Jill Kerby

IT’S NOT A PROPERTY BUBBLE…IT’S A DISTORTED MARKET

All this talk about new property bubbles makes me very uneasy.

First, the only evidence I see of serious price inflation is in certain areas of Dublin where there is heightened demand for family homes near good schools and transport links.

It’s being fuelled by older cash desperate to get a better yield than tiny deposit rates and from young professionals with substantial, safe jobs and a sense of desperation because there is so little available supply.

The number of mortgage approvals in the last year – approved, mind you, not actually drawn down – is up 11.1% between August 2012 and 2013 according to the latest statistics from the Irish Banking Federation. Approvals fell 5.3% in August from July 2013 and were worth 8.5% less, but the annual value of these approvals were up 11.3% (to €297 million).

Meanwhile Dublin prices are up just over 10% in the past year and by 2.8% in the rest of the country. Official inflation is very low at the moment (less than 2%) but in a normal economy, with historic house price inflation of c2%-3%,that 2.8% increase suggests that it is probably a more authentic rise than the Dublin one.

Property prices are artificially high, says mortgage broker and financial adviser Karl Deeter of Irish Mortgage Brokers because the property market in general and bank-lending remains dysfunctional. There is insufficient lending because the banks are afraid of any future losses at a time when they have 150,000 existing customers in arrears and restructuring arrangements and the risk continues of mass repossessions, losses, and ultimately, debt write-off.

Meanwhile, says Deeter, young couples looking for family homes in good areas of Dublin are being forced to overpay for this property bottleneck that is forcing up prices.  Large tranches of repossessed properties hitting the market will inevitably dampen all prices in the future (as could property tax, water charges and any other taxes we will end up paying to service the on-going state debt.)

His concern, he says, some of those new buyers could end up as tomorrow’s negative equity and arrears victims if their personal financial position ever deteriorates.

I asked Deeter about the increase in mortgage lending: doesn’t that mean the market is showing some sign of recovery?  He agreed, but reminded me it is off a very, very low base with even Dublin house prices still 53% off their peak prices.  As with other small signs of more consumer spending, it’s is the least we should expect after five steady years of downturn.

Anyone actually seeking a mortgage faces a very different reception than back in 2007-2008.

“Most of the banks are offering 90%-92% loans,” he said. “But how much you can borrow has very little connection with multiples of income or any percentage of disposable income.”  The calculators on bank websites that suggest, for example that someone with a certain income can then borrow three, four of five times their income, are deceptive.

“Loans are now extended after the borrower’s cash flow is determined. Someone with two kids to clothe, feed and educate is not going to qualify for the same loan as the single person with the same income.”  Loan stress testing is more about whether your lifestyle can stand any negative impact, not just a rise in interest rates, said Deeter.

Even how much you pay in rent will not necessarily translate into a similar sized mortgage repayment since someone who pays rent can just walk away from their rented home. If you walk away from a mortgage you can’t pay, the bank will pursue you for any shortfall and be stuck with a liability on their balance sheet.

So what can a first time buyer do to secure mortgage loan approval? The obvious factors include having

- a safe job, that is, working for a company that isn’t going to go bust in the next 12 months (at least). Sole traders need to show 2-3 accounts. You will probably need to get your company to sign the bank’s employment certificate.

- money for the 8%-10% downpayment (parental ‘gifts’ are not always accepted) plus legal costs, etc.

- a track record of saving and/or paying rent (ideally higher than a monthly mortgage repayment)

- sufficient cash flow to pay the mortgage, insurance, maintenance, property taxes, etc now and in the future and meet all your other essential living costs.

- sufficient other resources to pass income and interest rate stress tests.

The old loan-to-income calculation of three and a half times your combined incomes may be passé, but it still seems very prudent to me. A couple earning just €50,000 a year isn’t going to have much money left over to start a family if they borrow more than €175,000 and have to pay a variable rate, 25 year mortgage of c€970 a month (at 4.5% interest).