A working couple in their early 30s, Aoife and her husband James should be ideal mortgage customers for Irish banks keen to lend into Europe's fastest growing economy and strengthen a fledgling recovery.
However, like many ready to buy after dodging a property crash seven years ago, the couple are struggling to save the big deposit now required by strict new Central Bank rules as rents rise amid a chronic shortage of housing supply.
"We know we can afford it, in fact we'd probably pay less per month on a mortgage but getting the deposit together is painfully slow," Aoife, who declined to give her last name, told Reuters news agency. She also faces the second-highest childcare fees in the OECD to keep her two-year-old in a creche while she works as a teacher.
A government intervention last month limiting landlords to increasing rents only every two years means renters face a big rise in 2017, Aoife said, when she fears they will still be stuck in a Dublin rental market that is almost back to levels seen at the height of a property boom.
For banks that lent too much to mortgage customers during the boom but are back in profit for the first time since the 2008 crisis, this perfect storm is set to cap mortgage lending at a modestly improved €4 billion this year, one-tenth of its overblown peak but also half the level of 2009 when they began swallowing up the euro zone's costliest bank bailout.
"A key part of the investment case for Bank of Ireland and AIB is the Irish growth opportunity and mortgages are front and central in that respect," said John Cronin, an analyst at Investec Ireland.
"The challenge is convincing investors that the market will eventually grow and that there isn't a structural change. Ultimately this problem will be rectified, it is unimaginable to think it wouldn't be, it's just a question of time."
That will likely be AIB's message if the 99-percent state-owned lender, as expected, launches one of Europe's biggest bank flotations since the financial crisis next year. The current government says it will sell a 25 percent stake if re-elected.
The dysfunctional mortgage market shouldn't compress demand, according to Cronin. A booming economy and rare chance of a pure stock market play on the recovery will be enough to spur investors who have flocked to Ireland to buy everything from hotels to shopping malls and petrol stations to banks.
Recent AIB bond sales also bode well, drawing up to nine-times the demand needed and the bank almost tripled its profits in the first half of the year.
However, with the central bank cautioning that bank profits are being temporarily flattered by the claw back of provisions made for bad loans, the bank's sale price could be affected when Irish mortgages account for 20 percent of its new lending.
While Ireland was left with a surplus of houses after the 2008 property crash that cut values in half, the wrong stock was built in the wrong places, leaving property scarce in cities like Dublin while out-of-town housing estates lie empty.
The lack of supply helped prices rebound sharply from 2012 and prompted the central bank to introduce the loan-to-income and loan-to-value limits this year that it says are working with annual house price growth cooling to 7.6 percent in October from almost 17 percent seven months earlier.
Such so-called macroprudential tools have produced mixed results elsewhere. In Sweden and Norway, governments have sought to tighten restrictions after loan-to-value caps did little to stem potential housing bubbles.
Despite government protests that the rules are having the opposite effect in Ireland, the central bank says the problem lies in the failure to build even half the 25,000 homes analysts say are needed each year to keep up with demand among a population that is also the fastest growing in the EU.
The government's belated response has also promised cuts to construction costs through looser planning standards and fewer levies. Some bigger developers are capitalized again and buying land to build on while NAMA, the state-owned "bad bank," has been given the job of building 4,000 units a year until 2020.
Yet while builders unable to cover costs wait for the implementation, planning permissions for new residential units fell 12 percent in the third quarter compared to the previous three months, central statistics office data showed on Tuesday.
Mortgage bank Permanent TSB (PTSB), the smallest of Ireland's three remaining domestically-owned lenders, became the first to explicitly say last month that what it called a "short-term supply lag" was constraining new lending.
"Given the relatively low level of refinancing that happens in Ireland, new lending is really a function of the amount of houses that we're building," said Diarmaid Sheridan, an analyst at Davy.
"To get to the 8 to 10 billion euros of annual mortgage lending considered to be a normal market, you're really looking at 2018 before you get anywhere near the 25,000 houses needed."
The bigger banks like AIB, Bank of Ireland and Royal Bank of Scotland's Ulster Bank, will have to compensate through further growing their business and corporate loan books that are recovering but are more capital intensive than mortgage lending.
The task is less onerous on Bank of Ireland as the country's largest lender by assets sells more mortgage in Britain than Ireland. At 1.5 percent, its forecast share of the 210 billion pound market will likely exceed the entire volume of the total Irish market this year.
Until supply meets demand and affordability becomes less of an issue for first time buyers, it will likely be customers who get squeezed with banks unlikely to cut interest rates much further if they are to keep income ticking up. (Reuters)
