There is little doubt that when they lend at all in the foreseeable future, they will be constrained by the strict application of the multiples formula when calculating affordability. So, let’s say that they now apply 3.5 x times earnings for the primary income and 1 x one the secondary income (a generous multiple) for a couple who are both in full-time, permanent employment, that could work out as follows:
Income one: Average public sector earnings of €50,000
Income two: Average private sector earnings of €38,000*
= The maximum they can borrow is €213,000.
Even if one was on €80,000 and the other on €60,000 (and I don’t know any such couple pulling in that between them, but maybe that's the company I keep) the maximum amount would be €340,000.
Obviously, single people or couples with one earner could borrow correspondingly less.
I invite you to take a look at My Home or Daft, where you will still see asking prices of €750,000 for detached houses in established parts of Dublin 15 (just an example, as it's my own backyard), and see if asking prices tally up with those figures.
Then take David McWilliams piece in the Indo yesterday, where he predicts further price falls based on the following investor model:
"With government bonds yielding more than 5pc, it's fair to suggest that an investor would need to get a yield of at least 7pc from housing. So taking the average house price at €220,000 and the average rent at €863 per month, we see that the investor gets -- with these prices and these rents -- a gross yield of just over 4pc. This is before he takes into account his funding costs. Why would he bother getting into the market just yet?
In order to make a 7pc yield at the present average rent, the average price of houses would have to fall to €135,620. This suggests a huge further drop in average house prices here."
By either criteria, Tom Parlon’s famous bottom looks very far away at the moment.
Mercifully.
*both figures sourced from Ronan Lyons, Feb 2009.
5 comments:
213 looked a bit low so I entered the data in mortgages.ie 's calculator and got a mortgage of 526,000. Which explains partly why prices haven't dropped more, I suppose. But even if they do, it's bad for some people and good for others, if they want to buy. Which is not to say banks won't introduce some other criteria for lending, particularly if they are too undercapitalised to lend anything.
And NAMA is keeping prices up too ...
I was househunting with a friend of mine around about 2007 and was shocked at what people were asking for pure rubbish. Sadly he ignored advice and bought anyway and is now in negative equity, which is an awful way for newly married newly-qualified professionals to start out.
I just had a look at that, Tim, thanks. I would be amazed, absolutely amazed, if any bank is actually lending those kind of multiples at the moment... it's something in the region of x10 of earnings! I would be very sceptical of those claims, I really would.
I used the x3.5 + x1 formula as I think that was the standard before the madness began.
Way back in the day, our multiple was 2.5 times the higher salary plus 1.5 times the lower. And we had to give a 10% deposit plus bloody stamp duty and solicitor's fees. I'm with McWilliams on this, prices have a way to fall yet...
Surely the amount banks are willing to lend (and/or the willingness of customers to borrow the full a loan amount available to them -remember just because you CAN doesnt mean you SHOULD) is hardly the main limiting factor as long as there is oversupply in the market ?
At the end of the day when Paddy Irishman learns that a house is just a home and its ok to visit a holiday resort for 2 weeks on your holiday without having to buy it, then, maybe then we can begin to build a country and not a joke
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