The figures from today’s Daft Report confirm both that the country’s housing shortage persists but also that – at least for the family home segment in and around Dublin – things are improving steadily.
There was almost no increase in property prices between June and September. And year-on-year, inflation continues to cool, with prices in Dublin 5.9% higher than a year ago. Inflation has been 9.9% this time last year so while a 6% rise is still well above healthy, it is far better than things were.
Having a stable mortgage rules system takes some of the guesswork out of understanding the housing market. The cooling off of inflation relates directly to supply. The total number of homes available in the Dublin market in September was almost 5,000, compared to just 3,400 a year ago.
But those same mortgage rules that pin down the relationship between housing prices and the real economy have also had a secondary effect in the market. The fine print of the rules has meant that market has become an extremely seasonal one.
To see this, it is worth taking a bigger picture. Between 1996 and 2006, housing prices rose steadily – and those increases were more or less the same regardless of the time of year. In the first, second and third quarters of the year, the average three-month increase 1996-2006 was close to 3.5%. Only in the final three months of the year did any kind of seasonal effect kick in.
That market is long gone and what is emerging in its place is a see-saw market, where prices surge forward in the first half of the year and then tread water between July and December. Nationwide, the average quarter-on-quarter increase in the first half of the year since the Central Bank rules were introduced has been 3.3%. In the second half of the year, the increase has been just 0.7%.
The root cause of this is a wrinkle in the mortgage rules. The overall make-up of the rules is not under question. While I have separate reservations about the effect of loan-to-income restrictions, they and their loan-to-value counterparts ensure that Ireland will never again suffer a housing bubble and crash episode like the one seen 1995-2012.
In the fine print, under Central Bank rules, individual banks have exemptions in relation to loan-to-income and loan-to-value caps. Specifically, for first-time buyers, one in five first-time borrowers – technically 20% of the value of new mortgage lending – can be above the LTI cap. For other owner-occupier buyers, the fraction is 10% (since the start of this year).
But, crucially, those exemptions are based on a calendar year. The obvious result is that bank employees, keen to meet their sales targets, frontload their exemptions into the start of the year.
Using overall targets for lending by their bank that year, it is not difficult to estimate how many exempted mortgages they can give that year. Once they know that, it is simply a case of trying to lend out those exemptions as fast as possible once New Year’s Day hits.
And borrowers know this too. Anyone who has a good prospect of an exemption will wait until late in the year, get their paperwork in order, and then make sure they are good to go once January rolls around.
This of course feeds through to the sale side. Estate agents advise their clients that, if at all possible, they should wait until January when the fresh batch of exemptions comes through. (No point in being on the market all that time as, to homebuyers at least, houses “go off” after a couple of viewings.)
All of this is, of course, completely unnecessary. A simple tweak would fix this oddity. The Central Bank merely has to change the basis of their LTI exemptions from being done on a calendar year basis to being done on a rolling 12-month basis. This would move the market away from being a see-saw one without in any way undermining the effectiveness of the mortgage rules.
None of this should take away from the challenges still facing the Irish housing system. The mortgage rules are, by and large, right. And the one segment of Irish housing that is – at least when you compare demographics to the stock of buildings – not under-supplied is starting to show signs of life.
But that still leaves a huge challenge to get the right type of housing built, given how we are going to live in ten, thirty and fifty years time. In particular, we will be living more in cities and more in households of one to two persons. Therefore, the policy priority must remain on increasing the supply of urban apartments, so that our housing stock better matches the likely future path of our accommodation needs.