Given the significant price declines until last year and low mortgage rates that are expected to prevail in 2014, affordability for new buyers remains very strong, says the report from Fitch Ratings.
It adds that this is likely to be further helped by an expected increase in mortgage availability in 2014 but repossessions are likely to start coming through in late 2014 and continue for several years and this supply of properties is likely to dampen house prices. Furthermore, nearly 50% of existing mortgages are in negative equity and this makes it difficult to move up the property ladder, especially because of tighter underwriting standards.
‘Overall Fitch expects single digit growth in house prices during 2014 with variations based on the type and location of properties. While affordability will support prices, especially for average family homes in larger cities, there remains an oversupply of properties in some rural and coastal areas, due to overbuilding in the boom years,’ the report points out.
It also says that affordability for new buyers is a bright spot in the Irish market. Despite the recent uptick, house prices remain nearly 47% below peak level while rates remain low. On the other hand, wage growth is expected to remain modest. For an average house, a first time buyer couple pays 17.3% of net income on their mortgage compared to 26.4% at the peak of the housing market.
Overall mortgage rates are expected to remain low and the high proportion of floating rate mortgages coupled with low re-mortgage activity has meant that mortgage rates have remained relatively stable.
‘Rates on new lending have increased slightly over the last year, with lenders taking the opportunity to increase margins. The new lending rate currently stands at around 4.5% to 4.85% and will, in Fitch's view, remain within this band,’ the report explains.
It also says that mortgage arrears could peak in 2014 which is likely to be a crucial year for mortgage performance, with increased clarity around measures to resolve distressed mortgages.
‘More importantly there are now incentives and sanctions to facilitate that both distressed borrowers and banks engage and find a sustainable solution. The central bank has set targets for banks to find long term solutions for the majority of their distressed borrowers. They have also been given more freedom with regard to contacting borrowers and applying sanctions against non-co-operating borrowers,’ the report explains.
‘Borrowers have to engage with banks as well, failing which the banks can now initiate foreclosure proceedings. In the case of borrowers who are willing to co-operate, banks are much more open to considering solutions, including partial debt forgiveness,’ it points out.
‘As existing arrears cases start being resolved and the inflow of new arrears cases subsides due to the stabilising economy and housing market it is likely that arrears will peak in 2014. Given the slow legal process, repossessions are only likely to start flowing through towards end of 2014 if any, but will increase in the future,’ it adds.
Compared to 2012, new mortgage lending is expected to be around 10% lower in 2013, partly due to changes in mortgage interest tax treatment that were introduced in late 2012. Mortgage lending has been mainly constrained due to lack of demand given very low number of housing transactions and lack of remortgage activity.
Fitch expects new mortgage lending to increase by around 10% in 2014 broadly in line with housing transaction volumes. Mortgage availability is expected to increase through a combination of existing lenders offering more products, e.g. remortgages, and some currently inactive lenders returning to the market.
But the report also points out that in addition to low rates on historical mortgages, the housing market remains weak with almost half the mortgages under water. Mortgage availability will increase; however, lenders have re-priced their products up and lending criteria's have been tightened.
Fitch expects prepayments to remain in low single digits for the foreseeable future due to mortgage demand and supply side situation; borrowers on tracker rates are unlikely to remortgage any time soon given the dearth of attractively priced products while the percentage of borrowers unwilling to realise a loss on their property will limit demand.
