Mortgage rules stem ‘price spiral’ of up to 26%

Mortgage rules stem ‘price spiral’ of up to 26%
The Central Bank, file photo

The Central Bank has left its mortgage lending rules unchanged for another year and published new research showing the controls have helped stem a Celtic Tiger “credit house price spiral”.

Prices would have been up to to 26% higher in the absence of the rules, the Central Bank has found.

The rules set limits on the amounts home borrowers can borrow based on income and the size of the mortgage loan but they also allow lenders certain exemptions to exceed their home loan limits in a significant number of applications.

The decision to keep the rules unchanged for a further year was no great surprise but the Central Bank research nonetheless presents a strong case that the rules are working to prevent a further house price crash.

It also suggests that the rules, which were first put in place 2015 and are reviewed annually, will be a permanent feature of the mortgage and housing market.

However, signalling some level of concern over the commercial property market, it said it will carry out “a deep dive” review of the role that investment funds are playing in the property market, as part of a wider review to assess the resilience of the economy to any downturn.

The Central Bank insists its rules are not meant to control house prices but its research showing that the rules have likely helped house prices from topping Celtic Tiger levels stands out.

“The analysis finds that, if the measures had not been introduced, residential property prices would have been 11% higher at the end of 2015 and 26% higher by end March 2019 than was actually the case,” according to the analysis. The living standards of Irish households have therefore been safeguarded, it said.

“The mortgage measures are working” and the Central Bank did not propose to change them in its latest review, Central Bank governor Gabriel Makhlouf told reporters.

The rules set a loan-to-income ceiling of 3.5 times income. First-time buyers must have a deposit of 10% of the property value, which rises to 20% of the value in the case of second-time buyers.

Its latest review investigated the ways the banks use their exemptions during the year but concluded that any issues were not as significant as some believed.

Some analysts had suggested that the lending rules should be tweaked to reflect the huge differences in home prices between Dublin and some other parts of the country. But the Central Bank said that regional rules were scrapped in New Zealand and that the loan-to-value and loan-to-income ratios are now used in many parts of the world.

Its research showed that the banks’ exemptions were important for borrowers living in Dublin to take account of higher property prices and higher incomes in the region.

Mr Makhlouf said that in future years it was “extremely likely” that some sort of mortgage lending rules would stay in place.

In its financial stability review, the Central Bank said the risk of a disorderly Brexit remains a threat to Irish agriculture and food and retail firms, sectors most exposed to the British market.

But the absence of a disorderly Brexit posed a risk that the economy gets closer to its capacity limits and could overheat.

The report reiterated risks to the economy and the banking system, including potential changes in the global tax regime and elevated levels of sovereign debt.

Banks are in much better financial health but still require lower levels of non-performing loans and boost profitability.

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