Mortgage measures were not designed to limit house prices, says Donnery

The Central Bank's mortgage rules were never designed to limit house prices but to increase the resilience of banks and borrowers, the bank's deputy governor Sharon Donnery has said.

Speaking at the start of a two-day webinar on the measures, Ms Donnery insisted the rules had reduced the risk of another credit-fuelled housing boom by dampening house price expectations and limiting credit growth.

Lending into the housing sector here has been happening at much lower loan-to-income ratios than during the pre-2008 cycle, she said.

Ms Donnery also noted that borrowers with lower loan-to-income and loan-to-value ratios were less likely to require payment breaks in response to the pandemic shock.

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However, she acknowledged that affordability remained a key challenge, with average house prices in Dublin now topping half a million euro and house price inflation running at more than 15 per cent.

“We must remain clear that there is a distinction between our aim to mitigate the damaging role that credit can play in housing markets and an explicit targeting of house price,” Ms Donnery said.

“Housing markets are complex, with many different stakeholders and prices are influenced by a variety of factors, both domestic and global, which are outside the control and mandates of central banks,” she said.

“Targeting house prices is not the aim of macroprudential mortgage measures,” Ms Donnery said.

‘Too restrictive’

The mortgage rules constrain buyers from borrowing more than 3½ times their annual salary or, in the case of second-time buyers, more than 80 per cent of the value of the property.

However, much of the property industry views them as too restrictive in the context of the recent upward shift in house prices.

Price growth in the State’s property market has risen almost continually since the start of the pandemic, fuelled by factors such as increased savings, remote working and lower-than-anticipated supply.

Ms Donnery said the measures were introduced in an era where housing supply had been slow to respond to price growth, both globally and in Ireland.

"There are several factors that are likely contributing to the slower response of housing supply to house prices, exacerbated by long-running cost pressures in the construction sector," she said, noting these factors had been compounded more recently by pandemic-related supply chain issues and the Russian invasion of Ukraine.

However, she warned there were societal risks with simply allowing households to borrow more, only so that they could purchase housing at even higher prices due to elevated construction costs.

“A policy framework that can deliver lower construction costs, greater supply, lower house-price-to-income ratios and less indebtedness is far superior to one in which a higher cost base and great indebtedness are hard-coded into the system,” she said.

The webinar event is part of a framework review of the mortgage measures. Ms Donnery said a public consultation conducted last year elicited the largest ever response to a Central Bank survey.