important way to look at it, is in terms of local administration, and the raft of different skills that are needed – engineering, day-to-day management, etc.
It is a sort of science.
All of the local borough districts around the United Kingdom, vie with each other, to develop human resources. That is the main job that they do. It is only by developing and growing that talent base, that areas can gain greater insight, into ways to deal with a whole plethora of challenges. Here in Ireland, we should be hooked into that as well. We should exchange human resources, with local authorities on the other side of the Irish sea. More than anything else, that we can do as a nation, this is the most important one.
Irish people therefore, would come into contact with agencies such as the British national health service, and understand what way, they coordinate with local administration. Ironically, we did it a lot more, in decades gone by in Ireland. It probably still happens in the northern part of the island. The thing to realize is, is that in Dublin city, there is a long ways to go, for the three local authorities, which aren’t Dublin City Council. They have to decide how they can execute some medium to long term plan, how they can manage to accommodate larger populations over time.
We only have one area, in Dublin city, Dublin city council, where staff can come face to face, with a modern urban environment and learn lessons that are needed, to assess, plan and build a modern urban environment. Our human resources at local administration level, don’t get to move around and learn, to the same extent as their counterparts do in the United Kingdom. A typical city manager in the UK, might have worked in a good many local borough districts, before they attain their status. That is not the case in Ireland.
Which does lead us to create very ham-fisted attempts, at blueprint for an underground system, for example. There are many ways in which we under-achieve, in this space, in Ireland. BOH.
There are lots of elements which make up the final cost of a newly built house.
You can alter those through policy – things like ‘official certification’ of every item used (OTT in my view) are policy and cost choices.
There is one, dominant, element which could be reduced without disincentivising builders to build or taking chances with build quality. There is no benefit that flows through to the purchaser of a newly built house around Dublin arising from the builder having to purchase the land for many, many times the value of agricultural land. The end purchaser has to fork out for it though.
Typically agricultural land might be worth 10 – 15k per acre yet builders are paying 50 – 150 k for a site of maybe 0.1 acres.
Thats ov the order of 1 million per acre for land zoned for building. It is ridiculous.
In many places around the world there is a municipal levy for new housing construction based on square footage of the house and lot size to even out the land used by apartments and single family homes. In some countries only the municipality can buy and rezone raw land which it then sells to developers/builders. Expropriation of land by Public Authority under rules of law that specifies the premium to be paid over its value in the raw state is the norm. Slum clearance is also an area where gov’ts build increased density social housing. The Irish Gov’t should be reducing its role in Social Housing and ensuring that the cost of housing bears a realistic relationship to people’s incomes. If the Germans can do it so can we. The private sector can be incentivised to build rent geared to income apartment buildings with subsidies for the lowest paid tenants. Eviction for nonpayment of rent becomes essential. Leniency is only afforded to Mothers of young children, people over 65 and the handicapped. Nowhere is it written on the rocks of bawn that the gov’t owes healthy adults a place to live.
I mentioned in a previous post that I actually heard a homeowner in Drumcondra mention that rates (property taxes) should be charged and that FF made a big mistake when they eliminated rates. Others agreed with him, I almost fell out of my chair. I read into it that homeowners with upper middle class incomes are coming to realise that there are too many tax evaders and that property taxes would level the field between wage earners and the propertied classes. One swallow does not make a summer but that was the first glimmer I saw that Ireland might be capable of change.
I agree that this 20% requirement should form part of the housing landscape and talk of dilution should be avoided.
I do have a problem however with your current stance in relation to the c120k or so still in mortgage distress. Simply because the idea that today in 2014 we are calling for this requirement when it was actually required in 2002 when this mayhem actually began is hard to stomach.
The availability of cheap credit from 2002 to 2008 and most importantly its effect on prices (not long term value, which is driven by rents) have ensured the distressed cohort are highly unlikely to get much sympathy. They were unfortunate to be buying when the banks credit was actually bidding up prices and now face the loss of their property as a result now find the additional equity required to get back into a buying position is more than likely beyond their reach when and if they get the opportunity to revisit the market. Hardly equitable.
Much better, as I’ve noted here many times, to ensure the long term valuation model as determined by long term stable rents becomes the methodology for the ‘V’ in the LTV models. Utilising this model, very quickly it will be known what overpricing was allowed to have occurred by the banks in the 2002-2008 period. This overpricing model should be used as the model to calculate the write off required on distressed mortgages and the correct long term valuation on the property. Moral hazard has left the building with along with Mr. Elderfield.
Fix the basic problem – houses were mispriced by the banks in 2002 to 2008. By recognising this new deposit requirement suggests to me that you now understand the error resided with the banks, not the borrowers, in relation to this ongoing issue.
Rent is the symptom,the lease law is the disease. Ireland has the most anti-tenant lease law in the world–for residential and commercial tenants. The state colluded with these landlords and wrecked the Irish economy.
@Y or B
When one Irish bank began lending recklessly to developers and home buyers it began a period where all banks had to dance while the music played. As the banks threw cheap EZ money out the window housing prices skyrocketed. This led to the positive reinforcement phase where the collateral on existing loans looked as safe as a house on fire. Home buyers had to get in on this sure fire path to enrichment before they missed the bus. Anyone who hinted that as had happened in the past in almost every country in Europe that this was leading to a bad end was labelled a begrudger who lacked faith in Ireland. Religion was in decline and being replaced by faith in Ireland.
Non recourse mortgages and legislation that forbids taxpayer rescues of the banks will ensure that the 20% rule is observed. In addition the Line of Credit secured by property (HELOC in the US) abuse has to be addressed by disallowing LOC loans where the LOC + Mortgage exceeds 70% of valuation. Evictions are an absolute necessity to stop homeowners from getting on their knees in the banks begging for their own financial destruction.
The banks have to face real risk as do the homeowners otherwise the taxpayers will continue to foot the bills for their irresponsible behaviour. I might add that buyer affordability has to be evaluated on 5 year mortgage rates not on the variable rate of the day that can double within a year. Under no circumstances should the life of a mortgage exceed 30 years nor should “interest only” mortgages be allowed.
Adherence to sound practices should reduce the eviction rate to the point where it does not become a the cause celebre that it is now.
If rates rise in the US (I wonder how likely that is but let’s say they do) wouldn’t yields also rise and prices fall ?
asset prices are v high now cos interest rates are low- wouldn’t you expect house prices to fall ceterus paribus if rates go up ?
Housing prices should not outstrip inflation in the long term,because except for land restricted sites,house prices should tend towards building costs plus normal economic profit.
Morgan Kelly wrote a paper a while back where he suggested that based on the evidence available the least important long term driver of house prices was the rate of interest on mortgage loans. The argument you trot out above , whilst empirically seems sound , the reality is however that the rate of interest is only a marginal driver in the market place. What drives prices is the credit tap and the supply demand dynamic.
Interest rates upward movements tend to get baked into wage demands to compensate employees and as a consequence tend not to be the big barrier as people believe and equally prices do reflect a potentially longer term structural shift higher if that ends up being the case as it was in the RoI in the late 1970s early 1980s.
Whilst the points you make are undoubtedly sound they do not unfortunately help the financial lot of those caught in negative equity, with massively reduced incomes and unable to repay existing mortgages. New lending rules are irrelevant to this cohort of people of which there are c120k of them.
They require a fix, they don’t require much else. That fix is a write off. We can argue until the cows come home about nicely dressed up alternatives but I’ve been reading those alternates for the past 5 years and we’re no further on. Let there be a fix based on a model which makes sense. Rest assured there will be no moral hazard in doing so, they public recognise that Priory Hall and the other Priory Halls were not the fault of the borrowers.
Re: Sky rocket
Mickey Hickey wrote,
Those were first order effects. There were also real second order, and third order effects that it created. The effect of sky rocketing prices, was that developers, in key places, got out of the habit of delivering real product.
It didn’t happen everywhere. Out in the outer commuter belt areas, of Dublin city, . . . developers, held on to the logical opinion, that building of housing stock on land, was necessary to add value. That is the ‘over production’, which economists talk about. What we discover in Ireland, is that builders and developers (even if they were third division players), did produce a lot of housing stock in the periphery. As you get further in towards Dublin city (where you find first division, players at work), a different behavior took hold.
Builders and developers in those areas, got clean out of the habit of building, believing that it wasn’t necessary to make profit. In the Internet boom, for example, a lot of companies wanted to remove physical stuff, from their balance sheet. Physical production was seen to be old-world. The future was in owning virtual assets, the ownership of a web address, or whatever. It became the norm in Ireland, that when a portion of land rocketed in price (while one sat and did nothing), that developers attributed that to some action on their own part.
Building stuff, if you were a builder, came to be seen, as old-fashioned. Developers were hiring consultants, at increasingly to add value, by doing paper sketches. This was all viewed as adding value. It is like the story of the Emperor’s clothes. The finest tailors, were employed to weave better and better cloaks, which became more and more difficult to see with the naked eye. The developers in Dublin, got sucked into a firm belief, that they were able to add value, without building anything. Champagne parties, became more lavish. Yachts, became larger. To be truthful, builders, spent less and less time, being builders.
The third order effect, was also corrosive, from a point of view of production. Events led to the creation of a national asset management agency. The problem before the bust, had been too much paper work, too many spreadsheets, too many business plans, too much analysis, and too much invisible clothing being created. What did we do after the bust? The answer was, to create, more paper work, more spreadsheets and more invisible coats. Hire more people to do that, and fire the rest. That third order effect, brings us to the present.
The net effect of NAMA, is that we see a whole decade, of non-production now, in most of the key areas of Dublin city. Two and three governments worth of non-existent production. We are no closer, to where we can extract ourselves from the first, second and third order effects of a real estate bubble. It is important to understand sequence, how one leads to another. One has to do something, decisive, I believe to break such patterns. Probably, after the second order effect, had began to take hold, that was the time that the government should have began to produce housing – in areas that were under-served. I don’t know. The worst that could have happened, was that a few thousand public authority renters, would have been created. BOH.
It appears that the Minister for Finance does not understand, or perhaps does not want the population at large to understand, the point you make in your post at the top of this thread:
“Finance Minister Michael Noonan will specifically say that he wants the Central Bank to introduce a transition period for the changes, RATHER THAN FORCING BORROWERS TO RAISE MORE MONEY from next month. Mr Noonan also wants more people to be exempt from the rules.”
I wonder if, by concentrating so firmly on the flawed premise that the availability of credit for property purchase does not affect the cost of purchasing it (a house in Dublin being very much akin to a shiny new BMW from a factory in Germany you see), the Irish print media and politicians might have shot themselves in the foot?
No doubt Patrick Honohan and the rest of the Central Bank supervision policy staff are feeling the heat but, so obvious is the fundamental flaw about the extent of the potential unfairness to those denied the opportunity to bid prices even higher against eachother, that it could be a bit embarrasing to buckle under it.
Low rates drove up prices and the bank of England sez half a million mortgage holders will be in arrears if rates rise by 200bps. It will be even worse if incomes are stagnant.
There is that study from some canal area of Amsterdam over 300 years where the main link to house prices is earnings , not credit.
“Assuming a 10% increase in income for all households, a two-percentage-point rise in mortgage interest rates would likely raise the proportion of mortgagors with a debt service ratio (DSR) of at least 40% from its current level of 4% to about 6%.
“The number of UK households in this vulnerable category would increase from about 360,000 to 480,000.But the impact would be more severe in a second, less likely, scenario where there was assumed to be no increases in incomes.”
Increasing incomes don’t seem to be compatible with the latest version of capitalism
@Yields or Bust
I agree with you.
The people who became over indebted 2008 + or – have been subjected to a slow hanging. As my mother used to say wrt to the Thatcher gov’t, shooting would be too humane slow hanging would be more appropriate. The gov’t hurriedly bailed out the banks and their lenders including bond holders in 2010. What they should have done was put the banks in receivership (examinership) which would have put the fear of Ireland into Brussels and Frankfurt and given the gov’t at least a year to sort things out. Instead they dreamed of putting humpty back together again by accepting liability and loans from the Troika after Honohan blinked and jumped the gun. NAMA would hold distressed properties off the market thereby increasing property values and rescuing both FF and FG when they finally decide to sell into the scarcity of housing market they have created. I saw the terms and conditions resulting from a successful auction bid for developer (previously) owned land, essentially NAMA has tied the hands of the purchaser and the County Council as to how the land can be used. Totally unacceptable to the Solicitor doing due diligence on the contract. NAMA from what I have seen is now a holding company not an asset disposal company. Frankfurt and Brussels will continue to help the gov’t keep things in aspic so as no repercussions wash up in FRA, BRU or Berlin. With the exception of some desirable parts of Dublin there is little indication that the housing market is recovering. Largely because if I am to believe the locals out the country “Sure half the houses in town have a NAMA lien on them and the newly (2008-2009) built developments are shoddily built and unsaleable without extensive repairs (5-6 yrs vacant)”. That is the perception and right or wrong it is holding back the market.
Lack of growth and low inflation throughout the EZ has been the real killer, even a measly 2% per year would have been a big help. Now we have a situation where 200 to 300 thousand voters have a vested interest in what the gov’t will do to alleviate their burden. Governments have covered it in the aspic (low cost loans) provided by ECB hoping to get re-elected by making vague promises. This could continue until there is a bout of inflation in the EZ at which time low cost short term loans become more expensive with interest rates geared to recovering economies like DE, FR, Ned and a few others. Then the willingness to fund NAMA will end abruptly and the fire sale will proceed.
Obviously the number of people affected makes this a very serious issue. Since we cannot trigger the first line of attack being high inflation that leaves us with two options evict and auction or debt forgiveness. Debt forgiveness would have been tried already if there was any indication that it was acceptable to society at large. It appears we accept bailing out banks but not bailing out the people who were victims of callous and cynical machinations.
As I saw it and still see it the Irish gov’t did not know that banks can go bankrupt and life goes on much as before. The Central Bank the Regulator and the DoF were behaving like the claque at La Scala before and during the Financial system spinning out of control. I would apportion blame first to the Irish Gov’t as a whole, the Irish banks and their lenders who greased the wheels and accelerated the collapse. Who should pay the piper 1) All is not well with Irish voters who send chancers like themselves to get what they can out of the Dail. They overlook all kinds of wrongdoing if they think they are getting advantage. 2) The Central Bank and the Regulator are a joke. 3) The DoF are at the mercy of the chancers in the Dail and by now are beyond redemption. 4) Our goose was put on a platter surrounded by spiced red cabbage in 2010 when our gov’t guaranteed to bail out the banks and their lenders.
What can be done but will not be done is to forgive the excessive debt of the most unfortunate cases now, before rising interest rates squeeze them further. Mothers of young children and the handicapped should be dealt with expeditiously and humanely. The more capable borrowers can negotiate what is fair and reasonable with a NAMA that has to get direction from its political masters. There has to be some parliamentary oversight of NAMA and I do not mean what is going on now.
If SF and Independents form a coalition after the next election it is possible that the fixation on working through the banks will lessen and sound policies that promote the greater good will be implemented. There are glimmers here and there that the Irish have had enough of FF-FG and the banks and are willing to try something new including a major overhaul of gov’t structure.
Oil down to a 5 year low and EMs being abandoned in favour of the US which is hardly rocking and rolling. I hope JtO can talk sense into the markets so that the lever pulling of the CBs can continue without anyone noticing that they don’t really know what they are doing….
Re: Feel-good factor
Another useful analogy, to use to think about the third order effect, model that I suggested above, . . . is to use an analogy of a virus. This time of year, the influenza virus is always on the march, in Ireland. These are naturally occurring viruses.
Sometimes the real trigger event, for these kinds of bugs, is a really fine day in the depth of winter. People feel good, get out a lot, mingle, and the virus piggy-backs into the population, on these events.
In a similar way, the rising home, prices described by some commentators, are like the fine day in winter time. They have an initial feel good, factor attached to them, . . which ultimately allows the virus, to become well embedded into the system.
The fact that we moved in the opposite direction, away from construction of public housing at about the same time, as we experienced the property price inflation, in Ireland, . . . may have had an effect of lowering our defense mechanisms, even further, in regards to this particular virus.
Like a flu bug too, it does appear as though the initial virus, has to go through a definite series of stages, before it is cleared out of the system. Assuming, the positive outlook, offered by a number of regular commentators, the economy, in Ireland may be regaining a state of health of some kind.
We may even be in search of one of those fine days, that I mentioned above. This is all that these financial super bugs, actually need, to gain a new foothold in a new cycle. We don’t understand fully, whether the bugs are partly produced in human controlled laboratories, by mad scientists, or whether they are for the most part naturally occurring.
All we do know, is that they exist, and are quite real. I even have my own suspicions that these things, may even be getting more virile, as history progresses. I would only reiterate again, the importance, I think of something like a banking inquiry, as boring as it may appear to be now, to scrap together primary research about the sequencing and nature of these challenges that society now faces.
And if the above, does sound like a blurb, for a bad science fiction movie, my apologies. BOH.
@ MH: Nice one! Here’s hoping!
Folks, please keep a very careful watch on that crude oil price: its dangerously low. If it falls further or just stays as is, then things (politically) could go pear-shaped awful quick in the export lands – populations have high dependency on subsidies. The global spot price must be above $80/bbl or preferably above $90. A low oil price could spark a nasty credit event and take down so many financials that no amount of CBs interventions would halt. It might then just be a Cyprus-style bail-in for depositors and pension funds. Very unfunny times ahead.
What do you think is driving the oil price ? Is it global slowdown or something more political ?
Slowdown in the biggies – the principle consumers. The smallers are still moving along somewhat, but the proportions are quite lopsided, so the overall effect is ‘down’. Its funny how so few folk realize that the 1996 – 2007 ‘growth miracle’ was all a smoke-and-mirrors credit fueled gambling circus. Pay-back time has arrived. Its not funny anymore. The US looks positively sepulchral – and the $ is rising???
There are indeed politicals at work: like “Get Putin, and all his gang!” – mindlessly stupid stuff. The US initially bullied and suckered the EU to sanction the Ivans. Very bad career move. Light bulb popped on a short while back. D-land is not in any risk of loss of gaz – but not so the other useful idiots.
Saudi may be targeting the ‘frackers’ – they’re a pesky irritation. Their product is produced fast and declines faster. They have to drill, drill and drill or its close-up-shop time. Very costly! Big debts. The story is that they are living on the cash flow. When that aria stops – there will not be any chairs to sit on! That would be a big credit shock. If it happens … 2008 will look like a picnic.
Simultaneously the Kingdom may be having a go at Russia. Gruppy fingerprints and muddy bootmarks of State/CIA all over the shop. The mid-east is Pandora’s Box in real time! If John Wayne were still upright Hollywood would have him leading the Big Red 0 over the sand-dunes to save western civilization – again!
There hadn’t been a discussion on here about this topic, and my letter here was kept short for purposes of editorial acceptability, but here’s some of my view from a couple of weeks ago.
There are two primary factors affecting oil prices one is increased production in the USA, the other is a slowing global economy.
Saudi Arabia anticipated increasing production in the USA which would continue if prices exceeded $80 US a barrel. Similarly with Canadian oil sands which can profitably produce at $70 but needs $80 + to increase capacity.
The consensus is the Saudis will issue the knock out blow if they go below $60 for six months or more.
Russia has monetary reserves that would allow it to overproduce for at least a year.
This is about shots across the bow of high cost producers and their investors. You can invest but be prepared for losses. This should bring new development to a halt and result in higher prices in the medium term.
In Canada the banks, service companies and specialised manufacturers are already affected. The Canadian $ took a hit. Venezuela is in dire straits but China is likely to come to the rescue.
Hypocrisy describes it exactly.
Governing for the greater good is an idea that has yet to enter Irish political consciousness. No sooner do they adopt a 20% deposit policy than they come up with ways to weasel out of it. A good source of “campaign contributions”, no doubt. The same with corporate taxes from 12.5% to less than 2% in the blink of an eye. Turbo charged ride to the bottom. Living in the moment with sights firmly fixed on reelection and to hell with the medium to long term. We are lucky that some adult supervision is coming out of Brussels, Frankfurt and Berlin.
I wouldn’t go as far as to call Frankfurt and Berlin adult. They remind me more of teenage babysitters. Teenage nightmares are so hard to deal with.
I think the political angle may be the most important. Nobody in the market expected prices to fall 4 or 5 months ago . Shale has been around for longer than a few months.
“For Saudi Arabia, plunging oil prices are a political weapon”
Well the property roller coaster is not over yet….. after the next GE… either in 2015 or 2016…. the motley crew which will inhabit Dail Eireann may change the property landscape dramatically.
I think it is very very interesting that the very few infrequent media articles written a few months ago have now multiplied, all of them containing warnings!!
After the 1916 celebrations… we may get ready for the 1917 celebrations!!
A run for the door by investors is still a real possibility after the next GE..IMO
Research piece here from the Irish central bank showing default rates on sample of Irish mortgages far lower for First Time Buyers (10.3%) than for other borrowers (14.9%) perhaps supporting the case for differential macro prudential tools.
I respectfully disagree that the Saudis are politically motivated or influenced by the USA to reduce oil prices to punish Russia or reward the USA. The whole fracking for tight oil and gas business is already in disarray as is the oil sands business. The companies going into receivership and the banks suffering hardship plus shareholder, bondholders getting cents on the dollar will be in North America. The Saudis need $100+ plus oil to placate their citizens and avoid a Saudi spring leading to civil war. The Russians are not pussyfooting around they are diverting their market East and South, in true Russian fashion not talking about but actually doing it.
This is a short term loss to ensure medium term gain strategy, no more and no less. Sometimes business is just business. I might be influenced by the fact that people close to me get a good portion of their income out of the Persian Gulf, They tell me basically what I laid out above.
I was thinking more about Iran supporting the anti ISIS side. ISIS is a Saudi baby. Iran needs a price of well over $100.
@ Dan McLaughlin
From your time at Bank of Ireland, how well did those “macro prudential tools” work the last time round?
They didn’t exist apart from an additional capital requirement for higher LTV’s. Had LTI limits existed credit growth would have been lower. I think the limits are a good idea in general with two caveats; the timing is odd as mortgage credit is still contracting and flexibility through the cycle might be better.