Prudence puts you deeper in debt… Nice work by the Central Bank

The news that higher loan to values will have to be limited is being mistakenly applauded by many financial commentators, almost none of whom work in credit. Towards the end of the post we demonstrate that you can actually be worse off by being forced to wait and put down a larger deposit than if you acted normally and bought today with a 10% deposit.

That’s why taking a look at the numbers beneath and how it will affect mortgages is important. First time buyers are typically the younger end of the house owning spectrum, they largely chose to stay out of the market during the financial crisis, a good choice, very rational.

That is why the people renting rose so much between 2006 and 2011. A total of 474,788 households were in rented accommodation in 2011, a considerable rise of 47 per cent from 323,007 in 2006.

It created a build up of non-owners who want in, but who are not the main driver of property price increases as they represent the thin wedge of the ‘property market’, they are merely over-represented in the borrowers market (44% of loans in 2013 were over 80% of LTV and mainly to first time buyers), but this is to be expected.

A move like this where only 15% can be over 80% means that on the lending side (cash buyers can still do as they please) about 2/3 of first time buyers will face a financial lock-out, not because they can’t afford to pay the loan, but because the folks on Dame Street changed the rules.

These same people are facing into higher rents, and rationally want to consider buying at a time of more affordable prices and when interest rates are reasonable.

The yield curve is flat, at 5 years out it’s only 0.23% or 23 basis points, up until 3yrs2mths it’s NEGATIVE. You can’t take the yield curve as a crystal ball with magical powers, but at least it has some foundation, the Central Bank rules are based on opinion and using comparative analysis of markets that are simply not like ours, it’s a classic ‘apples to oranges’ situation.

The same people who talk about ‘what happens when interest rates rise’ should be parked in the same camp as the inflationistas who fear rampant inflation (they are intimately conjoined as rates will rise only if we see strong inflation which has yet to manifest and will likely take many years to do so).

Bearing in mind, we aren’t calling for 100% mortgages, just to leave alone the regime that is working fine as it is. Lending is being done prudently, after the storm we finally got something workable that ensures people and banks both behave and it will end when these rules kick in.

Equally, if rates did rise in 5 years, loans are already stress tested and people will have been amortizing during that time and they’d be able to absorb interest rates of c. 7% because that’s one of the many tests loans go through nowadays.

Let us not forget the numbers though, they matter and are the very things that are under-mentioned in this debate so far. This is where I start to struggle with the idea, if you were to buy a house costing €250,000 today using a 90% loan at 4% over 25 years then in three years time you’d have a balance of €208,000.

If property prices rose 3% a year every year during the same period you’d buying at (250k * ((1+r)^n)) which is just over €273,000. What’s 80% of that? €218,000.

So you’d owe MORE at that point in time having had to face rising rents and half your money being taken in tax during that time while trying to save the extra 10% deposit.

The sums simply don’t add up unless you assume we are facing into rapid interest rate increases very soon and that property prices will crash. This is perhaps the greatest example of pointless intervention we have seen in recent years. It deserves a maxim of its own ‘if it ain’t broke then break it’.

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