Soaring house prices are pushing the cost of mortgage repayments for first-time buyers to Celtic Tiger levels in Dublin and surrounding counties, a new study has found.
Couples who bought their first house in Dublin were paying 27.4 per cent of their net income to service their mortgage in May compared with 25.5 per cent in the same month last year, the EBS-DKM Affordability Index said.
The study, which was carried out by DKM economic consultants, said that the expected rise in house prices would mean that mortgage repayments would account for 29.2 per cent of the combined income of first-time buyer couples by the end of this year.
The situation is worse for those buying their first home alone. In the Dún Laoghaire-Rathdown region of Dublin, single first-timer buyers will spend 53.6 per cent of their net income on monthly repayments, compared with the national average of 32.6 per cent.
A sustainable mortgage for a single person is thought to be equivalent to about 38 per cent of net income. Affordability for single first-time buyers peaked at 52.2 per cent in late 2007, just before the housing market collapsed.
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Ciara Morley, an economic consultant with DKM, said: “First-time buyers are facing more expensive mortgages and inflated pricing due to the chronic shortage of houses in Ireland.
“We are seeing an upward trend in the proportion of disposable income required to fund a mortgage for first-time buyers over the last two years and we expect that proportion required to continue to rise.”
The report said mortgage affordability for first-time buyers had deteriorated in the two years since the Central Bank introduced mortgage lending rules and the government launched a help-to-buy scheme. At the start of 2015 the Central Bank imposed a cap of three and a half times a person’s salary and a loan-to-value ceiling of 80 per cent.
Last November the Central Bank tweaked these rules to allow 90 per cent loan-to-value caps for first-time buyers. In the budget last October the government introduced a Help to Buy scheme that offered a rebate of up to €20,000 for those buying their first home.
The DKM report noted that there was a surge in house prices in the months after both of these measures were introduced.
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It said that the Help to Buy scheme would only have a positive impact on affordability provided it was accompanied by an increase in new housebuilding. “Until such time it is difficult to identify the impact from such a scheme, particularly in light of the revisions to the macroprudential policy made by the Central Bank in recent months. It should be noted that the Help to Buy scheme is currently under review by the government and may be phased out prior to the end of 2019.”
It is estimated that between 12,000 to 15,000 new homes were built last year. The Economic and Social Research Institute forecasts that 35,000 new houses are needed to meet demand. According to the latest report by Daft.ie, the property website, house prices rose by 8.8 per cent over the first six months of the year.
In a recently published interview with The Times, Philip Lane, the governor of the Central Bank, said that changes to lending rules and the government’s Help to Buy scheme were not responsible for the surge in prices.
“The idea [is] that there is a bubble and the only thing that moved was our rule, but what has really moved is the economy,” he said.
He said that the fundamentals of the housing market were based on employment and income growth and the prevailing interest rate, all of which were supporting strong price increases. He added that the Central Bank’s review of the mortgage market last year also raised issues around affordability.
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“What we have seen in our analysis of 2016 is that those who have received mortgages are those on high incomes. When you see the profile on those that have received mortgages in 2016 compared to 2015 there is a significant drift up in income. That is not helpful for affordability issues.
“If we are saying that only people above certain incomes can get significant mortgages, it doesn’t help the general housing situation in the country in terms of affordability and we know there are all sorts of supply challenges there,” he said.
Other findings in the DKM report include that house prices are now rising quickly outside Dublin, implying that affordability is also deteriorating across the country, with homes in the commuter belt particularly affected.
Dublin, Wicklow, Kildare, Galway City and Meath were the least affordable locations, with buyers needing between 20 and 26 per cent of disposable income to fund a mortgage in those locations.
Longford, Offaly and Leitrim were the most affordable counties. Less than 11 per cent of a couple’s disposable income was required to fund a mortgage in these counties.
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The average national cost for a first-time buyer in May this year was €245,662. The average mortgage for a first-time buyer was €196,530.