The Central Bank’s rules introduced early last year are designed to protect the financial sector from risky lending which caused the financial meltdown Irish banks are still recovering from.
Their introduction slowed house- price inflation last year and looked to be taking the heat out of the Dublin market but this was just a temporary effect that has now passed, according to Savills director of research John McCartney.
Already this year, Dublin house price growth has rebounded, rising steadily from 2.6% to 4.6% and will continue to increase throughout the remainder of the year.
“As we predicted, the mortgage rules have proved to be more a bump in the road than a lasting barrier to house price growth,” said Mr McCartney.
“If you freeze people out of buying their own homes they have to rent. This just inflates rents and attracts investors who drive up prices by competing for properties.
“Eventually, investors were going to cop on that if they had a pile of money they were better off putting it in bricks and mortar than putting it in the bank because it’s generating a return of 5% to 6% even in some of the best addresses around Dublin compared with less than 1% with the bank.
“In Dublin, you cannot escape the fundamentals of the market and you know the population is growing really strongly, especially in Dublin, and yet we’re not building anything like the number of houses and that’s not going to change.”
May and June house price data is likely to show further rises with inflation reaching about 5.5%. This will continue into the second half of the year and climb to 6%-10% by the end of 2016, Mr McCartney said.
The idea that the Central Bank’s lending rules were designed to stem house inflation is misplaced, he added. Instead, their intended effect is to uphold the stability of the financial sector and prevent the banks from becoming overexposed to risky property lending.
“In terms of the property market, people have made the assumption that the Central Bank’s rules were introduced to try and curtail strong house price growth,” said Mr McCartney.
“I’m not sure that was ever the objective. In any event, it’s not going to achieve that, for the reasons I’ve said.
“All you’re doing is diverting people to renting. That drives up rents, that drives up yields [and] that attracts investors who come in and buy the properties anyway and they compete and bid up the price of property so it won’t be effective in controlling house prices. I’m not sure it was designed to do that.”
The Central Bank will issue its review of the lending rules in November but Mr McCartney said it is likely to be conducted in the narrow prism of the bank’s remit of protecting the financial sector and not take account of a range of wider effects on home ownership and pensions, for example.
The newly established Housing Ministry could look at conducting a more wide-ranging review of the Central Bank rules which would take account of these other considerations, Mr McCartney said.