Central Bank singles out cash buyers as key driver of house prices

Government may soon have to raise taxes to stop the economy from overheating and to allow for investment in housing and water

Prof Philip Lane, governor of the Central Bank: “There are no one-way bets in the housing market.” Photograph: Cyril Byrne / The Irish Times

Prof Philip Lane, governor of the Central Bank: “There are no one-way bets in the housing market.” Photograph: Cyril Byrne / The Irish Times

 

Cash buyers of property are limiting the ability of the Central Bank to control house prices through mortgage lending rules, governor Philip Lane has said.

Speaking ahead of an economics roundtable event in Dublin on Friday, Prof Lane singled out cash buyers as one of the key drivers of inflation in the Irish property market.

Cash buyers used to account for about 25 per cent of house purchases in Ireland, but since the crash and ensuing credit crunch this figure has risen to 60 per cent.

In his remarks, Prof Lane also rejected suggestions that recent changes to the bank’s mortgage lending rules, making it easier for first-time buyers to borrow, had fuelled further inflation in the market, noting there was “no fixed relation between credit conditions and the evolution of house prices”.

“To the extent that the revision is contributing to an increase in aggregate mortgage credit volumes, this should be interpreted in the context of the subdued level of lending in recent years,” he said.

Prof Lane predicted that a pick-up in house building would eventually moderate price growth, which is currently running at close to 12 per cent year on year.

While rising incomes, low interest rates, high rents and “post-crisis adjustment dynamics” were currently contributing to significant house price pressures, he said the likely expansion in supply should restrain house prices in the medium term.

Separately, Prof Lane warned the Government may soon have to raise taxes to stop the economy from overheating and to accommodate increased investment in public infrastructure like housing and water.

“Deficit financing in a hot economy is going to add to overheating pressures. You have to recognise that if you’re going to expand in one sector you’ll have to offset that with measures that will cool down other sectors,” he said.

However, he stopped short of calling for a change in the Government’s fiscal stance ahead of the upcoming budget, suggesting a more sustainable and strategic policy framework would have to be adopted for budgets 2019, 2020 and 2021.

Pressures

In a pre-budget letter to the Minister for Finance, also published on Friday, the governor said that despite the strong pace of economic recovery, risks to growth in Ireland remain, including a legacy of high public and private sector debt, vulnerability to international shocks and Brexit.

“In the opposite direction, policymakers must also be prepared to address overheating pressures, if upside risks dominate” he said.

In relation to fiscal stability, Prof Lane welcomed the Government’s commitment to maintain a long-term debt target of 45 per cent of gross domestic product (GDP), significantly under the EU recommended ceiling.

“The volatile nature of the Irish macro-financial system and the history of crises suggests a debt target that should be materially below the appropriate level for a larger, more stable economy,” he said.

In terms of the Government’s budgetary stance, Prof Lane the pursuit of macro-financial stability requires that the Government runs a counter-cyclical fiscal policy.

“The development of a counter-cyclical fiscal strategy should also strike the balance in the allocation of surplus revenues between the proposed rainy day fund and reducing the gross stock of public debt,” he said.