Irish household incomes are rising strongly, driven by robust employment growth, and that would normally support the demand for mortgages, particularly against a backdrop of rising property values and low interest rates . Indeed,Irish financial institutions have seen new mortgage lending rise year on year since 2013, albeit at an erratic pace, reaching €7.3bn in 2017 from under €2.5bn four years earlier. The number of new mortgages drawn down annually for house purchase rose from 13,000 to over 29,000 over that period.The strength of new lending also began to offset mortgage redemptions a year ago and the annual change in net mortgage lending has picked up since, to 1% in September.
The market has had to adapt to constraints on new mortgage lending, introduced by the Central Bank in 2015, including a number of changes to the controls, most notably from the beginning of this year, with FTB lending allowed in excess of the 3.5 LTI limit reduced to 20% from the 25% observed in 2017. The constraint applies to lending over the calendar year as opposed to approvals, and the latter may not translate into actual drawdowns for a number of reasons. Banks have therefore become much more cautious on approvals, paricularly to FTB’s, and approvals to that segment have been falling on an annual basis since March, declining by an annual 3.3% in the three months to September.
In fact approvals to all borrowers for house purchase is also down relative to last year, at 9,741 in q3 against 9,876 in the same quarter of 2017. The relationship between approvals and drawdowns can vary a lot from quarter to quarter and actual lending for house purchase in q3 was stronger than the approvals trend implied, albeit still confirming a slowdown in the pace of new lending.
Over 8,700 loans for house purchase were drawn down in the third quarter, 8% up on the previous year but compared with annual growth of 9.4% in the first six months, itself about half the pace seen in 2017. The value of lending for house purchase is also slowing, emerging at €2bn in q3, up an annual 11% against 16.5% growth in H1. The implication is that the average new mortgage is also increasing, as one would expect given rising house prices, but again there is a noteworthy change; the average mortgage for house purchase in the third quarter was €228,000, just 3% up on the previous year.
Central Bank research indicated that mortgage controls would dampen mortgage lending and house building while also impacting house prices and that certainly seems to be playing out, although the possible effect on prices is being offset to some degree by the scale of non-mortgage buying, which still appears to be running at about 50% of transactions. One other striking feature of the mortgage market is the strength of re-mortgaging, such that lending for house purchase has fallen to 80% of total mortgage lending, from 94% three year ago.
Finally, we have trimmed our estimates for new mortgage lending for 2018 as a whole, with €8.2bn now envisaged, including €6.8bn for house purchase. The number of loans for the latter is projected to be just over 30,000 from 29,400 last year.