Central Bank move may have pushed house prices higher, ESRI suggests

The average loan to income ratio in the Irish mortgage market is back to multiples previously seen at the peak of the Celtic tiger

In 2022, Central Bank of Ireland governor Gabriel Makhlouf told reporters that the changes to its mortgage lending limits could lead to a 'modest' rise in house prices.  

The Central Bank has likely fuelled higher house prices by loosening mortgage lending rules too early, a report by a leading economic think tank has suggested.

The Economic and Social Research Institute (ESRI) said it appears changes in credit standards over recent years are “once again” leading to residential prices ticking upwards.

In a working paper examining the residential market in the Republic of Ireland following the global financial crisis in 2007/2008, the ESRI said the decision made by the financial regulator more than two years ago to ease mortgage measures — when the upper limit on the loan to income ratio was raised from 3.5 to 4 for first-time buyers — was “premature”.

“Enabling prospective house buyers to borrow more at a time when there was considerable savings already built up in the Irish economy due to covid-19 has almost certainly put upward pressure on house prices,” the institute said.

In 2022, Central Bank of Ireland governor Gabriel Makhlouf told reporters that the changes to its mortgage lending limits could lead to a “modest” rise in house prices.

In the first six months of 2023, 25% of first-time buyers had loan-to-income ratios just below the regulatory threshold, versus just 6% before the Central Bank loosened its mortgage lending rules.

The loan-to-income ratio, on average within the mortgage market in the Republic, is now back to multiples previously seen at the peak of the Celtic tiger boom, according to the paper.

ESRI warns about fundamentals

Meanwhile, the ESRI also warned a “significant deterioration in economic fundamentals” including lower income levels amid stubborn inflation and higher mortgage rates could result in these households experiencing some difficulties in repaying their mortgages.

This is clearly shown in Central Bank figures released earlier this year.

The number of households falling into arrears with their mortgage repayments increased at the end of 2023 following the first full year of aggressive interest rate hikes by the European Central Bank (ECB).

The total number of home mortgage accounts in arrears during the period rose to 47,734 in the last three months of 2023, driven by an increase from the previous quarter in the number of accounts falling into arrears at an early stage.

Concern over changing credit conditions 

The ESRI suggested it does not believe changing credit conditions is creating a systemic risk to the Irish economy, but it still must be “closely monitored". 

The ESRI also said that much of the increase observed in Irish house after the banking crisis 17 years ago can be attributable other factors including the recovery in the economy and a chronic supply shortage in the housing market amid a growing and working population.