Central Bank mortgage lending rules can lead to rising rents, ECB says 

ECB research says rules 'negatively impact' lower-income and younger buyers

The research also found reducing access to credit could also lead to homeownership increasingly being concentrated in the hands of wealthier households. 

Measures that restrict access to mortgage credit, such as the ones employed by the Central Bank of Ireland, can lead to an increase in rents and “negatively impact” lower-income as well as younger households, new research from the European Central Bank (ECB) has said.

In its latest research bulletin, which focuses on how limiting access to mortgage credit can “push up rents and reduce welfare for renters and prospective buyers”.

The bulletin notes when credit is constrained, wealthier people can potentially opt to purchase a cheaper property to satisfy restrictions, which can price out the people already aiming to purchase these more affordable homes, “therefore, they stay tenants for longer, either buying property later in life or not at all”.

“These developments mean that the demand for rental accommodation goes up, and the demand for most owner-occupied housing goes down,” the bulletin said, adding to meet this demand, rents would have to go up to entice new investors into the market.

It notes this results in a shift from people owning their own homes to renting and concentrating homeownership among wealthier households.

To emphasise its point, the bulletin cites the Central Bank of Ireland’s mortgage measures, which are part of its macroprudential policy framework.

The Central Bank introduced mortgage rules in 2015 but were revised slightly in October 2022. Under the rules, first-time buyers can borrow up to four times their gross income and 3.5 times for second/subsequent homes. 

This means a first-time buyer couple with a combined income of €100,000 can borrow up to €400,000 while a mover-purchaser can borrow up to €350,000.

Both sets of buyers would need to have a deposit of at least 10% of the mortgage value.

“Using a life-cycle model of homeownership where house prices and rents are determined by relationships within the model, we find that these borrowing limits increase rental prices,” the bulletin said.

They are 4% higher four years after the intervention, with a new stable equilibrium level of rents that is 3% higher.

“The homeownership rate decreases substantially, by around 2% and, as a result, the ownership concentration in the housing market increases.” 

The bulletin also analysed the impact of an unexpected increase in interest rates on this issue, which found similar outcomes, but with some differences.

The rate hike makes saving in financial assets more attractive compared to investing in housing so “rents need to go up even further” to keep small housing investors in the market.

"Higher interest rates on savings make it easier to save for a down payment, though we find this effect is minimal so tenants are still worse off," it stated.

The ECB concluded the bulletin by stating shocks that reduce households' access to credit “negatively impact lower-income and/or young households”.

“Not only can these shocks close the door to buying a home altogether, they can also increase the rents — in equilibrium — that tenants have to pay,” it said.

However, the ECB added it supported strong macroprudential tools in the housing market and further work was needed to assess the negative impacts described with the benefits from increased financial stability.