Tighter lending rules to prevent housing bubble

The majority of home-buyers will in future have to put down a 20% deposit and be able to borrow a maximum of 3.5 times their salary, according to new rules by the Central Bank.

The new macro-prudential rules are aimed at preventing another housing bubble from wreaking havoc across the economy. From January next year, only 15% of the entire value of a bank’s mortgage lending can comprise mortgages with a loan-to-value ratio greater than 80%.

Furthermore, 80% of mortgage customers in value terms will be able to borrow a sum no greater than 3.5 times their salary.

However, there are exemptions, including customers in mortgage arrears and customers in negative equity looking to switch homes.

Central Bank deputy governor, Stefan Gerlach, said he still expected house prices to increase following the introduction of these new rules, but not at the rate seen over the past 12 months. However, the aim was to making the banking system and housing market more stable and not to control house prices, he added.

Property Industry Ireland, part of the employers’ group, Ibec, warned that the measures could undermine the efforts of first-time buyers to get on the market.

“Without reducing the underlying cost of housing, or increasing the supply of properties available, these restrictions will inevitably hurt first-time buyers and others who are competing with cash-buyers.

A sustainable property market is vital to economic recovery, so next week’s budget is an opportunity to help cool price increases by reducing the cost of development,” said PII director, Peter Stafford.

Merrion Stockbroker analyst, Ciaran Callaghan, said the move could lead to a spurt in activity over the next two months as banks try to close deals before the new regulations are introduced. Over the short term-to-medium term, the mortgage caps will lead to fewer property transactions, which will weigh on the banks’ profitability.

There was €2.4bn of mortgage lending done by Irish banks last year, and 44% of these mortgages would have breached the new rules on loan-to-value ratios and 23% of mortgages would have breached the rules on loan-to-income ratios.

The head of financial regulation at the Central Bank, Cyril Roux, said Irish banks had traditionally a very high concentration. These new rules would force them to increase lending to SMEs and other businesses.