IMF warns mortgage limits must stay in place

The Central Bank’s mortgage lending rules should be maintained to help head off the boom-bust economic cycles that have plagued Ireland and brought the country to its knees during the recession, the IMF has warned.

The US-based organisation said there is evidence the lending limits, which require borrowers to provide a 20% deposit and which caps home loans at 3.5 times gross income, are working.

Despite calls from prospective homebuyers and industry lobby groups for the loan-to-value (LTV) and loan-to-income (LTI) rules to be relaxed, the IMF has cautioned against doing so; saying more information is needed before any attempts are made at refining the limits.

In time however, the Central Bank should consider transforming the loan-to-income requirement into a debt-to-income limit.

The IMF suggested this should be done once the Central Bank has established a database of personal and credit information known as the Central Credit Register which is set to come into effect in 2018.

Separately, the Central Bank’s deputy governor Sharon Donnery has warned of the clearly “negative and material” impact on Ireland’s economic fortunes of the UK’s decision to leave the European Union.

The adverse economic impact of the Brexit vote on the Irish economy will be felt both in the short and long-term, although the exact magnitude is to be seen.

Ms Donnery highlighted the benefit to Ireland of the UK retaining access to the EU single market but warned the scale of the impact “could be much more significant” under a more restrictive agreement.

“The economic impact of Brexit on Ireland is difficult to estimate. It is clear, however, the impact will be negative and material, both in the short term and the longer term.

“Trade, FDI and the labour market are the key channels for the macroeconomic effects of Brexit. Any agreement which keeps the UK access to the single market largely intact would have a more limited impact but the scale of the impact could be much more significant under a more restrictive arrangement,” Ms Donnery said.

Speaking at the Global Interdependence Center Central Banking Series in Dublin, Ms Donnery said the uncertainty caused by Brexit could dampen consumer demand and investment decisions by firms.

Irish exporters in the agri-food; clothing and footwear; and tourism sectors — which have the highest exposure to the UK — could be disproportionately affected by the fallout. Despite the risks currently complicating the Irish economic outlook, the country remains on track to be the fastest growing economy in the EU for the third consecutive year.

Brexit has knocked 0.2% of the Central Bank’s GDP growth projections this year and 0.5% in 2017 but “economic activity continues to expand at a reasonably healthy pace”, Ms Donnery said.

While growth is nowhere near the 26% figure measured by the CSO earlier this year, the Central Bank estimates growth is running at about 5% with consumer spending now a strong driving force.

The ECB’s monetary policy stance which has led to rock-bottom interest rates has also been a “central cog” underpinning Ireland’s economic outlook.


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