Mortgage limits should be defended

When Tony Blair was first elected as prime minister in 1997 the first thing he and his Chancellor of the Exchequer Gordon Brown did was to grant operational independence to the Bank of England.

Under the new system the Chancellor would set an inflation target and it would then be up to the Governor of the Bank of England to use monetary policy to achieve that target.

Prior to that change, the government of the day effectively dictated interest rate policy and this very often resulted in interest rates being taken down prior to an election to help the government of the day get re-elected.

Often as not, once the election was out of the way, inflation would take off and interest rates would have to shoot up.

This resulted in the UK economic performance being heavily characterised by boom-bust economic cycles, which is not good for business activity or indeed anything else.

Since 1997, the UK economic performance has become a lot less volatile, with the exception of the period of the ‘Great Recession’, when economic stability went out the window for most developed economies in the world.

The ideal situation is for politicians to have as little as possible to do with the operations of a central bank, because God knows, politicians can and very often do immense damage with the key tool of economic policy that they control, namely fiscal policy.

In the UK model today, if government starts to pursue reckless fiscal policy, then at least the Bank of England can offset some of the worse effects by pursuing an independent interest rate policy.

Any central bank does of course have to be accountable to the government of the day, but that can be achieved.

Here in Ireland the Central Bank obviously has no control over interest rate policy, since 1999, but it can utilise other powers, the main one being the ability to influence the lending behaviour of the banks.

Obviously this power was not effectively used in the decade leading up to 2007 and the price of the reckless behaviour of the banking system is now being paid by every citizen of the country and will be for some time.

Thankfully we may have learned some lessons. The Central Bank is now starting to exercise some control over the banks, as it should. New regulations on mortgage lending were introduced in February.

For non-first time buyers of private dwelling houses (PDH) a limit of 80% loan to value (LTV) applies to new mortgage lending.

For first-time buyers, a limit of 90% LTV applies to the first €220,000 of the value of a residential property, and a limit of 80% LTV on any value of the property above that level.

Furthermore, the total value of new lending for PDH mortgages above these LTV limits cannot exceed 15% of the value of all PDH mortgages in a calendar year.

For buy-to-let mortgages, a LTV limit of 70% applies, which should be exceeded by no more than 10% of the value of all housing loans for buy-to-let purposes.

In addition, a loan to income (LTI) limit of 3.5 times gross annual income applies to all new lending for principal dwelling homes.

From the perspective of prudential lending behaviour, these new measures make sense, but they are having negative side effects, making it very difficult for first-time buyers in particular to buy a house in Dublin.

It was always thus, because 30 years ago first-time buyers struggled to buy a house close to Dublin city centre and started the housing cycle in the suburbs.

That is just a fact of life. Allowing people borrow too much is not good policy. It is quite amazing that some are reacting to the further easing of Dublin house prices this week as some sort of crisis. It is far from it.

It is deeply worrying that a minister with responsibility for housing should be launching an attack on the regulator of the banking system. It is up to the minister to ensure that the many impediments to the delivery of housing are removed as quickly as possible.

He is not achieving that. The new Governor of the Central Bank, Philip Lane, should stand up to this political bullying.

Banks need to be forced to behave prudently, because left to their own devices they are incapable. Some of the recent lending to the dairy sector proves this to be the case.


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