We should thank the central bankers for not easing mortgage rules years ago

Beware of stopped clocks, especially when it comes to ones who are the vested interests who always criticise the Central Bank of Ireland’s mortgage lending limits. Stopped clocks are only ever right for a yoctosecond, which is short enough to mean they can be ignored. Like vested interests, they always say the same thing, regardless of how the world moves around them.

The Central Bank on Wednesday slightly eased its mortgage loan-to-value (LTV) rules to halve the deposit requirement of 20 per cent of the value of the home for those who are not first-time buyers, who were already at 10 per cent. Meanwhile, the bank will now allow first-time buyers to borrow four times’ salary instead of the previous loan-to-income (LTI) limit of 3.5 times, which still applies to others.

About 84 minutes later (tardy even for a stopped clock), Brokers Ireland, the representative body for most mortgage brokers, welcomed the loosening of rules that it has always believed were too strict, even when it seemed obvious to many others that they weren’t.

Brokers Ireland then said the changes by the Central Bank are “too little and far too late”. That sounded like code for “the Central Bank should have loosened the rules more and earlier like we wanted”. It shouldn’t have, and thank God it didn’t.

Central Bank’s move to tweak mortgage rules suggests it finally gets its mission

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We should thank the central bankers for not easing mortgage rules years ago

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What will loosening of mortgage rules mean for homebuyers?

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Central Bank easing of mortgage rules ‘a reaction to Government failure’ - Doherty

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The difficulty with the position of the brokers’ representative is that if the preferred course of action of the sector’s main lobby group had been followed when it first chimed in on this topic at the end of 2014, it is possible that things would now be a whole lot worse for many homebuyers.

House prices would probably have been far higher than they are now, and far more buyers... would likely be in a stressed position as we now buckle up for a vicious upwards interest rates cycle

This might also be true for banks and, by extension, the rest of us dumb sods, who through an unwritten creed are generally understood to have guaranteed the solvency of all major indigenous banks forever. House prices would probably have been far higher than they are now, and far more buyers (and their lenders) would likely be in a stressed position as we now buckle up for a vicious upwards interest rates cycle and an uncertain economic future. Another price crash might have been on the cards.

Ahead of the introduction of the mortgage lending rules in February 2015, the Central Bank held a public consultation in late 2014. About 110 members of the public responded, along with 47 more official contributors, such as politicians, companies and professional bodies. Most of the submissions held that the rules as proposed were too strict; the original proposals were even stricter than what was adopted, as they required a 20 per cent deposit from everybody, even first time buyers.

Prominent among the objectors in the consultation was the Professional Insurance Brokers Association (Piba), the main forerunner association of Brokers Ireland, which emerged in 2017 when Piba joined forces with another, smaller, brokers’ lobby. Piba’s chief executive when its submission was written in 2014 was Diarmuid Kelly, who is Brokers Ireland’s chief executive now. There is consistency at the top.

Horribly wrong

Piba essentially argued in its submission that the rules the Central Bank was proposing were not needed at all: “We firmly believe that... the current lending practices put in place over the last number of years are prudent.” If they are prudent, this appeared to imply, why change them?

Piba was perfectly entitled to lobby for a version of the rules that would be easiest for homebuyers, who are its members’ customers. Looser rules might equal more business. This is a perfectly legitimate desire in lobbying. But that doesn’t mean that Piba was right in what it said. In fact, it was horribly wrong.

Piba could not have foreseen this situation, but when the rules were introduced in 2015, Ireland was already on its way back to a horrible spike in house prices that would have been immeasurably worse if the Central Bank had not brought in strict rules on credit. Those macroprudential restrictions kept a lid on things. We ought to be thankful for the stubbornness of central bankers in the years that followed, when they resisted the pressure of various property and financial vested interests who wanted the rules loosened, which would have had the handy side effect of providing more business as prices climbed.

Piba was subsumed into Brokers Ireland, but brokers’ scepticism towards the rules remained. As it became clear that the rules were stopping house prices from galloping away even faster, the brokers wisely moderated their message and accepted that some rules were necessary. But it still wanted them loosened, and said this every year until now.

Brokers Ireland is singled out on these pages only because of how vocal it was in criticising the rules, which to others in recent years seemed perfectly appropriate. Yet they were hardly the only group sceptical about the regulations.

The Central Bank said in 2015 that lenders were “unanimous in [their] disagreement with the LTV limits”, which the banks felt was “too restrictive”. It also received seven submissions from the property industry, which all said the proposed rules were “too restrictive”.

Given what happened as house prices spiked drastically over the following five or six years, it could credibly be argued that all of those commentators were wrong.

Politically, only the Green Party and Sinn Féin broadly backed what the Central Bank wanted to do at the time. In hindsight, it looks as if both of those parties were right

Fianna Fáil in 2014 wanted a deposit requirement of about 10 per cent for all, which is looser than what was implemented and is essentially what the Central Bank has plumped for now. But the years that followed 2014 were, I bet, economically far different from the years that will follow 2022. It now looks, in hindsight, as if the party was wrong to call for lighter restrictions.

Hindsight

Helen McEntee, who is now the Fine Gael Minister for Justice, wrote to the consultation in 2014 calling for the rules to be majorly watered down. She was wrong. Politically, only the Green Party and Sinn Féin broadly backed what the Central Bank wanted to do at the time. In hindsight, it looks as if both of those parties were right — certainly they were more right than the other parties.

The Central Bank now argues that loosening the rules a tad is appropriate because the upwards pressure on house prices will be offset by the downwards pressure of higher interest rates and more constraints on available income in the cost-of-living crisis. Perhaps this is true.

But no matter what way it is sliced or diced, it is equally true that when all is counted, house prices will eventually be higher after the loosening of the rules than they would have been if nothing had changed, and that downwards pressure had been allowed to take effect.

Maybe that will spur extra housing supply, or maybe it won’t. But one thing seems certain: if the rules had been loosened years ago as many finance and property professionals had wanted, things would be a whole lot worse now than they are.