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Opinion: Game over for mortgage affordability?

In many areas property is simply unaffordable, again – yet our political class seems to regard the ‘recovery’ in property prices as only a good thing.

Kevin Byrne

WITH THE LATEST price increases our property market has crossed an important and unwelcome threshold – for many buyers mortgage affordability is now worse than at the height of the bubble.

This week’s latest CSO residential property index figures show a massive 25% increase in Dublin property prices over the last year, which is driving a 15% increase year-on-year nationwide (with almost no increase outside of Dublin). In light of these rapid price hikes it’s worth revisiting the issue of mortgage affordability.

The latest figures show that on average properties nationwide are 41% off their peak values (while Dublin houses are 39.2% lower). This figure is probably a conservative estimate as the CSO still excludes cash sales (despite the property price register being up and running for almost two years) so they are missing about half of all property transactions. Nevertheless, as it’s the only figure available, let’s use it to look at the affordability of the same house now as compared with during the bubble.

Affordability? What affordability?

With these latest price increases the property market has crossed an important and unwelcome threshold – mortgage affordability is now worse than it was at the height of our property boom for public sector workers. And private sector workers are not far behind – their mortgage affordability is just 2% better than for a buyer in the property bubble era (less than 1.5% if we just look at houses in Dublin).

But of course even that 2% is on a net income that is much smaller than in 2008 and which also has to pay many other expenses that have risen rapidly (eg, health insurance, car costs and, soon, water charges), meaning that disposable income has been squeezed even further than the increased tax take would indicate (a point clearly seen in the Credit Unions’ “What’s Left?” surveys).

Couples even worse off

The above example is for a single first time buyer earning €50k in 2008 and buying a property that cost €300k then. For a couple it’s even worse. If we look at a couple earning €100k and a property worth €550k in 2008, then for a public sector couple their mortgage today is a massive 5.5% less affordable than that on the same house bought during the boom, while they are less than 1% better off if private sector.

If we just look at Dublin houses, mortgages are now 7% less affordable for public sector couples while for private sector partners unaffordability is the same as at the peak of bubble. You can find details of these calculations at NowOrSoon.com.

A growing problem

So for any public sector would-be-buyers, be they a single person or a couple, their mortgage affordability is now worse than at the peak of the boom. Single private sector workers are still 2% up on the bubble era, and private sector couples are 1% up, but for Dublin houses they are now at bubble era unaffordability levels.

And all the above numbers are the averaged picture – in many popular Dublin residential areas we are long past boom era levels of unaffordability, and any mortgage backed would-be-buyers are largely priced out of those markets. As prices continue to rise this growing unaffordability will only get worse.

Easy credit is not the solution

All this means that complaints about access to credit strangling our property market’s ‘recovery’ are wide of the mark. To buy with a mortgage today people have to extend themselves just as badly as during the boom, an issue that has been talked about privately in banking circles for a while, but which isn’t being discussed much publicly.

To be fair, to date this boom has been different in that a lot of sales have been fully or in large portion cash, meaning credit hasn’t played as much a role as last time around… yet. However if the nightmare of cleaning up the national collapse from our last property bubble is actually considered a bad thing then perhaps some alarm bells should be going off round about now.

In many areas property is simply unaffordable, again. This won’t come as a surprise to many couples trying to buy their first home, but it is seemingly news to our political class who only see the ‘recovery’ in property prices as a good thing. The damage to competitiveness of rising property prices and rents is largely ignored by government policy. Unbelievably the Minister for Housing actually welcomed the latest price increases.

The future needs as much consideration as the past

If we compare someone buying a home today to someone still paying off a negative equity mortgage on the same property bought in 2008 we find that it is now over 2% less affordable for today’s buyer. Such is the difference in mortgage servicing costs between a 2008 buyer (tracker, mortgage interest relief) and a 2014 buyer (SVR, no tax relief) that it is actually cheaper for them today, despite their larger mortgage.

Given all the political effort and financial forbearance that has been extended to negative equity homeowners over the last seven years, perhaps it’s now appropriate that first time buyers are afforded some attention too. The future needs to be given as much consideration as the past, otherwise we risk holding younger generations back by continually shackling them with the legacy of previous mistakes.

Demand… but no supply

The main driver of these damaging increases in property (and rental) costs is a lack of supply of accommodation where people most need it, which is where most economic activity is – the greater Dublin area – where there is a growing population but minimal building activity since the crash. If that isn’t addressed, expect to see more and more homelessness (including of those in employment) and a generation largely locked out of any prospect of owning their own home.

Dr Kevin Byrne writes about Irish policy and politics at NowOrSoon.com. You can follow him at fb.com/noworsoon or @noworsoon

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Kevin Byrne

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