Mortgage rules spark war of words between Central Bank and ESRI

Think tank claims regulator’s move to relax rules has fuelled house price growth and lifted loan-to-income ratios back to Celtic Tiger levels

ESRI economist Kieran McQuinn: he warned that average loan-to-income ratios were now back to levels not seen since the peak of the Celtic Tiger era. Photograph: Mark Stedman

A war of words has broken out between the Economic and Social Research Institute (ESRI) and Central Bank governor Gabriel Makhlouf over the bank’s move to ease borrowing restrictions on homebuyers.

Mr Makhlouf insisted this week that the regulator’s decision to relax the rules for first-time buyers in 2022 had not “added to house prices in a way that’s affected the stability of the [financial] system”.

He was responding to criticism from the ESRI that looser credit conditions had fuelled further house price growth and that the regulator’s move had been “premature”, particularly with the huge build-up of savings during the pandemic.

Asked about the governor’s comments at the ESRI’s annual budget perspectives conference on Thursday, economist Kieran McQuinn doubled down on the think tank’s position, insisting the governor and his chief economist admitted at the time the move would be inflationary. “When they changed the macroprudential measures they did acknowledge that they would have upward pressure on prices,” he said.


In 2022 the Central Bank lifted the upper limit on the loan-to-income ratio requirement for first-time buyers from 3.5 times to 4.

In his presentation to the conference, Mr McQuinn, a former Central Bank economist himself, warned that average loan-to-income ratios were now back to levels not seen since the peak of the Celtic Tiger era.

While the rapid house price growth seen over the last 10 years had, in the main, been driven by “fundamentals”, such as income growth, looser credit conditions were once again playing a role in driving house prices, he said. “Over the last two to three years we’ve seen an increase in that ratio again, so it’s now up to pretty much where it was at the peak of the financial that is a warning signal.”

However, he noted the number of mortgage loans currently being issued was considerably less than at the height of the boom, meaning the risk of another system-wide credit bubble was limited.

Speaking at the launch of the Central Bank’s latest biannual Financial Stability Review on Tuesday, Mr Makhlouf said he did not “believe that the changes we made...have actually added to house prices in a way that’s affected the stability of the system and the stability of the household resilience”. He also claimed his organisation “has access to a lot more granular information than they [the ESRI] do”.

He pointed to a chart in the report which suggested that the median loan-to-income (LTI) ratio of first-time buyers remained stable at about 3.5 times in 2022-2023, even if almost 40 per cent of new lending to this group had been in the 3.5 to 4 range. The median during the boom years was above 4 times.

“There is no evidence, to my mind, that the measures are actually fuelling some sort of credit boom,” Mr Makhlouf said.

Earlier, Minister for Public Expenditure Paschal Donohoe told the ESRI’s conference that the Irish economy had remained “resilient” in the wake of two big global crises in the form of the pandemic and the energy price shock. By building up resilience in the public finances the Government was able to support the economy during these crises.

Mr Donohoe said the upcoming budget would be framed around preserving that “stable anchor regarding the public finances”.

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times