“the Central Bank did expect that there would be a shift towards more people renting..So these are partially the effect of the rules”
What is the basis for this claim, as Ireland does not capture inter-Censal statistics on households renting. There was a 145% (huge I know) increase in private renting households between 2006 and 2011. In 2011, there were just over 320,000 households renting out of 1.7m. But where are the statistics since, and particularly since last January when the CB introduced the mortgage restrictions?
I see the CB is doing a co-production with NAMA to publish new commercial property price indices. Any chance the CB could ring the CSO and ask the CSO to include a new field on their quarterly national household surveys to include type of accommodation tenure (private rent, public authority or other rent, own outright, own with mortgage, homeless). At least that would provide some sort of inter-Censal estimate of renting and probably at very little cost.
(The PRTB is supposed to have details of ALL private rental agreements but traditionally it has had an “evasion rate” of 25% and for Q3,2015, it had around 330k records, almost the same as Census 2011, and I don’t believe there are just 7k extra renting households in the last four years!)
As for the decision of the CB to review the mortgage rules at all, just before he took up his role, Philip Lane’s underlings went to the press to reaffirm their support for the rules. I wonder how they now feel about the review.
Despite the rules not being welcomed in many quarters, especially government, they are there for prudent reasons. The main ECB rate is 0.05% today, it was nearly 5% in the 2000s. Households must be capable of meeting future rate increases. Otherwise you risk another bank collapse.
The 3.5 time income rule is probably more restricting than the 20% deposit. With average gross incomes of €35k, a singleton or single earner household has a mortgage reach of €120k which along with a 20% deposit gives you €150k of spending power. An average Dublin home is nearly twice that today.
The only way the 3.5 income rule will work is if building costs (labour especially) are allowed to float in a free market unencumbered by labour agreements. Or if builders bring labour in from the UK.
I wouldn’t like to be Philip Lane. Central Banking is a busted flush when the OECD economies all run Friedman supply side style cannot generate 2% inflation. Does Draghi do an MBO at year end for Lane? The mighty ex Squid is like Hitler in March 45 insisting that the Soviet advance can be turned back. General Deflation is a patient enemy. Speaking truth to power is as dangerous as ever.
@ Jagdip
Rent is the symptom, Irish property lease law is the disease. Ireland is the most anti-tenant country in the world. To mark the centenary of the 1916 Rising there is an excellent article on page 45 of the current edition of the Phoenix Magazine titled ” The Patriots Lease”.
The greatest bank crash in the history of mankind started with one house –Leinster House.
“The only way the 3.5 income rule will work is if … …”
Careful Jagdip, careful. Its actually a fearful debt problem at back. Just artfully disguised, is all. Preying Mantis on prowl comes to mind.
Private residential property (PRP) prices were levered up due to ‘demand’ – not the regular economic demand of consumers, but the inverse-demand of lenders for borrowers to accept what the lenders were anxious to lend to them. This supply-led demand inversion caused a massive and unprecedented Irish PRP bubble of +350% over a 12 year period.
However, within the same time interval our median income increased by approx 50%. Hence PRP prices had a x7 times head-start. Now, if anyone wants to correctize Irish PRP prices you must bring those aforementioned PRP values back into line with median incomes. Likely to happen? No!
So what we have here, in respect of Irish PPR mortgages, is a lot of wishful ‘willy waving’ – in the best possible taste, you understand. And no disrespect to the wavers – or should that be waverers? We’ll see.
Several things are needed to re-anchor the Irish PRP ‘market’ on the Sea-of-Reality – which if done, might also re-anchor the private rental sector as well. Though this latter sector has some woeful problems. There is always prayers to St Jude.
1. Irish commercial banks are prohibited by statute to offer PRP mortgages.
2. A single Irish PRP mortgage lender is established.
3. All Irish PRPs are non-recourse.
4. Apply the 20%; 26% and 32% Golden Rules of PRP mortgage lending.
Bingo! – problemo solved. But this will not happen – because …. ….
PRP values (hence prices) would ‘revert to mean’, that is, there would be a slow and painful (3-5 year) decline of -60% to -70% on current PRP valuations. Problem? Yeah, a big one. You’d need a PRP mortgage Jubilee to reduce Negative Equities. And no, the taxpayer would not have to be r*ped again. Most of the credit given out as mortgages was fiat stuff; you know, that Fracking Reserve economic gimmick. Losses? Nope again. You only lose something you actually possessed. Not something you conjured into existence – you know, like:-
“In the Beginning was the Word; and the Word was Credit; and Credit was made Flesh; and the Name of the Flesh was Debt; and Debt became Hell!”
Something along those lines describes global banking practices. Mortgage lending fits in nicely.
“To be persuasive we must be believable; to be believable we must be credible; to be credible we must be truthful. It is as simple as that.”
Edward R. Murrow
@Jagdip
The embedded site value is over 50% of the sale price for many houses in Dublin.
The only reason that is the case, is because it is government, bank and property industry policy to keep house prices high. This has been achieved through a deliberate manipulation of serviced land over many years.
The reality that exists is, more often than not, the result of a deliberate policy to bring that reality into being.
Labour cost is the key driver of ‘house building cost’ in Dublin, ‘site cost’ is.
Correction to above: It should have read.
Labour cost is NOT the key driver of ‘house building cost’ in Dublin, ‘site cost’ is.
@jagdip
Good point about the need for more timely data. For example, completions since q1 2011 (the last census) amount to 48k but if one assumes a depreciation rate of 0.7% per annum on a stock of 2mn the net change in the housing stock is -22k.
I suspect the Central Bank are a bit worried about the credit situation. Net mortgage lending has been falling for 6 years now and new lending appears to have fallen very sharply of late; approvals for house purchase in the 3 months to November fell an annual 14% and in November alone the decline was 23% ( the headline figure quoted in the media includes re-mortgages and top-ups which are growing strongly but are extremely small). How much of that is due to the controls is of course debatable but it is interesting that the CB has decided against introducing additional counter-cyclical capital buffers at this time.
Prof. Lane notes that the economy is not overheating but, according to Finance and the EU, it is;Ireland had a positive output gap of 2.3% in 2015. That was predicated on 6.2% growth so if the latter was actually 7% the output gap was over 3%. Unless one assumes that the potential growth rate was higher than the 3.4% assumed, which in turn means the constraint on government spending in 2016 was wrong.
Jagdip,
I don’t think lab costs are the main problem causing high construction/property costs. Ireland’s lab costs are 10th in the EU.
Finance costs are now too high – The Strategic Investment Fund in conjunction with KKR fund lends to builders at 14%. Unbelievable.
Profit margins expected by developers are also too high.
An impressive performance!
On a not entirely unrelated matter, the changed situation that whatever future government emerges will face with regard to the Dáil, the institution which is, after all, that to which the government is responsible.
10 replies on “Philip Lane interview”
“the Central Bank did expect that there would be a shift towards more people renting..So these are partially the effect of the rules”
What is the basis for this claim, as Ireland does not capture inter-Censal statistics on households renting. There was a 145% (huge I know) increase in private renting households between 2006 and 2011. In 2011, there were just over 320,000 households renting out of 1.7m. But where are the statistics since, and particularly since last January when the CB introduced the mortgage restrictions?
I see the CB is doing a co-production with NAMA to publish new commercial property price indices. Any chance the CB could ring the CSO and ask the CSO to include a new field on their quarterly national household surveys to include type of accommodation tenure (private rent, public authority or other rent, own outright, own with mortgage, homeless). At least that would provide some sort of inter-Censal estimate of renting and probably at very little cost.
(The PRTB is supposed to have details of ALL private rental agreements but traditionally it has had an “evasion rate” of 25% and for Q3,2015, it had around 330k records, almost the same as Census 2011, and I don’t believe there are just 7k extra renting households in the last four years!)
As for the decision of the CB to review the mortgage rules at all, just before he took up his role, Philip Lane’s underlings went to the press to reaffirm their support for the rules. I wonder how they now feel about the review.
Despite the rules not being welcomed in many quarters, especially government, they are there for prudent reasons. The main ECB rate is 0.05% today, it was nearly 5% in the 2000s. Households must be capable of meeting future rate increases. Otherwise you risk another bank collapse.
The 3.5 time income rule is probably more restricting than the 20% deposit. With average gross incomes of €35k, a singleton or single earner household has a mortgage reach of €120k which along with a 20% deposit gives you €150k of spending power. An average Dublin home is nearly twice that today.
The only way the 3.5 income rule will work is if building costs (labour especially) are allowed to float in a free market unencumbered by labour agreements. Or if builders bring labour in from the UK.
I wouldn’t like to be Philip Lane. Central Banking is a busted flush when the OECD economies all run Friedman supply side style cannot generate 2% inflation. Does Draghi do an MBO at year end for Lane? The mighty ex Squid is like Hitler in March 45 insisting that the Soviet advance can be turned back. General Deflation is a patient enemy. Speaking truth to power is as dangerous as ever.
@ Jagdip
Rent is the symptom, Irish property lease law is the disease. Ireland is the most anti-tenant country in the world. To mark the centenary of the 1916 Rising there is an excellent article on page 45 of the current edition of the Phoenix Magazine titled ” The Patriots Lease”.
The greatest bank crash in the history of mankind started with one house –Leinster House.
“The only way the 3.5 income rule will work is if … …”
Careful Jagdip, careful. Its actually a fearful debt problem at back. Just artfully disguised, is all. Preying Mantis on prowl comes to mind.
Private residential property (PRP) prices were levered up due to ‘demand’ – not the regular economic demand of consumers, but the inverse-demand of lenders for borrowers to accept what the lenders were anxious to lend to them. This supply-led demand inversion caused a massive and unprecedented Irish PRP bubble of +350% over a 12 year period.
However, within the same time interval our median income increased by approx 50%. Hence PRP prices had a x7 times head-start. Now, if anyone wants to correctize Irish PRP prices you must bring those aforementioned PRP values back into line with median incomes. Likely to happen? No!
So what we have here, in respect of Irish PPR mortgages, is a lot of wishful ‘willy waving’ – in the best possible taste, you understand. And no disrespect to the wavers – or should that be waverers? We’ll see.
Several things are needed to re-anchor the Irish PRP ‘market’ on the Sea-of-Reality – which if done, might also re-anchor the private rental sector as well. Though this latter sector has some woeful problems. There is always prayers to St Jude.
1. Irish commercial banks are prohibited by statute to offer PRP mortgages.
2. A single Irish PRP mortgage lender is established.
3. All Irish PRPs are non-recourse.
4. Apply the 20%; 26% and 32% Golden Rules of PRP mortgage lending.
Bingo! – problemo solved. But this will not happen – because …. ….
PRP values (hence prices) would ‘revert to mean’, that is, there would be a slow and painful (3-5 year) decline of -60% to -70% on current PRP valuations. Problem? Yeah, a big one. You’d need a PRP mortgage Jubilee to reduce Negative Equities. And no, the taxpayer would not have to be r*ped again. Most of the credit given out as mortgages was fiat stuff; you know, that Fracking Reserve economic gimmick. Losses? Nope again. You only lose something you actually possessed. Not something you conjured into existence – you know, like:-
“In the Beginning was the Word; and the Word was Credit; and Credit was made Flesh; and the Name of the Flesh was Debt; and Debt became Hell!”
Something along those lines describes global banking practices. Mortgage lending fits in nicely.
“To be persuasive we must be believable; to be believable we must be credible; to be credible we must be truthful. It is as simple as that.”
Edward R. Murrow
@Jagdip
The embedded site value is over 50% of the sale price for many houses in Dublin.
The only reason that is the case, is because it is government, bank and property industry policy to keep house prices high. This has been achieved through a deliberate manipulation of serviced land over many years.
The reality that exists is, more often than not, the result of a deliberate policy to bring that reality into being.
Labour cost is the key driver of ‘house building cost’ in Dublin, ‘site cost’ is.
Correction to above: It should have read.
Labour cost is NOT the key driver of ‘house building cost’ in Dublin, ‘site cost’ is.
@jagdip
Good point about the need for more timely data. For example, completions since q1 2011 (the last census) amount to 48k but if one assumes a depreciation rate of 0.7% per annum on a stock of 2mn the net change in the housing stock is -22k.
I suspect the Central Bank are a bit worried about the credit situation. Net mortgage lending has been falling for 6 years now and new lending appears to have fallen very sharply of late; approvals for house purchase in the 3 months to November fell an annual 14% and in November alone the decline was 23% ( the headline figure quoted in the media includes re-mortgages and top-ups which are growing strongly but are extremely small). How much of that is due to the controls is of course debatable but it is interesting that the CB has decided against introducing additional counter-cyclical capital buffers at this time.
Prof. Lane notes that the economy is not overheating but, according to Finance and the EU, it is;Ireland had a positive output gap of 2.3% in 2015. That was predicated on 6.2% growth so if the latter was actually 7% the output gap was over 3%. Unless one assumes that the potential growth rate was higher than the 3.4% assumed, which in turn means the constraint on government spending in 2016 was wrong.
Jagdip,
I don’t think lab costs are the main problem causing high construction/property costs. Ireland’s lab costs are 10th in the EU.
http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Estimated_labour_costs_for_the_whole_economy_in_EUR,_2014.png
Land costs are way too high.
Finance costs are now too high – The Strategic Investment Fund in conjunction with KKR fund lends to builders at 14%. Unbelievable.
Profit margins expected by developers are also too high.
An impressive performance!
On a not entirely unrelated matter, the changed situation that whatever future government emerges will face with regard to the Dáil, the institution which is, after all, that to which the government is responsible.
http://www.irishtimes.com/opinion/noel-whelan-government-had-no-option-but-to-embrace-d%C3%A1il-reforms-1.2488637
Mighty oaks from little acorns grow!