Cliff Taylor: As a first-time buyer, should you be allowed to borrow more?

Taoiseach Leo Varadkar needs to be tread carefully on the issue of the Central Bank rules for mortgage borrowers. On Friday, at the MacGill Summer School, he opined that he hoped the Central Bank might change one aspect of the rules, the one which requires first-time borrowers to have a deposit of 10 per cent of the purchase price. This was difficult for those currently paying high rents, he said, and was leaving many people trapped in the rental sector.

It is part of a growing clamour on the bank to change the mortgage lending rules. Ironically, by calling for change, the Taoiseach may have made it less likely to happen. And his timing, with a new governor shortly about to take the reins at the Central Bank, was poor. If the new governor, Gabriel Makhlouf, wants to underline his independence from day one, he may well choose to ignore calls from politicians for change when the rules are reviewed this autumn.

Unfair barriers

That the housing market is putting up unfair barriers, for younger people in particular, is beyond question. They are caught between sky-high rents and housing prices which have risen significantly in recent years. Housing supply has improved a bit, although there are signs in parts of the Dublin market that affordability is slowing sales – and some concern that this may be limiting supply. This is the background to calls from the property sector – and from some politicians – for the mortgage rules to be revised.

For what it’s worth, I would be a bit sceptical. Are we really arguing that we should go back to the era of 100 per cent mortgages, or allowing people to borrow large multiples of their income in the hope that future wage and house price increases would square the circle? It was a strategy which didn’t work very well last time, although the level of mortgage credit now being extended into the market remains a fraction of the boom-time peak.

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The Taoiseach's intervention was nuanced, focusing just on the deposit rule and recognising that the Central Bank had an independent role. However, there are signs here of some lack of coherence within the Government. After all, Minister for Finance Paschal Donohoe has refused to confirm that the help-to-buy scheme will continue beyond the end of this year. And it is this scheme which has been crucial in allowing many first-time buyers to meet the deposit rules by giving them a tax rebate and thus access to the required pot of cash. It helps renters get out of the trap identified by the Taoiseach.

It would be ridiculous to argue that the rules should be set in stone and should never change, of course. The way banks are allowed to give exemptions to some borrowers, for example, can be messy and there might be a case to have the one set of income and deposit rules which apply to everyone. You could, say, apply a limit of four times income for all first-time borrowers, rather than the current 3.5 times for most and more for some.

But the key to solving all this does not lie in the borrowing rules, it lies somewhere in the availability of serviced land, the price of building and, perhaps, the hobbled nature of the building sector after the bust. In this context I would prefer to cut VAT on new homes – putting the exchequer at some risk but lowering the cost of new properties – rather than allowing people to borrow more to get on what used to be called “the property ladder” and putting them at risk. We need affordable homes, not unaffordable loans.

Sustainable borrowing

It is the Central Bank’s job to ensure sustainable borrowing in the middle of this policy mire. And it should be let get on with it. The Taoiseach may have referred to the independence of the bank, but he was clearly giving a nudge to the new governor. And this new governor, remember, was a surprise appointment of someone who, while he has extensive experience in the public service and financial and economic policy, does not have direct experience of running a central bank. And after a controversy over how he responded to leaked budget information in New Zealand, he starts the job on the back foot.

Any perception that the bank will be more pliable to the Government under his watch would be dangerous. A big failure during the economic crash was that the Central Bank did not have a sufficiently strong and independent role and did not do its job as the property bubble inflated. It was too close to the banks and too slow to criticise government policy in any real way.

In recent years, the Central Bank has regained some ground, managing to annoy both the banks and the Government. The banks feel some of its interventions are heavy-handed and the Government – as the Taoiseach has indicated – wants it to loosen up a bit. The new governor needs to set down an early marker. It would be ironic if he did so by snubbing the Taoiseach’s suggestion of a change in the deposit rules.