Curbing price volatility in the housing market is an ongoing challenge for governments. Clearly, in order to stabilise house prices, supply and demand must be brought into equilibrium. The difficulties inherent in achieving this goal are illustrated by Ireland’s economic travails over the past decade.
During the heady days of the ‘Celtic Tiger’, property developers embarked on a building frenzy, their expansionary drive fuelled by three factors: the availability of almost limitless credit, the flow of cheap labour from Eastern Europe and an apparently buoyant property market. However, too many of these building schemes were not brought to fruition. The onset of the recession and the accompanying credit crunch which it triggered forced many developers to abandon their projects. The landscape of Ireland is now littered with ‘ghost estates’, abandoned, unoccupied or unfinished. They have been declared economically unviable and have consequently been flagged for demolition. Compounding the difficulties in the housing sector, the lax mortgage credit criteria have also led to a cascade of defaults amongst existing mortgage holders, thus creating an unprecedented wave of house repossessions.
A priority of paramount importance for governments in shaping social policy these days is, undeniably, the provision of quality housing for its citizens. One legacy of the 2008 financial crisis, however, is an acute shortage of housing. As a supply shortage inevitably drives an upward spiral in prices, this is reflected in the housing market. During 2014, house price inflation across Ireland has vacillated between 8% and 20%. Galloping ahead of the rest of the country, house prices in Dublin increased by 20%, whilst nationally the rate averaged out at 13% to 14%. These increases in prices show marked variations from county to county. In the last quarter of 2014, the year-on-year changes recorded per county were: Donegal 0.1%; Cavan 1.5%; Monaghan 5.2%; Louth 11.4%; Longford 12.2%; Roscommon 9.7%; Wicklow 18.8%: Cork City 12.2%; Limerick City 2.8%; Dublin City Centre 27.1%; South County Dublin 17.9% and North County Dublin 15.9%.
According to analysts, the five factors impacting on house prices are credit, expectation, income, supply and demographics. Of these variables, changes in credit and expectation are most likely to induce changes in house prices. Harnessing this recognition, the Central Bank has established new regulations that place quantitative ceilings on the proportion of mortgages at high loan-to-value ratio and on the proportion of mortgage lending at high loan-to-income ratio. According to the Central Bank, this change in macro-prudential policy in the real estate sector will have a dual effect: increasing the resilience of the banking and household sectors to financial shocks, and dampening the pro-cyclical dynamics between property lending and housing prices.
In practical terms, the new regulations mean that first-time residential buyers can borrow as much as 80% of the property price or even 90%, up to a limit of €220,000, plus 80% of any amount beyond it. The scope of these caps also extends to housing loans secured on residential property in the state, as well as to equity-release/top-up mortgages. What it does not cover is the refinancing of a house loan or loans that have been negotiated for the purpose of addressing arrears of payments.
Although the regulations have been welcomed by property analysts, there has been a current of dissent. Opponents of the restrictions, whilst conceding that they may have the desired effect of moderating house inflation, argue that the measures may also foster a concomitant escalation of rental prices. They predict that a rising demand curve for rented accommodation will have the inevitable consequence of luring speculators into the market thereby destabilising house prices and posing a threat to first-time buyers.
About the Author
Luigi Wewege is the founder of Vivier Group and the Managing Director of Vivier Mortgages (a Dublin, Ireland based home loan company), as well as CEO of its Auckland based financial services arm, Vivier & Co, a boutique Financial Service Provider in New Zealand, offering no–cost, above average returns for investors.
Vivier Mortgages
Vivier Mortgages is a Dublin, Ireland based home loan company that has specialised in secured property lending, principally for domestic mortgages and building projects, for nearly twenty years. The company, having recently become part of Vivier Group, is currently looking for new opportunities in Ireland, in the areas of property acquisition, redevelopment and regeneration.
Vivier Group
Vivier Group is the global umbrella organisation of the Auckland based Vivier & Co and Vivier Investments, the London based Vivier Developments & Vivier Home Loans, and the Dublin based Vivier Mortgages.
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