You might be someone in your late 20s, 30s or 40s who's still living
with parents, wondering how they managed to get a secure home and you
can't.
You might be a parent who bought in your 20s, with adult children in the house, asking the same thing.
All this week, online and on television, Prime Time will be looking
at the issue of a generation - housing. What has changed for today’s
prospective homeowners, that makes their housing situation so different
to their parents?
On Tuesday, Louise Byrne has new research with data on those
questions, this piece examines changes made to the system overall. It
could easily run to five hours reading time, but we'll keep it to five
minutes. For that reason, complex elements will be simplified, but
hopefully not oversimplified. Here goes.
The very short answer is: everything.
The way this generation access mortgages is very different. The
State’s role in the housing system has changed utterly, in several ways.
We have euros not punts. Grants and subsidies available for home-buyers
have gone. Rules around lending are tighter. The banks’ outlook on
property lending has been altered by the bust. International investment
funds have entered Ireland in a significant way.
It’s not the 1980s anymore. Ireland is a very different country, with a very different system of housing development.
Video: 'Enterprise' visits a new housing development in Feakle, Co. Clare in 1973
Mortgages
Let’s start with mortgages. The average first time buyer is 34. Their
parents likely bought their first home somewhere around 1986, when they
were in their 20s. Then, mortgages came from two sources, neither of
which control significant portions of the market anymore.
Building societies were the primary source, and nearly all the rest –
about a quarter of the total – came from local authorities.
Building societies had one key role: promote homeownership. That
aligned with decades of national policy, and for that reason the State
favoured building societies with preferential tax treatment.
It wasn’t perfect. They operated by taking in savings, bundling them
together, and providing them as loans to applicants. That meant
sometimes there was 'mortgage rationing’.
"People would apply for a mortgage in February, and you'd have to
wait till October until there was enough money to give it to you" says
Michelle Norris, Professor of Social Policy at University College
Dublin, whose research has focused extensively on this period of
Ireland’s housing history.
Local authorities were the other source of mortgages. They typically
provided loans to lower-income families. That meant the two key types of
mortgage providers had different pools of customers.
In other words, building societies could pick and choose their customers.
The system had operated this way for decades, with little competition
– and at times building societies were accused of operating as one when
it came to setting mortgage interest rates.
That changed in the late 80s. It was part of what was called
financial deregulation, which was in part a requirement of membership of
the European Single Market, which eventually led to Ireland adopting
the euro currency.
"We were changing the structure of our financial system to get to
access to that European system." says Conor O’Toole, an economist with
the ESRI.
The preferential tax treatment given to building societies was
withdrawn, and the legal distinction between banks and building
societies was removed. Banks and building societies were now in
competition.
Video: RTÉ News reports on the challenges faced by building societies in 1987.
In the late 80s and early 90s, in the space of a few years, building
societies became more like banks, then they became banks, or were taken
over by banks.
Now, banks dominate the mortgage market.
In that period, there were famously high mortgage interest rates – up
around 12%. These were partly subject to tax relief at the time, and
stabilised and fell as we moved towards the euro system and the economic
outlook improved.
"You then had no exchange rate risk for German banks to lend into our
system for example," says Conor O’Toole "because they were lending in
their own currency. It all meant there was a much greater degree of
activity."
It meant Irish mortgage lenders could borrow on international markets
to access money to fund applicant’s loans. The mortgage system no
longer had to rely on the savings being invested by members of the
public.
"That meant there was effectively no cap on the amount of money
flowing into the housing system" says Professor Norris. "And it was
quite easy to get a mortgage for a time, but the link between prices and
wages was broken."
Mortgages became big business for financial institutions in Ireland,
and they began fighting to gain customers. By 1990, the country was
starting to come out of prolonged economic crisis.
A Change in Incentives
That crisis had lasted much of the previous decade. In an attempt to
resolve it, governments cut back on grants and subsidies available to
home buyers. The last major one was abolished in 1988.
That system had hugely promoted home-ownership up to that point, with
researchers estimating at times up to one-third of the price of buying a
suburban home could be recouped in various forms of grants and
subsidies.
With unemployment heading for 20% in the mid-80s, incentives were focused on trying to stimulate jobs.
Generous tax benefits were offered to companies to develop residential and commercial properties in run-down urban locations.
The first of these policies was introduced in 1986 and was limited
geographically to projects in hard-hit areas in the Republic’s five
cities – Dublin's Docklands being one.
Video: RTÉ News reports on the new Urban Renewal Act in 1986
The concept worked, and development began.
Those incentives were expanded, and expanded through the 90s and
2000s, even as the country hit full employment and construction
companies made huge profits. They eventually covered small towns and
large rural areas too.
They are partly why so many new homes were built in the boom period. And a lot of new homes were built in those years.
The combination of development incentives and easy credit – among
many other things - led to a massive building bubble which saw house
prices skyrocket. leading to an economic bust.
The banks had not only provided a lot of the mortgage loans, but also financed a lot of the builders and developers.
Historically, they used income-based criteria to assess the value of
mortgages they would offer, but through the late 90s and especially into
the early 2000s, the criteria many used to assess whether mortgage
applicants could meet repayments was relaxed.
People started to take on more and more debt.
Video: Margaret Ward reports on the challenges faced by first-time buyers in 1998.
Some financial institutions were offering things that sound bizarre
to anyone trying to get a mortgage now: minimal deposits, loans for ten
times – and more – incomes. The Central Bank found some lenders were
considering 'potential future earnings’ when assessing mortgage
applicants.
Video: George Lee reports on a 1999 Central Bank letter to banks about lending criteria
Thousands of people were loaned money not just for one home, but two –
taking on more debt, becoming landlords through a mortgage on a second
home. While doing this the banks also took enormous risks around the
finance they offered to developers.
It’d come back to haunt them – and the whole country – by 2008.
The scars of it are seen in the housing system today, and in the types of homes which are – and are not – available to buy now.
Video: George Lee reports on concerns about a growth in mortgage lending in 2003.
Modern Development
In the decades before and during the boom, builders built homes in
tranches. They would go to a bank for finance, build a few houses, sell
them and use that money to build the next phase.
Since the crash, that’s changed. Instead, a lot of the finance for development is coming through international investment funds.
"The finance system for housing development that we operated for
decades had major flaws, obviously, since it undermined bank stability,"
says Professor Michelle Norris, "but it had major benefits also, in
that we had a very elastic system of housing supply and a lot of supply
for home buyers."
"That has now ended - putting a suitable alterative system in place will be a big challenge."
International investment funds use money raised through – often here,
but not always - people’s pension contributions to finance development.
They want reliable, long-term returns, and that means generating rent
from people on high incomes, in globally mobile jobs. For that reason,
they tend to build apartments for rent in urban areas, not low-density
starter homes to sell.
Last year, for the first time in Ireland, more apartments were built than single houses.
Built-to-rent developments are controversial for a variety of
reasons. The presence of investment funds is controversial too. The
units they build do add to the headline housing supply number each year,
but not typically to the number of homes becoming available for sale.
The funds argue that they’re providing housing which wouldn’t be
built otherwise. People like Technological University Dublin housing
lecturer, Lorcan Sirr, see it differently.
He says they’re crowding out typical buyers, and distorting the housing system.
"We’ve deprioritised housing in Ireland for, say, permanent
households." he says. "Potential homeowners have been displaced by the
presence of these large funds to commuter belts, and further around all
the major cities, and that’s even contrary to our national planning
policy."
Dr Sirr’s analysis of housing supply in recent years indicates that
while the overall supply of new housing is growing, the number of homes
coming available to buy each year isn’t.
The combination of banks retreating from financing starter homes, and
international funds interested in rental units, means new buyers are
mainly in the second-hand market.
And now, also there, is the State. That’s one other difference between the 1980s and now.
State involvement in building and leasing homes
Local authorities were responsible for the building of about one in
four homes each year in Ireland prior to the mid-80s. Then, the system
used to fund new local authority building was changed.
They had been able to borrow to finance building and repay the loan
over the long-term. Since, they’ve been required to get a grant from
central government up front.
Almost immediately, the proportion of homes they were responsible for
building each year fell to under 10%. But they continued to sell the
houses they hand on their books at discount to tenants.
The tenant-purchase policy was a route to homeownership for council
tenants, but also led to a depletion of the local authorities housing
stock in the long term.
Video: RTÉ News reports on social housing waiting lists in Limerick in 1981.
Nevertheless, local authorities have an obligation to provide housing
to people who meet the State’s set criteria. For decades, this was a
struggle for local authorities.
After the crash, it was even harder. There were more people meeting
that criteria. Councils found they didn’t have enough homes for people
in need of help.
It takes a long time to go from planning application to a key in the door, and the situation was urgent.
Since then, more and more often, local authorities have been buying,
or entering into long-term leasing arrangements with landlords.
The local authority gets someone off their waiting list, the property
owner gets a long-term agreement or a reliable sale. The person gets
into a home. It's quicker than building, albeit it’s more expensive in
the long-run.
It's fine, unless you’re someone interested in buying the same home.
"The problem that young people in their 20s and 30s now are facing
now," says Dr Lorcan Sirr, "is there are far less houses for them to
chase. And, of course, the more people you have chasing houses, the more
prices get driven up."
"In parts of Dublin for example, about one in three second-hand
houses that go for sale are being bought by the local authority." "So if
you’ve looking in any of those areas, you’ve a good chance to be
bidding against the State, which is not something that happened a lot
before."
Often now, the local authorities and investment companies are working
together. The investment companies buy, or build, housing – again,
often apartments - and lease them to local authorities.
New social housing units add to the housing supply total, but again never come up for sale.
The Modern Starter Home-buyer
Prices of second hand homes are rising fast. A lot of people in their
20s and 30s are left competing against each other too, for the same
homes. Meanwhile, relatively few new starter homes are being built.
Since 2015, first time buyers can only be provided with – typically –
3.5 times the value of their incomes in the form of a mortgage. They
also need a deposit of 10% of the value of the home. The deposit
requirements especially are hard to raise while also paying rent.
Those lending limits were brought in when house prices appeared to
have begun to ramp up again. The Central Bank feared a repeat of the
1990s. Another policy that’s emerged from the bust.
By most expert views, they worked to calm price growth and mean the
banking system is stable. But it also means as prices go up, people are
priced out.
Some first time buyers have managed to save bigger deposits during
the pandemic, which makes them more competitive when it comes to
bidding. Others can’t save a deposit at all, because rents are high.
Others have access to the Bank of Mam and Dad.
But others still haven’t. They’re on the couch with Mam and Dad. They see house prices rising, and their hard-won deposits looking smaller and smaller. Many of them are wondering not about the past, but the future, and wondering what next.
Soure RTE
