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ESRI again highlights regulator’s role in fanning house prices

Think-tank not backing off previous suggestion that loosening mortgage rules boosted the property market

Kieran McQuinn believes the Central Bank's move to loosen the mortage rules was premature. Photograph: Cyril Byrne / THE IRISH TIMES
Kieran McQuinn believes the Central Bank's move to loosen the mortage rules was premature. Photograph: Cyril Byrne / THE IRISH TIMES

The Economic and Social Research Institute (ESRI) used more diplomatic language but it clearly still thinks the Central Bank’s decision to relax the borrowing rules for first-time buyers in 2022 was a misstep and has played a role in fanning house prices since.

Back then the regulator lifted the upper limit on the loan-to-income ratio requirement for first-time buyers from 3.5 times earnings to four times. But since then the ESRI’s Kieran McQuinn, a former Central Bank economist himself, has been warning that average loan-to-income ratios – a key measure of a borrower’s ability to repay the loan – have been rising. He has described the bank’s move as “premature”.

Central Bank governor Gabriel Makhlouf has rebuffed the criticism, claiming the relaxation had not added to house prices “in a way that’s affected the stability of the [financial] system”.

In the latest economic commentary the ESRI, however, highlighted what is described as the substantial pickup in house price growth this year, the level of house price overvaluation in the Irish market (put at 10 per cent) and the prospect for another price correction.

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“While credit growth is not as significant a factor as it was in the pre-Celtic Tiger era, there is recent evidence to suggest the growing contribution to recent house prices of changes in the loan-to-income ratio,” it said. “Consequently the Central Bank of Ireland must be particularly vigilant and prudent in any review of the mortgage measures in its macroprudential policy framework.”

In its report the ESRI says the continuous increase in Irish house prices since mid-2013 means that Irish house prices are, as of August 2024, now 13.4 per cent higher than the pre-global financial crisis peak back in April 2007.

It also notes the combination of factors driving them forward again, which include ongoing supply issues, population and income growth plus the acceleration in real wages. But it also lists looser credit conditions courtesy of the Central Bank as a factor.