Central Bank says mortgage lending rules are here to stay
Review of regulations will not lead to their abolition, says chief econimist
Central Bank chief economist Gabriel Fagan. Photograph: Alan Betson/The Irish Times
The Central Bank has again robustly defended its restrictive mortgage lending rules, saying they are “permanent”.
At the presentation on Friday of the bank’s quarterly accounts, chief economist Gabriel Fagan said the bank was working on a review of the rules, which will be published in November, but said this review would not lead to their abolition.
Mr Fagan warned against people equating a review with a change in the rules.
“We shouldn’t think of a change taking place,” he said, adding that the rules may not be changed at all or may be tightened.
Introduced in February 2015, the rules limit the amount home buyers can borrow, typically to 3½ times their gross income up to a limit of 80 per cent of the purchase price of the property.
Last month, the Central Bank issued a robust defence of the home loan caps, saying commercial banks and mortgage brokers were unable on their own to uphold “prudent” credit standards.
However, the rules continue to come under increasing criticism.
Addressing the wider economic recovery, the Central Bank revised its growth forecast upwards for the Irish economy for 2016 and is now predicting growth of 5.1 per cent, up from 4.8 per cent previously, “on the back of exceptionally strong rates of growth in domestic demand”.
However, it warned that Ireland’s economic recovery was “not complete” as it forecast “marginally lower growth” for 2017.
Overall the outlook for the economy remained “broadly favourable”, it said.
It is forecasting gross domestic product (GDP) growth of 5.1 per cent for 2016, up by 0.3 per cent from its previous forecast, and 4.2 per cent for 2017, down from 4.4 per cent previously, as it said domestic demand was now firmly the main driver of expansion.
While the economic outlook may be relatively favourable, the Central Bank also noted risks, including levels of public and private sector debt, which remain high.
As such, there is a “strong case for precautionary behaviour and prudence”, Mr Fagan said.
This would allow the next government to build up a buffer should adverse circumstances arise.
Wage growth was also cited by the Central Bank as a potential risk, as it warned that while there may be some recovery in wage growth, “it is important that that this process does not lead to overshooting”.
Political uncertainty at home may also be an issue.
Five weeks after the general election and with no sight of a new government, Mr Fagan said the uncertainty had so far not had a negative effect.
However, he warned that “protracted uncertainty could lead to an adverse impact”.
On the external front, the regulator said emerging market concerns as well as broader geopolitical factors were potential issues, as was the forthcoming Brexit referendum which “creates uncertainty and is a downside risk factor”.
Pointing to household debt figures, the Central Bank said gross new lending increased in 2015 with households drawing down €4.4 billion in new mortgage loans.
However, the figures also revealed that “a significant degree of deleveraging” was still under way in Irish households as they continued to reduce overall debt levels.
This ongoing decline might suggest that the economic recovery had, to date, been somewhat “creditless”, the Central Bank said.