Is the Central Bank really giving us more money to buy houses?

The Central Bank is giving me more money to buy a house, is it?

That’s not what’s happening at all but it did make a big announcement that might lead you to being able to borrow more money from a bank if you are in the market for a house.

Right. So, can you tell me more about this big announcement?

The top line is that from January, the amount first-time buyers can borrow as a multiple of their income goes from 3.5 times income to four times income.

But an increase of 0.5 doesn’t seem like a big deal?

It’s bigger than you might think. It means would-be homeowners will be able to borrow 14 per cent more than they can now, which could be the difference between being able to find a house and being priced out of the market.

What does it mean in cash terms?

Under the existing rules, a first-time buyer or couple with an income of €90,000 can borrow €315,000. They also need a 10 per cent deposit, so the most expensive house they can buy will cost around €350,000. With this change, they will be able to get a mortgage on a house valued at €400,000.

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Why did the Central Bank make the changes?

As ever, context is key. The lending restrictions were first rolled out after the property crash almost 15 years ago caused by reckless lending by the banks. To make sure that never happened again, lending limits were imposed by the Central Bank. But over recent years it has come under pressure to modify the limits to take into account house price increases.

What does that mean?

The price of a newly built home has jumped by almost 90 per cent since 2013, while second-hand homes have climbed by more. That means a home bought on 3.5 times a buyer’s salary in 2013 is now out of reach for a person on the same salary. According to the Central Bank, the share of renters who can buy a three-bed semi-D in Dublin at the latest estimated build price has fallen since 2015, and increasing the mortgage cap for first-time buyers to four times income “will increase the share with estimated viable demand to around the level experienced in 2015″.

But won’t relaxed rules see people borrowing too much?

A move from 3.5 times income to 4 times income will benefit people on the margins but will not allow the wild lending practices of times past return. Apart from anything else, banks have very strict rules on lending now.

Has the Central Bank done anything else?

The definition of first-time buyer now includes those who are separated or divorced if they no longer have a financial interest in their former home, while those who have gone through bankruptcy or insolvency and lost properties are also considered first time buyers.

What about second- (or third- or fourth-) time buyers?

There have been some changes on that score. Right now, second-time buyers need a deposit of at least 20 per cent of the value of the new home. That is being reduced to 10 per cent.

Will the changes not just cause house prices to climb?

Year on year, house prices were up 12.2 per cent in August and with demand continuing to outstrip supply, prices are still climbing. Injecting more cash into the market could cause prices to climb higher faster, but the Governor of the Central Bank, Gabriel Makhlouf, has said other factors, such as rising interest rates and the rapidly rising cost of living, “absolutely will play a role in moderating house prices” in the months ahead.