The Central Bank introduced rules in February that limited banking lending to 80% loan-to-value mortgages for 85% of overall mortgages issued over a 12-month period. A loan-to-income cap of three and a half times’ salary was also introduced.
However, in a modification to the original proposals, first-time buyers are allowed take out a 90% deposit for the first €220,000 of the overall value of the mortgage.
The Central Bank cited evidence that showed that first-time buyers play only a marginal role in stoking a property bubble.
However, associate research professor with the ESRI, Kieran McQuinn, said s a considerable body of international evidence suggests first-time buyers are disproportionately affected by a collapse in the property market, as they get access to credit during the preceding boom that would otherwise have not been granted.
Consequently, there should have been no exemption for first-time buyers in the Central Bank’s, he said.
The ESRI fully supported the role of macro-prudential policy in preventing a property bubble, but the factors underpinning the recovery in the Irish housing market do not merit the new rules now, said Prof McQuinn.
House prices fell 50% from peak to trough between 2007 and 2012. The double-digit rebound since 2012 is a result of the over-correction in house prices during the downturn, he added.
However, based on fundamentals, house prices are still 10% undervalued, according to the ESRI.
Macro-prudential rules such as increased deposits should only be introduced when credit supply and housing supply exceed key indicators. The level of new mortgage lending and new housing supply are well below current demand levels, said Prof McQuinn.
Suppressing house prices now will result in fewer houses being built and fewer mortgages being issued, putting greater pressure on the rental market, he added.