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THE REFORM ALLIANCE has released a new mortgage policy which it claims will protect the housing market from overheating in the future.
The RA says that the steps in its Fair Value Lending policy can prevent the return of a property bubble, stabilise property prices and make property more available for first time buyers.
The policy rests on an attempt to “address speculative behaviour by reasserting the link between property prices and mortgage size.”
The method they suggest uses average national income to dictate the fair value of a property, and then limits the amount that a bank can lend out to 90 per cent of that fair value.
By using this technique, the RA say that volatility and rapidly escalating house prices can be worked out of the property market.
They point to data from both the UK and Ireland that show the price-to-earnings ratio spiked prior to property crashes in the UK in 1983 and 2008 and before our own crash in 2008.
Reaction to the policy has so far been mixed, with some elements of the policy being welcomed while the link to the national average wage for price setting has attracted criticism.
The RA also cite a 2011 IMF report that found that the higher the average loan to value ratio in the wider property market, the more sensitive economic performance is to house price movement.
Do you think this would help stave off future housing market overheating?
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The answer to this problem is relatively simple. Go back to the Mortgage lending rules that were in place 20 years ago with the banks. The formula was you could borrow a maximum of 2.5times the main earner’s income plus one times the second earners income. This pegged mortgages to the earnings of the borrower and their ability to repay. It also meant that house price inflation is more or less in line with wage inflation.
That’s a simple and fair solution.
It’ll need some regulating and we’re crap at that.
A reasonably Financial Regulator who is awake at his desk like Matt Elderfield , would be a start.
Yup. Availability of cheap credit is what tips rising house prices over the edge and into a bubble situation.
The problem with such a simple solution is that if it were implemented overnight it would lead to a sudden crash in demand and a drop in prices sentencing thousands more to negative equity and worsening the situation for those already in negative equity.
Such rules would need to be an aspiration to be worked towards…
Joe that would be perfect in a closed loop! Unfortunately we’re an open economy and if credit isn’t available to people looking for houses to live in that gap will be filled by landlords as rent becomes the only option available to anyone other than the very wealthy! It’s a good concept but it needs more!
I agree we need credit to be available – but not at levels that people can’t pay back. The rules I mentioned had been in force for many years and in that time house price inflation ran at modest levels and mortgage defaults were low. Another regulation that would make the banks be more prudent in offering credit would be that if a borrower defaults then the bank only has recourse to the mortgaged property. This will make the banks more careful in the percentage mortgages it offers. It was the availability of crazy levels of credit that fuelled the worst of the bubble.
But such a return to prudent financial regulation will have to be matched by an increase in supply.
I’ve always believed that you should only be able to borrow up to a certain sum, then a sliding scale of a percent of the higher amounts. So no matter what you earn you can only borrow say 50% over say €500,000, 25% over a million and nothing after that. “Ordinary” people were borrowing millions to buy a house, that’s totally daft. If you want to buy a €5,000,000 house you should have the money.
The major problem for many people is that rent is too high to be able to save a deposit. A mortgage repayment would be far less than our huge rent but we can never save it.
That’s a problem when solutions are what is needed! You’re correct of course but it fixes nothing!
@Jayniemac…. Could you not rent a lower priced place for a while?
Or korea…. ^_^
Where? @hairylemon
All I know is the bubble has started again. There was a few houses I looked at in the last week and there was queues just like the boom. Crazy stuff no lessons learnt.
To be fair Thor, I bet you those houses were either cheap or of good quality / location etc. Would I be correct?
Nah wouldn’t say cheap some were between 285k and 350k but all went up at least 50k with people bidding. In regards to desirable area yeah I suppose so.
See that’s it. There’s no concrete evidence of a bubble. A steep rise yes but only for certain properties in certain areas. Theres a distinct lack of quality (in Cork anyway) and when a good property in a good area comes up demand is high..
Make the capital increases on non primary houses very heavily taxed! If property is less of a commodity and more of a house then speculators will steer clear and prices will regulate themselves!
…leading to less rental properties and higher rents as demand further outstrips supply. But then it again becomes attractive to investors who come back in… I have a headache.
You just can’t win aye?
Would Dublin not become more and more expensive as the rest of the country just got cheaper……like at the moment really?
I don’t know what Lyons is going on about.
Anything would help the current farcical, yet tragic situation at this stage.
But I’d suggest to,
(1) Regulate the Banks, the Estate Agents and the property industry.
(And fcuking enforce the regulations!!!)
(2) Introduce non recourse lending so that all the well paid “experts” and “economists” who work in the banks and the property industry will have to do their fcuking job for a change,
and if these “experts” fcuk up,
heads will roll
and they should roll!
Remember we are talking about the ability to provide basic/affordable/vital shelter for our people and their kids here, and not a fcuking roulette wheel in a casino.
Less of the pathetic, gibbering PR spin please!
Fitzpatrick – Not guilty!
The Irish People – Guilty!
Am I missing something?
Spot on Patrick.
And our children’s children.
Given the amount of people on min wage or no wage..house prices will have to fall a lot!
I’m praying for the housing bubble to come again , first time my house reaches mortgage payoff amount selling off house and getting the fook out of this country . Emigration is the only way forward in this country , very soon we will be paying for the Irish fresh air in each room .
A better solution I suggest is what prevails in Germany, 20%-30% savings required, only 70% mortgage, accumulating such a large deposit takes time & financial prudence, in my opinion a good training for most likely the biggest financial decision of many peoples lives, German house inflation is typically 1-2% per year, more or less in line with inflation or a bit lower
That would work but how can I save that amount of money if I’m paying more than a grand for a flat?
I was thinking maybe the rent-to-buy scheme would resolve some issues…
Yeah a govt funded rent to buy scheme would certainly help stimulate the building industry.. But.. where would they get the funds?
“That would work but how can I save that amount of money”
That’s exactly the point Leo. Trust me, it would save you (and everyone else) a lot of heartache in the long run. Not that I object to your rent-to-buy scheme either. That’s fine by me as long as it’s done right, but I’m not quite sure how to do it right. What do you have in mind exactly?
If the govt or nama put together a fund and worked with the planning authorities, local councils and cso to identify what mix of housing stock was needed where, developers (its not always a dirty word) could build the required units using the fund (bid by tender). The govt should benefit from economy of scale.
These units could then be let to pre approved tenants with an agreed level of deposit and agreed repayment period at the end of which ownership reverts to them.
Part of each development could be allocated as social housing. Therefore the people buying the properties fund the social units and there is no extra drain on the exchequer as the initial fund is payed back over time.
Builders get back to work, tax take increases and new housing stock is built to best standard in a sustainable and socially beneficial way.
If people want to leave the scheme to upsize after a defined period of say 10 years the unit could be sold for market value, whatever balance is owed can be paid by the new purchaser and the built up equity used against the old occupants new property.
Just a loose idea…
Limiting bank lending, re that will work? They’ve gone back whole 30 years too…
New buildings would never get built if the price is in effect fixed low. And we need loads of new buildings soon.
There are plenty of empty new buildings around the country including Dublin.
I’d be interested to hear of any problem which has been solved by the government fixing prices.
It’s an impossible task once there is an opportunity for estate agents and property developers to drive prices. I believe everyone is of the opinion that something of a paradigm change is required. This can be achieved by government ownership of the land, proper engineering planners put in place and central government mortgages based on ability to pay. Houses are then built by builders against tenders. The construction industry goes back into full swing but this time ..no estate agents or developers.
Communism, great!
Estate agents and developers don’t drive prices. You’re clearly very far left. Gov take ownership of the land and only they can issue mortgages, what about private owners? What about private industry? Basic economic principles of fair competition. Also banks are regulated by the central
Bank so maybe having stricter regulation is the key. When money flows, increase tax, when money dries up, decrease tax, that’s how to stop inflation.
Interesting plan. Imagine the quango to organise that….
Worked brilliantly. .. :-D
Ah yes- central government has such a good track record in housing provision……………
Great idea, except we can’t trust our government.
Its not a great idea at all… even if we could trust our government.
Not communism David, we have to respond in this manner, in my opinion, because of the fact that our construction industry is all but dead. My way brings them back to life and the mortgage I am suggesting would be at a rate of 20 basis points having acquired the money from ECB at 10 basis points. Certain problems require certain actions, cannot sit by any longer. The EU will not do anything for us. Wait until they increase interest rates because the German economy stirs, thousands of more home repossessions. Our engineers would refuse to allow building on flood plains for example..etc.
Im confused by your last sentence. Are you saying engineers (I presume you mean planners) should have allowed us to build on flood plains?
Johnnycake, I am a property developer. Had we being living in an open market society we would not be having these problems. Banks should never allowed mortgages without equity from the borrower, true value of anything in Ireland has long gone, it’s all notional now and has been for a long time now. Have you heard of Bernie Madoff, doing 129 years in prison in the states for exactly what the Irish banks were and are continuing to do. Robbing Peter to pay Paul and borrowing from John at the same time.
Hi Ian, we don,t have to trust them, just watch them and let them know we are by regular audit.
A big part of the problem of building on flood plains is the water has to go somewhere and invariably it ends up as flooding in the houses. An engineer as a planner would never allow building in the first place. Now neither should a planner, but here’s a question, do we have flooding in different areas of the country?
What?
A good way of controlling the loan amount for residential property is to cap mortgage duration at a maximum of 20 years. No more 30 year mortgage terms.
It’s a supply that is compound by the oddities of the credit system. If you have a family with kids you want/need a 3 bed or more, but having kids reduces your potential loan amount. Those without kids would logically go “if I buy before I need the room I can afford a bigger house”. That’s a catch 22 I’ve of late.
There is a national discussion needed on property which includes CGT exemptions, property tax, site tax, inheritance, DIRT etc – not a tax grab but a real understanding of the tax principles that could be applied to ensure the housing market provides roofs over heads at a reasonable price.
Prob not going to be popular here but three things need to happen to get prices under control. Debt forgiveness for negative equity, higher interest rates to prioritize savers over borrowers and curtail speculation and big investment in affordable housing. My house is probably earning more than me and my gf combined at the mo. This is unsustainable!
Debt forgiveness for negative equity? Paid for by in part by those is positive equity? Good luck with that sunshine. You’ll be prising that cash from my cold dead hands.
Why not Padriag?
what’s a few more billion on top of the €100,000,000,000 the banks added to the national debt?
Why not? My mortgage is my choice. my debt, my responsibility. if you are in negative equity then you it’s because you made a choice to either buy at the wrong time or borrow the wrong amount or pay back too little. Suck it up, and don’t expect me to pay for it.
I agree totally, and if the banks were treated the same way you wouldn’t hear a peep from me. How come they get preferential treatment?? It was their choice, their investments, they should suck it up and not expect us to pay for it, but they didn’t did they? And that’s what’s inherently unfair about this situation. Many home owners are now paying their normal mortgage. plus many additional inflated taxes and charges in some deluded attempt to pay of French and German bad investments. It’s not as straight forward as you make out.
How about a revolutionary idea of letting open market forces dictate the fair price. Remove all vested interests, enforce financial regulation and creat a sustainable social housing policy.. I know I’m an idealist!!!!
Oh well back to Nama withholding all the housing stock in the country just to try and maximise their returns.
Bring back prudent lending to people who can afford. Other measures include:
- 20-30% deposits required
- only 2.5 first person and 1.5 second persons salary
- mortgage tax relief or childcare tax relief to first time buyers
- scrap tax incentives for investment properties ie the 7 year rule
- provide alternatives for renters, including some rights
Rights?? Tenants have huge legal protection here. Far more so than landlords…
No fixity of tenure. No 9 year leases with rent increases linked to general inflation as is common on the continent. People need to look at renting as a viable long term alternative.
Adequate social housing will best ensure an end to housing bubbles, and folks there is an election around the corner. :-)
Good man…that’s the solution…let’s continue to dish out freebie houses to all the scroungers and penalise those that finance their own home with increased taxes…genius you are
Rather be a “genius” that be self centred.
Rather let a few “scrounges” not pay their way, than have a women and her kids sleeping in their car.
Rather think like me, than think like you. If that made me genius, am proud to be so.
Sleeping in her car by choice after leaving one house and refusing an apartment to try and force the council to give her what she wants at our expense. Not the poster girl you should be choosing for social housing…
Make the lender responsible for any negative equity that accrues in relation to their mortgages. Then see how quick we get back to bubble economics and 100% mortgages.
Tax the snakes and the vultures out of the Dublin property market, and let’s just see how many nice affordable family homes come onto the market pronto?
The majority of the place is probably owned by a few speculators receiving big fat lumps of rent allowance from the state.
Who gives a fcuk about them and their greedy lifestyles?
They have enough.
The weasels!
I can assure you that these vultures as you call them are not collecting vast amounts of social payments. Those types of properties do not return strong enough yields..
I know what your saying.
But maybe its time for a good shake up,
including 1 year bankruptcy legislation (like our western peers),
it might be healthy for the market and it might give someone else a chance for a change.
It’s just that we are looking more like a corrupt dictatorship each day.
Yeah I agree. But all the stuff youre ranting about Nama and Vultures and Estate Agents selling to their buddys just isnt the case as I see it. The vast majority of receivership properties im aware of were transferred to the highest bidder. Or in some cases to a lower bidder for cash. In Cork the nama sales i know of went to Irish buyers.
I am of course aware of the large portfolios in Dublin that went to us & uk interests and that is most unfortunate but they were the highest bidder and indeed are companies that do this all over the world. If they see an opportunity to make a profit then as speculators they expect the Irish economy to improve. Had JP McManus bought these properties would there still be outrage?
To ensure a stable house property market the government has to make it as unattractive as possible in the future for new speculative capital to enter this particular asset class, at least in Dublin.
Ordinary people seeking to purchase a home near their place of work should not have to compete with deep pocket merchants looking for an investment.
Those high profile US hedge funds that bought up blocks of apts around Dublin were essential to ongoing banking fix process. But it would be beneficial to see these exit the market in time in an orderly fashion, without price gouging new home seekers.CGT rate planning strategy by Gov. should achieve desired result when time is ripe.
Landlords in a pre-bubble debt mire should be assisted via a long-term workouts.
Bespoke student accommodation facilities and apartment blocks, and of course commercial, will always offer opportunities for investors, but shortage of suitable sites in our Capital is the problem here.
I guess, in general, it will be hard to keep a lid on upward pressures in housing market, as more equity capital builds via inter generational flows, facilitating higher equity / debt ratios for many new market entrants. This dynamic alone is sufficient to squeeze out anyone with 10% cash deposit hoping to raise 90% balance via mortgage for a city home purchase.
Critical therefore for Government to steer future Foreign Direct and other Investment to the regions for long- term stability of Dublin property market.
Spot on, on your NAMA point Rory.
If we were all handed cheap apartments in Dublin 4 by NAMA,
with guaranteed finance,
with guaranteed tenants
and a CGT break thrown in (courtesy of the Irish government)
Sher wouldn’t we all buy one.
NAMA the agency set up to “help the Irish taxpayer”,
yet to date it has done nothing but enrich foreign vultures at the expense of the Irish taxpayer,
whilst it makes basic shelter more overinflated, unaffordable, and unattainable for the Irish taxpayer.
NAMA (like any dodgy estate agent) always sells the good stuff to their cronies as it keeps the worthless, rubbish leftover crap, to shovel out to Joe/Mary Public.
I was sure that their solution was going to be to say a few novenas.
This would be a disaster. While i applaud the motive behind it. This would just drive a black market version. Where people would pay more than the amount thats reported. So thats worse for the country as revenue will see less tax.
But on the other side of the arguement mosts houses are both by mortgages so therefore strict supervision of the banks mortgage practices and you would limit alot more of overpayments.
This has got me thinking.
It shouldn’t be government responsibility who borrows what and how much. When noone is going to be bailed out by any state intervention we will all have to take responsibility for ouselves, and those who lend and borrow like idiots suffer their own consequences, and therefore have a learning curve.
If markets stayed deregulated for long enough with bailouts and state intervervention were out of the question, we’d all end up incredibly prudent and sensible because we’d realise there’s no such thing as a free lunch. Why can’t some people accept that regulation and state intervention are counter intuitive and give people a safety net in order for them to act like idiots?
Bankers in this country and in France and Germany were bailed out at our expense, no learning curve for them. Bankers will playing idiot again soon enough with a view to conning more money out of us taxpayers. All with the help of the likes of Jean Claude Trichet and other pariahs who would love to see us crippled into submission.
Regulation is counter intuitive???
Are you nuts?? Builders should be accountable for their work. Banks should be accountable for their mistakes. In other EU countries, when you get a surveyor in to look at a property before you buy, they’re accountable if they miss something, and the previous owner if accountable if they hide damage that shows up later, even years later.
Regulation is common sense in some areas. Look at the state of the place, it’s in bits, that’s lack of regulation for you.
Lack of regulation across the EU messed things up, and Ireland, because our ‘leaders’ are useless, took the brunt of the crap.
Yes of course we all have to be accountable, to the market, directly to the people we deal with. For example, if a banker is willing to lend millions or billions to a cowboy developer with poor credit, let them. It’s their problem if they lose millions. They’ll collapse and be in serious debt, and eveyone will take note that you shouldn’t be a fool, or else the same will happen again. Why should the government regulate it or care at all what people so with private money? It should be the individuals undivided responsibility. No state regulation, no bailing out with taxpayers money. We’d have far better public finances if that was adhered to. I know it’s a cliché but market forces are logical and reasonable, but sometimes individuals like bankers and borrowers need to get burned in order to have a learning curve. I’m afraid that given the banjaxed EU driven state intervention in the recent banking crisis , the learning curve has been avoided. Bankers and big borrowers will have learned nothing about the value of money and harf work because they’ve got off scot free at our expense.
Tax the bejaysus out of the auctioneers and estate agents and the other parasites…
Joe Conway is correct. Regulation is the problem. Another comment was ‘we are crap at that (regulation)’. WRONG attitude. If it’s broke … FIX IT. Property bubbles are caused, not by greed, but by reckless lending. The banks are at fault NOT the borrowers. To compliment Mr Conway’s suggested solution, I feel the central bank should be allowed to apply different interest rates to different types of borrowing. Thus if property inflation appears to be rising, the bank could increase the interest rate on new mortgage lending. If general inflation was seen to be a threat, interest rates on consumer credit could be hiked for new lending. This way, the use of interest rates as an economic tool, is not the bludgeon that it is now, and can be precisely aimed at the perceived threat.
How about a 25-30% yearly value based tax on second homes owned by people or businesses. No offsetting, no tax relief on rental income. This would drastically reduce the price and make it less worthwhile to purchase housing as commodity.
Youre kinda missing the point. The economy needs landlords. Not everybody wants to or is able to buy. Without a healthy stock of rental properties the price of rent goes up. If rent goes up people who do want to buy struggle to save for a mortgage..
Yes Cian, but Maybe it’s time for some new landlords to take over from the greedy inbreed elite slum landlord types though??
Im not sure they exist anymore. What with the council inspections and the one sided mess that is the PRTB. There are higher housing standards for rental accommodation then there is for your own home.
Does anyone know how many/ or a percentage of vacant residential properties there are in Dublin? I heard that the banks are sitting on repossessed properties in areas where “too many” homes are on the market for a particular street and they are only releasing a trickle of what they hold in order to get the highest price for their properties and increase demand? I thought we’d have new legislation to penalize banks for each repossessed property that sat vacant for more than 6 months?
We need to set maximum prices (rental and sale) based on the size and quality of property, because in fairness nearly all new developments in Dublin are not big enough and have kitchens and sitting rooms squashed into the same room.
We also need to regulate where developments are actually being built. How many new houses and apartments built in the boom are out in the middle of nowhere, ridiculously far away from the jobs that people need to be able to afford them? That’s why there are so many ghost estates around the country while at the same time sky rocketing rental prices in Dublin City, as well as plenty of other cities and towns I’m sure. Where’s the connection between what people need and what’s granted planning permission and bank loans?
One hse one family,that will drive down the prices,or stabilise them
The hse hasn’t been able to keep any costs down…
The RA?
I’m always sketchy when it comes to the ‘Ra!
have your say