The second-time buyer is potentially being excluded from the housing market as a consequence of the recently-introduced Central Bank deposit requirements.
Philip Farrell, CEO of Real Estate Alliance believes that it is time for the Government and the Central Bank to reassess the effects that the recently-introduced deposit requirements are having on the property market both in Dublin and beyond.
While there may be some relief on the way for homeowners with the mooted freezing of Residential Property Charges, the real issue for homeowners looking to move house for whatever reason is their inability to raise 20% of the purchase price.
We are seeing evidence that this is having a marked effect on properties valued at above €300,000, and that rather than turning heat down in the market, it has cut off the flame for people wishing to trade up.
To understand their effect on the market, it is important to look at how these new borrowing requirements are structured.
First-time buyers can still borrow 90% of the purchase price of a house up to a maximum of €220,000. Anything above this figure only qualifies for 80% funding.
This cooling measure is having the desired effect amongst first-time buyers.
However, second-time buyers can only borrow 80% of the entire purchase price as the 90% facility up to a ceiling of €220,000 only applies to first-time buyers.
What is becoming clear is that in particular parts of Dublin, mainly the city centre and south Dublin, this is a bridge too far for second-time buyers.
The primary reason for the introduction of the increased deposit requirements was to take some of the heat out of sectors of the residential markets which had seen noticeable increases over the previous 15 months.
As is synonymous with capital cities in many rebounding property markets, Dublin had experienced the most significant increases in values, with properties increasing by up to 40% in some locations.
The Central Bank intervention in February 2015 was well intentioned and as a direct result we are now witnessing a slowdown in the increase in property values – and a decrease in some cases.
Recent market prices have also been influenced by the ending of the seven-year capital gains exemption relief period and the expiry of six-month loan approvals issued under the previous borrowing requirement structure.
It is now evident that while property values throughout most of the country are now static or experiencing minimal increases, values are now falling in some parts of the capital as highlighted in the recent REA Average House Price survey where Dublin prices were down 5% in Q2.
Our recent survey showed that the average price of a house in Dublin is now over €362,000.
A typical couple who bought an average small house during the boom may have a mortgage of €330,000, and, hopefully, no negative equity.
Let us say they identify a larger home they would like to purchase for €440,000.
Under the previous structure they would need a combined gross annual income of approximately €80,000 and would need to provide 8% of the purchase price of the property which would total €35,200.
Under the new borrowing restrictions they can only borrow up to 3.5 times their combined annual gross salary which would need to be in excess of €100,000
However, where the real challenge comes in is the deposit requirement which has now gone up to €88,000 – that is €52,800 more than previously.
This is a net figure which would require a borrower to earn an extra annual gross figure of approximately €90,000 – putting the next move on the property ladder beyond the means of most average families.
We are seeing that this restriction is starting to have a profound effect on the property values above the €300,000 mark.
And while there is an acute shortage of new homes on the market we may continue to see pressure on values over the next 12 months as people will not be in a position to raise such large deposits.
Many people who had intended to sell or look for something larger will now simply stay put and others may postpone moving plans for a couple of years.
While values outside the capital are much lower, the effect of these restrictions will still be felt, but to a much lesser degree.
I believe the Government should address this anomaly in the market and Real Estate Alliance will be making a pre-budget submission on this issue.
There was real merit in the Central Bank's initial intervention, however this needs to be reassessed as it is now alienating the second-time buyer and will continue to exclude them from the market not alone in Dublin but potentially throughout the rest of the country.
We are proposing that the Central Bank would retain the current price ceiling of €220,000 but bring second time buyers into the net, allowing them to borrow 90% of the purchase price up the ceiling of €220,000 with a maximum of 80% available on monies above this.
If this was the case, the deposit required for our sample couple would drop from €88,000 to €66,000, a saving of €22,000
The indications are that the annual supply of new homes required as a result of our demographics may not be satisfied nationally over the next two years.
However, if the current regime is retained it will act as a significant barrier to those looking to move up the property ladder, freeing up homes in the vital entry sector.
Philip Farrell is CEO of Real Estate Alliance