The Bank of Ireland has entered the debate about the Republic's high and growing levels of mortgage lending. According to the bank's latest Irish Property Review, mortgage borrowing continues to grow strongly but is not a problem for the economy.
The review states that growth in housing demand continues to be strong and is underpinned by strong growth in immigration, employment and wages. Growth in supply is moderating house price growth, it argues.
Addressing the issue of debt sustainability, Dan McLaughlin, the bank's chief economist, says in the review that there are more savers than borrowers in the economy. The present level of debt must be put in the context of interest rates being at a 50-year low, he said.
His comments followed a warning last week by Central Bank governor John Hurley, who expressed concern about rates of growth in private sector credit in excess of 20 per cent. He said that this raised the risk faced by the economy to possible future rises in interest rates.
In its commentary on the interest rate outlook, the Bank of Ireland says that the probability of an interest rate cut is low. The review suggests that the overall affordability of mortgage lending to the economy remains close to the historical long-run average.
The bank calculates an "affordability index" which attempts to gauge the share of income required to service a mortgage. Its level stood at 28.8 per cent in 2004, compared to a long-run average of 39 per cent. The index is forecast to increase to 29.8 per cent this year.
The bank expects that mortgage lending will reach €19 billion in 2005, up from €16.9 billion in 2004. The overall stock of mortgage debt is predicted to reach €90 billion, equivalent to 109 per cent of personal income.
Latest figures from the Permanent TSB/ESRI house price index show that house price growth moderated in the first quarter of this year to grow by 6.6 per cent, with growth slightly stronger in the Dublin region.
The Bank of Ireland attributes this moderation to continuing strong growth in supply, rather than any weakening of demand. A total of 77,000 new houses were completed in 2004.
The review forecasts a comparable rate of 75,000 new house completions in 2005 and that the average price of a house will rise by 5 per cent over 2005. This will bring the national average house price from €309,000 at end-2004 to €325,000 by the end of this year.
The bank says that housing demand is "stronger than ever". Evidence cited in support of this includes recent data from the Central Statistics Office (CSO) which show total employment in the economy up by 72,000 in the 12 months to June. The CSO's Quarterly National Household Survey, released last month, shows that 30,800 of the jobs created over this period were created in the construction sector.
The review also cites a recovery in private sector rental yields, which have been substantially negative over the past two years, as evidence of a recovery in private sector demand.
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