Central Bank research sounds warning on mortgage lending

Despite strict lending rules, mortgage lending is growing too fast, posing risk to economy

The Central Bank said the level of mortgage activity needed to be “carefully monitored”. Photograph: Alan Betson

The Central Bank said the level of mortgage activity needed to be “carefully monitored”. Photograph: Alan Betson


The current growth in mortgage lending, if it persists, could pose a systemic risk to the Irish economy, Central Bank researchers have warned.

Even with the Central Bank’s strict mortgage lending rules, introduced in 2015 to guard against another property-related credit bubble, new mortgage lending jumped by 29 per cent last year to nearly €7.3 billion.

In an economic letter, published on Wednesday by the Central Bank, the researchers warned that if this rate of increase were to continue in 2018 and household incomes rise in line with current forecasts of about 3.5 per cent, “excessive cyclical risks” related to mortgage lending may emerge.

They said while there was no reason for a policy intervention at this stage, the level of mortgage activity needed to be “carefully monitored”.

In the letter, Central Bank researchers Enda Keenan and Martin O’Brien noted that “house price bubbles and bursts, unsustainable credit growth and systemic financial crises have often accompanied each other”.


As a result, particular attention is now being paid to indicators that can “gauge the build-up of systemic risk” related to residential real estate and mortgage credit.

One of these indicators is the ratio of new mortgage lending to household disposable income (NMDI), which was 6.7 per cent at the end of 2017.

While this is currently consistent with wider structural elements such as long-term interest rates and population demographics here, the Central Bank researchers cautioned it could rise to 8 per cent in 2018 with the same level of mortgage growth seen last year, which would point to the emergence of systemic risk.

“As a result, near-term developments in the level of new mortgage lending warrant careful monitoring so that higher levels of activity are not accompanied by the emergence of excessive cyclical systemic risk,” the letter said.

Mr Keenan and Mr O’Brien, economist and head of function - macroprudential policy respectively, said it was now common practice for regulatory authorities to focus on the stock of outstanding credit, and to consider this stock relative to a flow measure of economic activity as a means of assessing its sustainability.

Recent study

They highlighted a recent study which suggested that “in instances following an excessive expansion of the stock of credit followed by a financial crisis, the standard credit gap can have implausibly large negative values for a long period of time, potentially underestimating emerging cyclical systemic risks”.

Recent figures from the Banking and Payments Federation Ireland show that total mortgage lending for 2017 rose to nearly €7.3 billion, an increase of 29 per cent on the previous year.

The figures indicate a total of 34,798 mortgages were issued last year, up 18 per cent on 2016. First-time buyers remained the single largest cohort, accounting for over 50 per cent of the new mortgages.

The pick-up in first-time buyers applying for mortgages has been linked to the Government’s Help-to-Buy scheme, which allows participants tax rebates of 5 per cent of the purchase price of a property.

Earlier this week, in its latest report on Ireland, the International Monetary Fund (IMF) said such demand-side measures should be restricted to low-income households.