Central Bank mortgage measures built up resilience during pandemic

The Central Bank's mortgage measures set limits on the size of mortgages that consumers can borrow
Central Bank mortgage measures built up resilience during pandemic

Deputy governor of the Central Bank Sharon Donnery said previous research suggested house prices may have been up to 25% more expensive had the measures not been introduced.

Restrictions limiting the amount banks could lend to potential homeowners have built up resilience to protect borrowers during the Covid pandemic, the Deputy Governor of the Central Bank Sharon Donnery has said.

Speaking at the Bank of Lithuania’s macroprudential policy conference, the deputy governor discussed the ongoing review of the Central Bank's mortgage restrictions which Ms Donnery said played an important role over the past seven years by protecting banks and borrowers from financial shocks and dampening the rise is bigger mortgages and increased house prices.

She also said that reducing construction costs rather than increasing mortgages should be used to increase housebuilding activity.

House prices entering the pandemic were at lower risk of a cyclical downturn than may have been the case in the absence of the mortgage measures, she told the conference. 

Ms Donnery said previous research suggested house prices may have been up to 25% more expensive had the measures not been introduced. 

"In addition, borrowers with lower indebtedness levels were less likely to require the support of a payment break," she said.

The Central Bank's mortgage measures set limits on the size of mortgages that consumers can borrow, through the use of loan-to-value and loan-to-income limits. 

The outcome of the ongoing review of the measures is expected to be announced in 2022.

Ms Donnery pointed to more recent research on the benefits of mortgage measures. "One way to describe the benefits of such policies is that they accrue to all citizens, rather than new mortgage borrowers only; operating through the reduction of both the likelihood, as well as the severity, of a recession stemming from spiralling housing-credit dynamics." 

The research also highlights the importance of a policy mix that stimulates additional housing supply through reductions in construction costs, rather than increased price levels resulting from increased debt for borrowers, the deputy governor said.

She also said that “loan to income ratios across the mortgaged population are similar in Ireland to elsewhere in Europe, and have fallen more than most since 2013.” 

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