There have been a couple of follow-on stories in the Independent by Charlie Weston about the EBS decision to redline apartments outside of the cities (here and here).  Weston suggests that the decision to redline apartments has been taken due to a feeling that there is excessive oversupply in areas outside of the principal cities and their hinterlands and they therefore represent a particularly risky investment.  Unfortunately there is excessive supply of all kinds of housing just about everywhere, so its still not clear why apartments are singled out.  The lack of any documented evidence-base to back up the claim is, I think, troubling.

I thought I’d have a look at apartments built in the Jan 2006 to April 2010 period (the stock most likely to be available to the market).  For context, in April 2006, there were 139,872 apartments/flats in the state according to the Census (9.5% of stock). Almost 58% of these were within Dublin alone.  According to the DEHLG/ESB house completion data, from Jan 2006 to April 2010 57,032 apartments were built constituting 22.6% of stock built (there is 4 month overlap in these figures at the beginning of 2006), meaning there’s c.  185,000 apartments in the state.  Crudely portioning counties and boroughs into categories of ‘principal cities’ (Dublin, Cork, Limerick and Galway) and ‘rural/non-principal cities’ (see Figure), it is clear that c.80 percent of all apartments (c. 45,309 units) were built in the principal cities and their hinterlands, and c.20 percent were built elsewhere (c. 11,723 units).  More importantly, of the 120,043 units of all types built in rural/non-principal cities only 9.7% of the 06-10 stock were apartments, whereas in the principal cities, apartments represented 34.4% of overall new stock.  What this tends to suggest is that, although apartments are likely to be in oversupply everywhere, the oversupply is perhaps more pronounced in the principal cities and their hinterlands as it seems unlikely that 1 in 3 of new purchasers will want to buy a new apartment.  In other words, perhaps there is a case for the redlining to be abandoned, turned completely on its head, or at least the redlining policy to be further explained.  There certainly seems to be a case for a more geographical nuanced analysis than simply dividing the country into the four principal cities and everywhere else.

Apartments built between Jan 2006-Mar 2010 in principal cities and their hinterlands and elsewhere

Weston also reports that EBS are being encouraged to tighten their lending criteria even further for first-time buyers, a group that would have typically bought apartments, under direction from the financial regulator.  It was felt that the society was lending too much, especially to those on lower incomes.

Rob Kitchin

At the end of last week EBS announced that it would no longer provide a mortgage for the purchase of an apartment outside of the four major cities of Dublin, Cork, Limerick and Galway, or the large commuter towns (such as Navan and Newbridge) (see here and here for story).  It’s not fully clear whether the move also excludes large regional towns such as Waterford, Athlone and Sligo, but it appears that way from the media coverage.  In the case of the cities it will only lend 85% of the value of the property, in commuter towns 80%.  It is also changing its rules with respect to second incomes, reducing the amount it will take into account, and only allowing borrowers to lend 30% of disposable income.  This change in policy concerning the purchasing of apartments is worrying for a number of reasons as it appears to execute a form of redlining.

First, it suggests that apartments are a particularly risky part of the housing the market, especially outside of the major cities.  I can find no data to suggest this is the case and, in the absence of a detailed explanation from EBS, my guess is that they feel that there is a serious oversupply of apartments in many areas, which they anticipate will lead to large price falls from present levels.  That said, there is a demand for apartment living in any town of any reasonable size, in terms of lifestyle choice and cost, and all local markets need a diverse stock to cater for different consumer groups.  Moreover, it seems unlikely to me that someone who can afford to front up 20% of the cost of an apartment represents a serious financial risk for EBS going forward and over the long term the value of the asset will increase (and EBS are protected from a future fall of 20% if the borrowers did get into trouble).

Second, excluding buyers from buying apartments across large swathes of the country potentially creates serious problems for both existing owners and EBS itself (who presumably have lent mortgages during the boom years to the purchasers of such properties) as it will undermine the value of the assets by making them much more difficult to sell.  This will potentially lock a number of apartment owners onto the first rung of the property ladder, unable to sell and move on, and also place them in (further) negative equity.

Third, EBS is a nationalized institution, which one would have hoped means that it would serve the interests of all citizens regardless of where they want to live (assuming they meet financial as opposed to geographic criteria) and also the taxpayer (one assumes that many new apartments are heading into NAMA and if no-one can access a mortgage to be able to purchase them they effectively become worthless).

EBS, Bank of Ireland and AIB, are the only lenders in the market at the minute, and if BoI and AIB follow EBS’s lead, then a significant part of the housing market in many areas of the country will become excluded from buyers and lock-in existing apartment owners for the foreseeable future.  It’s hard to see the justification for such redlining.

Rob Kitchin