The Irish housing market has developed a number of unusual features of late , one being the trend in mortgage affordability. That concept captures the monthly payment on a new mortgage relative to the borrowers income and will generally deteriorate as the housing cycle unfolds; rising house prices will push up the average size of a new mortgage and more often than not interest rates will also increase, offsetting the positive impact of rising incomes. For example. the average new mortgage for house purchase in 2008 was €270,000 against €172,000 in 2004 , with the mortgage rate rising to 5.1% from 3.4%. As a result the monthly payment for a new borrower almost doubled, from €850 to €1600, dwarfing the rise in income over the period.
One big difference in the current cycle is that mortgage rates have not risen, and indeed have actually fallen a little since the cycle turned in 2013; the new mortgage rate was 3.0% last year versus 3.25% five years earlier and if anything is likely to be marginally lower still in 2019. Against that, rising house prices have pushed up the average new mortgage and affordability deteriorated from 2012 to 2017, albeit at a modest pace and still leaving the monthly payment relative to income below the long run average.
Another difference in this cycle is the controls on mortgage leverage brought in by the Central Bank in 2015, including a 3.5 LTI limit. 20% of lending to FTB’s is allowed to exceed the limit but one might expect that the average new mortgage would now be tied more closely to average incomes in the economy, but what is curious is that the the growth in the average new mortgage for house purchase is now lagging the growth in incomes, so on the face of it affordability is improving again.
In 2018 household disposable income rose by 6.2%, but the average new mortgage for house purchase rose by only 4%, to €226,000. Employment growth and wage inflation have both acclerated in 2019 and according to the CSO household incomes rose by over 8% in the first quarter, so it seems likely that the full year will see another very strong rise in incomes. Yet data on mortgage drawdowns from the BPFI show that the average new mortgage for house purchase over the first half of the year was €230,6000 and just 2.5% up on the same period in 2018, so again substantially lagging income growth.Of course mortgages in Dublin and the surrounding counties will be higher, and affordability correspondingly worse, but it remains a puzzle as to why the national picture shows a booming economy and yet very limited growth in the average new mortgage. In fact it is hard to explain the recent slowdown in house price inflation in fundamental terms, given the affordability improvement and the relatively slow increase in housing supply, which is still far short of what is generally deemed to be required. Price expectations from both buyers and builders may be the most significant factor.