Return of lending should curb house prices, but Central Bank still needs to act
Opinion: The emergence of non-bank mortgage financing could be disastrous
Because of the limited powers available to the Central Bank, there is not much that can be done by the monetary authorities to rein in prices until this happens Photograph: Matt Kavanagh
The Central Bank is getting a bit of stick for its somewhat laissez faire approach to rocketing south Dublin house prices. The not-so- widespread concern is understandable given the bank’s abject failure to do anything about the last bubble, but criticism of Dame Street may be premature.
Prices have jumped 22 per cent in south Dublin over the past year, but the housing market there is so dysfunctional that the existence of a bubble – or even a nascent bubble – is not a foregone conclusion.
There are several factors at play which may or may not dissipate. For example, we are told cash buyers are driving the market but, in reality, how many returning expatriates or newly minted technology millionaires can there actually be in a State our size? The corollary of the cash buyer argument also has to be considered. What happens when the banks eventually start lending – hopefully after the stress tests later this year?
Then there is the issue of absolute price levels as against the increases seen in the past year. Prices may be up over 22 per cent in Dublin since last year but they still remain 45 per cent off their 2007 peak. Nationally prices are up only 1.8 per cent in the last 12 months.
We may tend to forget it, but the institution on Dame Street is the Central Bank of Ireland, not the Central Bank of south Dublin. Things may be a bit frothy in Dalkey and Monkstown now but there is an argument for doing nothing that might undermine a broader-based recovery in property prices.
Above all, one suspects that the Central Bank is as baffled about Dublin house prices as anyone else and will remain that way until the link between wages and house prices reasserts itself. Not only that; because of the limited powers available to the Central Bank, there is not much that can be done by the monetary authorities to rein in prices until this happens.
For now the link is broken because of the absence of normal bank lending, which is the connection between the two. Most people buy houses with money borrowed from banks and their ability to borrow is a function of how much they earn – or how much they can afford to repay.
Idiotic productsOne of the contributory factors to the last bubble was that the banks got this all wrong. They lent people much, much more than they could afford through a variety of what, in hindsight, were idiotic products – 100 per cent mortgages, tracker mortgages, interest-only mortgages. This fuelled house prices and a lethal spiral began.
We have been promised this will not happen again and, in theory, once the banks start lending we should see a much more conservative relationship between wages and house prices. This should act as brake on prices, as should the fact that most people’s wages have fallen or, at best, stayed the same over the past five years. Until this plays out, it is very hard to conclude anything very useful about Irish house prices.
However, this does not to give the Central Bank permission to sit on its hands. There are several things it could and should do. One thing is to follow the lead of the Bank of England, which last week warned it would cap mortgages – as a function of salary – if house price inflation exceeded a certain threshold.
Now though, the Central Bank must keep a close eye on the supply of unregulated non-bank finance for home buying. The emergence of a significant source of shadow or non-bank mortgage finance would circumvent its most effective weapon for controlling house prices, a cap on lending. Last week saw the entrance into the Irish market of Dilosk, which bought the ICS brand and a €250 million mortgage book off Bank of Ireland. Dilosk is not a bank. It is a company and it claims it will offer borrowers “an alternative source of financing to the traditional banking market”.
Its business plan is to offer mortgages to borrowers seeking to purchase or refinance residential property with a particular focus on residential investment properties (ie buy-to-let) in the Republic.
Dame Street should take note.