1 in 5 new mortgage loans now not for house purchase

House price inflation in Dublin is slowing according to the recent CSO data; values rose by just 0.9% in the three months to May and actually fell in South Dublin, by 1.0%. An increase in supply is widely expected to dampen price pressures but new house sales year to date  in the Capital are marginally down on the same period last year, as are total transactions, so demand factors may be playing a part. London and Dublin prices have been highly correlated in recent years and the price falls seen in the former may be having an impact on investor interest in the Dublin market. For buyers with Irish mortgages the latest data  from the BPFI, on approvals and drawdowns, indicates that the recent tightening of mortgage controls is impacting and that affordability is becoming more important as a constraining factor.

Mortgage approvals for house purchase fell by an annual 4.6% in June and  rose marginally in the second quarter as a whole ( by 0.8%) . FTB approvals fell in q2, however, by 0.8%, and have been weak since the the first few months of the year; 10,882 mortgages were approved for first time buyers in the first half of 2018, against over 11,000 in the same period last year. A quarter of mortgage loans to FTB’s exceeded the 3.5 LTI limit last year and the permitted excess was reduced to 20% in 2018, so one might expect that to dampen lending for house purchase, particularly as affordability ( the annual payment on a new mortgage relative to income) has deteriorated given the rise in house prices and associated increase in the value of an average new mortgage. Indeed, it is noteworthy that the average new mortgage for house purchase in q2 of €225,500 was broadly unchanged on q1 and 5% higher than a year earlier, as against a 9% increase in 2017.

The number of mortgages for house purchase  actually drawn down in q2 amounted to 7,381 or 9.2% above the same period in 2017, a slower pace of  growth than the 9.6% increase in q1 and the 14.7% recorded in q4 last year. The value figure was €1.7bn, up an annual 14.7%, against an 18.5% annual rise in q1. The growth in total mortgage lending ( i.e including top-ups and re-mortgaging/ switching) was unchanged at 22%, however, amounting to €2bn in q2 , driven by  a doubling of re-mortgaging/ switching over the year. Indeed, the latter amounts to 14% of total loans in q2 and one in five mortgage loans are now not for house purchase, the highest share since 2011.

In sum, the growth in mortgage lending for house purchase is slowing, and the average new mortgage is also growing at a more modest pace , with FTBs squeezed by affordability and tighter mortgage controls. The steady stream of lower mortgage rate announcements indicates banks are responding, and that competition is more intense in re-mortgaging and switching.

Irish housing transactions fall in q1 with cash buyers still dominating

The CSO’s Residential Property Price index for March showed prices still accelerating nationally, with the annual change at  12.7% from a downwardly revised 12.5% in February and 12.1% at the end of 2017. Property price inflation in the capital slowed, to 12.1% from 12.6% the previous month, but picked up strongly over the rest of the country, to 13.4% from 12.3% . Prices  were particularly strong in the mid-West (Clare, Limerick and Tipperary), rising by an annual 16.4% but fell for the second consecutive month in the Border counties, reducing the annual gain to 8.8%. Within Dublin, house prices in the city rose by an annual 14.2%, with South Dublin lagging, showing  a rise of 9.6%.

The housing market is generally perceived as characterised by chronic excess demand although the exact amount of new supply (house completions) is subject to some doubt. The number of housing transactions is available though, through the CSO, and the figure for the first quarter is actually down on the previous year, at 13,967 versus 14,500. The decline in turnover was particularly acute in Dublin, with transactions down 10% to 4,500.

The number of mortgages drawn down for house purchase in q1 , at 6,400 , was up by some 10% on the previous year, but that still implies that over half the transactions in the quarter (54%) were financed by non-mortgage buyers, a persistent feature of the market. First time buyers account for more than half of loans but are clearly competing against investors, both corporate and individuals, as well as each other, for the limited supply available.

Moreover, the approvals data, a leading indicator of drawdowns, indicates that lending is actually slowing, and quite sharply; approvals in q1 were  down on the previous year, by 4%, and by 13.7% in March alone. We have noted before that the Central Bank’s latest modifications to their mortgage controls, which took effect this year, was an effective tightening, as only 20% of FTB loans can exceed the 3.5 LTI limit , as opposed to an actual 25% last year. Indeed, new  mortgage lending was offset by redemptions and repayments in the three months to March. In other words net lending was negative and with new lending slowing and accounting for less than half the transactions in the market it is hard to argue that prices are being fuelled by credit. Rental yields in excess of 5% is obviously attracting buyers in a QE driven environment of zero short rates and  10 year bond yields of under 1%.