The Society recently staged a seminar on the residential mortgage market. PAUL O’GRADY reports.
At the Society’s recent mortgage seminar (from left): John Hogan, Head of Banking, Department of Finance; John McCartney, Savills; Kieran McQuinn, Central Bank of Ireland; and, Karl Deeter, Financial Advisor. Front: Society Director General Ciara Murphy.

At the Society’s recent mortgage seminar (from left): John Hogan, Head of Banking, Department of Finance; John McCartney, Savills; Kieran McQuinn, Central Bank of Ireland; and, Karl Deeter, Financial Advisor. Front: Society Director General Ciara Murphy.

Micheál O’Connor, President, Society of Chartered Surveyors Ireland, welcomed members and guests to the first of what he hoped would be an annual seminar on the residential property market. He noted that recently published market research carried out by the Society showed that one in five people currently renting accommodation intend to try to purchase somewhere to live in the next 12 months.

Solutions first
John Hogan, Head of Credit and Lending Policy at the Department of Finance, revisited some headline figures. “Stamp Duty, Capital Gains Tax (CGT) and VAT on property was €650 million in 1996. In the boom, employment and income increased, leading to an increase in demand for property. By 2006, the €650 million had become €6.8 billion. When the bubble burst, the loss of taxation revenue left a massive hole in the Government’s income and 160,000 jobs in construction were lost.”
He stated that investment is currently too low and there is a cross-Government group looking at how the Government might find new ways to support the economy. The Department of Finance is engaged in long-term economic policy planning in which property plays an important role, and a recovery in the mortgage market would be helpful. However, the provision of solutions for the mortgage arrears problem, and the active implementation of the new insolvency structures, are very important. Nonetheless, the Department of Finance man said that he believes that without returning to imprudent lending, the banks will meet the needs of their customers and of the market.

Employment is growing
John McCartney, Director of Research at Savills, looked at the current state of the residential property market. “Generally, the market is improving,” he said. Housing sales are up to 18,200 nationally in the period January to September 2013 (compared with 15,300 in the same period in 2010). He observed that outside Dublin, prices are stationary. Dublin house prices, however, have risen by 12.3% in 2013 over 2012. John outlined the important population and employment trends underpinning these figures. “Population has grown by 360,000 since 2006 necessitating 132,000 more homes. And while the population of Dublin has only grown 6.6% compared with 9.2% outside Dublin, the key age group driving demand for houses is 25- to 40-year-olds. This age group is expanding in Dublin, but is stagnant outside Dublin.”

Mortgages 1

House sales: units sold January to September 2010-2013.

On employment, there was a 16% drop in employment numbers from Q3 2007 to Q1 2012. However, since Q1 2012, there has been a net increase of 44,900 people in employment. (This is despite job losses of 11,000 – so the private sector has generated a gross 56,000 new jobs in that timeframe.) This increase in employment has translated into earnings growth in six of the last eight quarters. However, cash purchases have accounted for a high volume of house sales in the last few years. In Q1 2013, for example, they accounted for more than 60% of house sales. These cash purchasers tend to be international buyers; investors; institutional buyers; or, people trading down.
On the supply side, vacancy rates are much lower in Dublin and we have not built many houses in Dublin (only 800 year to date); therefore, new supply is needed.

Mortgages 2

A summary of the mortgage market 1990-2012.

Credit supply trends
Kieran McQuinn, Central Bank of Ireland, made the point that since the bust, Ireland now has much better information from financial institutions “… and Europeans tend to be envious of our information”. He stated that his research draws on that information. He noted that in the period up to and during the boom, there was considerable liberalisation of the Irish credit market. “Key credit and interest rate controls were removed. Irish institutions broke the link between credit and their deposit base, leading to voracious demand for credit from financial institutions. This led to vulnerable banks when the crisis arrived, and to a big increase in the proportion of gross income (from 16% to 25%) going on mortgage payments. This has now reverted to 16%, but needless to say poorer families that had benefitted most from the relaxation of credit terms suffered from the downturn.” He concluded by saying that significant changes have been observed in the credit supply and that demand which had been high is now low.

New debt solutions
Karl Deeter of Irish Mortgage Brokers spoke about the new insolvency and debt settlement arrangements. He said that some voices had argued that the people who need personal insolvency arrangements put in place may not be able to afford a personal insolvency practitioner (PIP). However, he said that ultimately the cost would be borne by those agreeing to a settlement on the debt and showed basic accounts to prove the case. Karl also stated that he believed the majority of debt settlement agreements would be informal deals. A caveat he sounded, however, was that the current structures left unsecured debtors very vulnerable to potential rigging of deals.

UK issues
Peter Bolton King, Global Residential Director of RICS, looked at the challenges of the UK residential property market. He said that the most significant challenge appeared to be a shortage of valuers in London and the south east. “Numbers are not meeting demand, and this is leading to delays in deals being completed. Interestingly, RICS would say that there are enough, but not enough want to get involved in valuations. The risk is too high and the professional indemnity insurance is too expensive.” Therefore, RICS has commissioned a report, which is due before Christmas, into the issue, but there is some evidence that fee levels are beginning to go up. He noted that England requires about 200,000 new homes a year and supply is nothing like that at the moment.

Bankers’ view
Felix O’Regan, Director of Public Affairs, Irish Banking Federation, reported that the mortgage market has increased by 12% in Q3 2013 compared to Q3 2011. He also noted that total mortgage repayments now are exceeding new lending, so there is a reduction in the total mortgage debt in Ireland. He said that the banks are keen to support the recovery and claimed that there is a 30% increase in the volume of properties listed for sale. Research is expected from the ESRI in the New Year relating to the future demand for housing, which will assist in informing Government policy to balance demand and supply.


Mortgages 3

Mortgage approvals and drawdowns Q3 2011-Q3 2013.

Discussion with the lenders
After the presentations, there was a panel discussion with the executives in charge of mortgage lending in the five Irish banks. There was a strong exchange of views, with some surveyors expressing the opinion that banks are not actively lending because they are putting up too many obstacles to borrowers. The bankers replied that they are lending, noting that while the refusals of mortgage applications were only 15-20%, the drawdown rate of the 80% that are being approved is very low. The banks all believe that the scarcity of housing available for sale, together with cash buyers, are driving up prices in parts of Dublin and other urban centres throughout the country. It was noted that an essential part of rebuilding the profitability of banks was mortgage lending. Asked about conditions attached to lending, the banks stated that there must be a robust approval process to underpin a mortgage that is sustainable for 20-25 years. Discussion also took place in respect of residential mortgage valuations, and further engagement between the Society and the Irish Banking Federation will address standardisation of mortgage application forms across the banks, and the role and process of valuation in residential mortgage applications.

Paul O'GradyPaul O’Grady
Paul is a Director with Think Media.