One of the more interesting takeaways from MyHome.ie and Davy's latest report on the Irish property market – apart from the fact that house prices are rising by about 10 per cent per annum or that prices remain a big multiple of average salaries – is that banks are now lending more to homebuyers than they were at the height of the Celtic Tiger.
The report, published on Tuesday, indicated that the average mortgage drawdown for second-time buyers or mover purchasers , which comprise the majority of buyers in the market, was €284,800 in the fourth quarter of 2021. This eclipsed the previous peak of €281,944 recorded in the first quarter of 2008.
Passing such a milestone might set alarm bells ringing in certain quarters. It was – after all – the pressure cooker of surging prices and mortgage credit that triggered such a spectacular bust last time.
But there’s a more benign explanation for why loan sizes have grown in recent years and that’s income. Prospective homebuyers can borrow or leverage more now because their salaries are bigger.
The calamity of the 2008-2012 period was followed by a period of job-rich growth, which boosted wages, particularly in the multinational-backed technology and pharmaceuticals sectors.
Average wages are now about €47,000 compared with €35,000 back in 2007, in other words a third higher. Hence, even with the Central Bank’s strict mortgage rules – which limit banks from lending and homebuyers from borrowing more than 3.5 times their salary – loan sizes and mortgage drawdowns are on average higher.
Cumulative lending by banks into the sector is, however, nowhere near what is was at the height of the boom. Separate Banking and Payments Federation Ireland (BPFI) figures show new mortgages to the value of €2.78 billion were drawn down by borrowers in the third quarter of last year. This compares with close to €11 billion for the same quarter in 2006.
If anything, mortgage lending remains tightly constrained by the rules and the prospect of another credit-fuelled housing bubble is remote.
"Given that banks are adhering to the Central Bank rules, higher mortgage debt levels are being driven by income growth rather than leverage," Davy chief economist Conall Mac Coille notes in the report.
“Average pay growth is now running at 5.4 per cent. Buoyant conditions are especially clear among natural homebuyer segments in the higher-paid professions, such as the multinational sector, evident in the 22 per cent growth of income taxes in 2021,” he says.
“The key point here is that the recent surge in house price inflation also reflects stronger demand and not only weak supply,” he adds.
There is a mutually reinforcing relationship between mortgage credit and house prices. In other words, a movement in one causes an equivalent movement in the other.
Without the rules, the Central Bank and the Economic and Social Research Institute (ESRI) estimate that house prices would be between 10 and 25 per cent higher.
This, of course, is cold comfort to would-be buyers, who can’t bridge the affordability gap.
The mortgage rules have – in combination with a dearth of supply – transferred much of the pressure in the market to the rental sector, where paying rent on average housing units in most parts of the State is now significantly costlier than paying a mortgage, putting paid to the notion that people here have an unhealthy obsession with owning.
“There are just 11,300 homes listed for sale on MyHome, the lowest on record and down 21 per cent on 2020, with the shortage of residential property for sale most acute outside Dublin. The same is true in the rental market,” Mac Coille says, while noting Davy may need to upgrade its forecast for 4.5 per cent house price growth this year. If a credit bubble isn’t around the corner neither is relief for would-be buyers.
