Not just higher mortgage rates that threaten home-buyers

The people best placed to judge the turning point in the Irish housing market are the brokers who make their living from selling mortgages. During the boom years, brokers made a very good living from the commissions paid by mortgage providers - pocketing one per cent of the value of the home loan if the borrower stuck with the same bank for the first three years of the start of the loan. In 2006, at the height of the housing boom, €40bn worth of mortgages in the Republic were sold to first-time buyers, second-timers, investors or buy-to-letters and to borrowers refinancing or increasing their mortgage debt. It was a very big business indeed. The brokers, including the Independent Mortgage Advisers Federation (IMAF), accounted for about half the mortgages sold on behalf of the banks and building societies. The lenders sold the rest to customers directly through their branches. However, the scale of the slide in the housing market will be so great that a €40bn new mortgage market will, the brokers forecast, barely reach €8bn this year. Allowing for special pleadings, you have to listen to the brokers when they warn about the dangers facing a depressed housing market. Many of the brokers left standing have, in effect, turned from selling new mortgages to first-time buyers into debt counsellors, advising existing lenders the best way to juggle their mortgage debt. Better placed than most to adjudicate on the housing market is Michael Dowling, former president of the IMAF. Dowling, for many years, accurately tracked the turning points in home prices by regularly measuring the number of mortgage applications or new business generated by IMAF brokers - who, after all, accounted for a big chunk of the market. The more borrowers seeking to buy, the higher the prices were likely to rise. Back in 2004 and 2005, he was able to predict from the number of mortgage applications that house prices were heading sharply higher. In late 2006, Dowling reported a sharp slide in the number of new applications, signalling the start of a slide in prices. Many academic commentators in the universities appear to welcome the continuing slide in home prices. In any market economy, prices have to fall after a bubble and, usually, the more quickly the better. But you have to listen to people like Dowling who say the continuing collapse of the housing market could impede an early uplift in the wider economy because the important factor of the market - the supply of credit - is in short supply. Only four banks, compared with 14 a year-and-a-half ago, are lending into the market, Dowling says. Worse, he warns that the lenders are demanding too stringent conditions from potential borrowers, threatening the flow of credit. In short, the housing market is almost too important to be left to the banks. Even borrowers with large equity values in their homes, with safe jobs, and who sensibly want to pay down other more expensive car and personal loans are being denied the choice to refinance against their bricks and mortar, he warns. The brokers say the Government could learn the wrong lesson from the bubble and complacently leave the housing market to sort itself out. Prices overshot dangerously in the bubble. In the bust, prices could also dangerously fall too much because rationed mortgage credit will add to the pressure on the market. After a disastrous start, the Government's own fund for first-time buyers has helped place some new money into the market. But it cannot make up the gap left by the mainstream private lenders. "I had a university professor with an income of €65,000 and a partner on €20,000 seeking a €300,000 mortgage, but they did not qualify from one of the main bank lenders," said Dowling. The brokers accuse the banks of offering very attractive low interest rates - variable and one-year fixed rates to first time borrowers - to convince the politicians that the lenders are open to business for first-time borrowers. Then, the lenders, say the brokers, impose conditions that few borrowers can reasonably meet and turn down the mortgage applications. Significantly, Dowling warns that lenders still ignore a potential first-time borrower who has regularly paid rent for many years as a condition to qualify for a loan. A deposit from a parent, even a good income, will no longer qualify the first-time buyer for a mortgage loan. "If you work in the private sector, all the lender wants to know is whether your firm will still be around in the next 12 months," said Dowling. Undoubtedly, the supply of credit will affect the ability of potential borrowers to buy a home. "A lot of people are still sitting on the fence. If I was thinking of buying, I would do the same because prices are still going to fall. It is affecting the market. I see no uplift even though several auctioneers are talking it up," Dowling said. He predicts that prices will fall on average by another five to 10 per cent this year before a trough is reached. But Dowling says that first-time buyers are losing out in yet another way. "Yes, there is a massive oversupply of apartments in Dublin and outside. But first-time buyers are now competing with a limited supply of housing in a particular category - for a typical three-bedroom semi-detached selling now for €325,000, when 18 months ago it was €500,000. There is a limited supply of this type of property. It is another blow for first-time buyers at a time when, for the first time, they can theoretically afford the properties in the districts where they have been reared." Dowling predicts that the Dublin banks will need to quickly raise their standard variable mortgage rates closer to the four per cent to five per cent the British banks charge for their home loans if the lenders here are to generate profits from selling mortgages. Other banks, in March, will follow the lead the Permanent TSB took this week in increasing its home loan variable rates. But the warning is clear: higher interest rates and stringent lending conditions will likely mean even more rationing of mortgage credit. That, say the brokers, will harm everyone.