Burton queries 80% cap on home loans

The Central Bank is unlikely to change the new rules on mortgage lending despite growing political pressure.

Tánaiste Joan Burton raised concerns about the proposed Central Bank rules to raise the deposit required for a mortgage to 20% of the value of the property.

“The size of the deposit does seem quite high, but they [Central Bank] are independent. They are consulting people, so people who have a view that one or other part of their proposals should be modified, should [put it] to the Central Bank,” Ms Burton said in an interview on RTÉ’s Morning Ireland.

The Tánaiste supported the Central Bank’s other mortgage cap proposal which stipulates that lending cannot exceed 3.5 times a salary.

“But for individuals paying high levels of rent out of earnings, they already have high levels of financial discipline. Traditionally, that is how local authorities and other lenders judged capacity to buy a house. So the Central Bank will examine, I’m sure, all the different factors.”

Ms Burton is the most senior politician to publicly question the new rules.

However, it is believed that other ministers have privately expressed concerns that the new measures could derail the incipient recovery in the housing market as well as the ability of first-time buyers to get on the property ladder.

The Central Bank announced guidelines last week that would limit banks to offering mortgages with a loan-to-value ratio of 80% or less for 85% of its lending in any given year. Moreover, 80% of mortgage lending will be capped at 3.5 times salary.

The Central Bank deputy governor, Stefan Gerlach, said the new rules ensured a stable banking system and were not aimed at controlling house prices, although house price increases would most likely moderate on the back of these measures.

House prices, particularly in Dublin, have risen over the past year as demand outstrips supply. The Government said it was looking at a number of initiatives to encourage more housing construction. The Central Bank declined to comment on the Tánaiste’s remarks.

However, a person familiar with the situation said that unless a submission was made that included “compelling research and empirical evidence” that these Central Bank rules were inappropriate, then they would be introduced in their current form.

Even though most of the traditional competencies of the Central Bank have been transferred to the ECB, as part of EU banking union, macro-prudential policy had remained in Dublin. This covered sensitive areas such as reining in bank lending to ensure no credit bubble formed in the future.

The Government exerted a high degree of political interference in the Central Bank in the past because of the circular flow of senior personnel between the bank and the Department of Finance. But changes in the wake of the financial crisis have seen the recruitment of a number of international candidates to senior positions that has broken that nexus and the possibility of political influence.

The Department of Finance said it would not be appropriate to comment on the Central Bank’s mortgage cap proposals during the consultation process.