Locked out of the Market: Structural Obstacles to Affordable Housing

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Restrictions by the Irish Central Bank have proven to be a major obstacle to homeownership for potential homebuyers across the nation.

The Central Bank rules are in place to promote financial stability and stimulate less-expensive supply. The government hopes to increase homeownership to quell the housing crisis gripping the state. These competing objectives foreshadow a potential confrontation between the Central Bank and the government.

The Central Bank sets mortgage rules as a way to protect the banking system. Inherently, these rules are aimed at limiting the number of people who can reasonably expect to purchase a home, therefore stabilizing home prices and managing risk in the financial system.

The success of these regulations has limited the number of prospective homebuyers below the level the government – and voters – would hope for, putting the government’s own housing policy at risk.

Stock of Unsold Properties on the Rise

The latest Goodbody report concluded that the stock of unsold properties is on the rise. The report found that in the last four quarters there were 2,500 more housing units built than sold nationwide. An imbalance between supply and demand has been a persistent element of the current housing crisis, but these figures suggest that there are more complex determinants influencing consumer activity and market outcomes.

Economists behind the Goodbody report attribute this oversupply to issues with housing affordability. Rising house prices – partially due to rising construction costs among other factors – and the Central Bank loan limits have priced more and more people out of the market.

The Central Bank mortgage rules, first introduced in 2015, were designed to prevent homebuyers from borrowing more than they could afford and to prevent excess credit build up – factors that contributed to the recession of 2008. The measures require that potential first-time homebuyers have a minimum deposit of 10% of the value of the home. Additionally, loan applicants can only borrow to a maximum of 3.5 times their gross income.

The Central Bank does afford banks and lenders some freedom to make a limited amount of exceptions to these limits within any one calendar year. However, the Irish Independent reported that analysts estimate that banks may have only issued income exemptions to 11% of first-time buyers in the second half of last year. This figure is half of what they could have issued, meaning thousands of potential new buyers could be missing out on getting a mortgage.

The Affordability Issue

The state needs to find a delicate balance between necessary Central Bank measures to protect the financial stability of the Irish economy while ensuring that potential homebuyers have access to affordable housing options.

The government has promoted homebuying through subsidy programmes for first-time buyers like the Help-to-Buy initiative that offers an income tax rebate for qualifying applicants. Such measures have been popular with the public, which according to a Department of Finance survey has a strong preference for home ownership.

The average price for a new home nationwide is €344,000. When factoring in wage growth since 2016, the figure is about seven times gross household income – twice the limit set by the Central Bank. Young workers feel these mortgage restrictions more acutely, leading to what has been dubbed a ‘locked out generation,’ with many delaying or ruling out homeownership.

Without the ability to affordably purchase a home, potential homebuyers are forced into the rental market which has seen increasing rental prices – often times higher than potential mortgage rates – and a rise in long-term renting.

There is, however, reason to be optimistic. The Banking and Payments Federation reported that the number of mortgages granted jumped 10% in May – 51% of which were granted to first-time buyers. There has also been a growing conversation within the industry and the government regarding a review of the Central Bank’s 10% deposit requirement. If this was adjusted to 5% rule, inevitably the market would see a modest increase in housing prices, but tens of thousands of people – especially young people – would be able to secure affordable housing.

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