ERSI: 20% deposit rule is harmful

The ESRI is the latest body to come out against the Central Bank’s proposed 20% deposit requirement for mortgage lending, saying it had the potential to do more harm than good.

In a submission to the Central Bank, research professor Kieran McQuinn welcomed the decision to introduce macro-prudential policy measures to ensure there was no repeat of the property crash. “However, it is about having a debate about how these measures are going to be implemented,” said Mr McQuinn.

In October, the Central Bank announced that from January banks would be bound by an 80% loan-to-value (LTV) cap for 85% of their annual lending, and a loan-to-income (LTI) cap of three-and-a-half times’ salary for 80% of lending.

Even though house prices in Dublin are growing faster than at the peak of the boom, they are still 50% below the height of the market in 2007.

Unlike the credit bubble that lasted up to 2007, the supply of mortgages in the market is still very small and not a significant determinant of house prices, said the ESRI.

In countries where both LTV and LTI caps exits, they have been quite powerful in moderating house prices.

“Therefore, the introduction of these measures sends quite a strong signal to the market. This is important as far as the supply-side of the market is concerned.”

But the main cause of house price inflation is the chronic lack of supply, noted the ESRI.

“There is a danger that the adoption of these measures may have additional, adverse implications for future residential supply,” said Mr McQuinn.

One alternative is that the LTV cap could be based on a sliding scale of between 75%-to-90%, with credit tightened or loosened according to market conditions which would then be assessed at regular intervals, he said.

The original timeframe for the introduction of these proposed recommendations was early January, but this has been pushed out as the Central Bank reviews the 157 submissions it received from stakeholders.

It is believed that while there is widespread support for the LTI cap, there is almost universal opposition to a 20% deposit.

A spokesperson for the Central Bank said the review process would conclude at the end of January. It would then release its recommendations, which would then have to be ratified by the board before the new rules could be adopted.

One of the criticisms of the Central Bank in the years leading up to the crash was that it lacked independence. The fact that the proposed macro-prudential rules caught the market by surprise is a sign of the growing independence of the institution. Indeed, the Central Bank has been accused over recent weeks of not acting in the best interests of the economy.

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