Central Bank will intervene if house prices get out of control

The Central Bank will intervene with even tighter lending rules if runaway house price inflation re-emerges, governor Philip Lane has indicated.

In a speech to the Cork Chamber of Commerce, Prof Lane said the bank’s macroprudential rules were designed to avoid “spiral dynamics” between house prices and credit volumes.

Since they were introduced in 2015, he said there had been a sharp moderation in expectations for annual gains in house prices.

Prof Lane also defended the bank’s recent decision to loosen its loan-to-value (LTV) requirement for first-time buyers, noting the move had to be seen in the context of the current low level of mortgage lending.

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The governor said he expected house price growth to be restrained in the medium term by an expansion in supply and a tightening of funding conditions for lenders.

Nonetheless, he said the bank stood ready to tighten its lending regulations if evidence of elevated risks in the mortgage market, especially in relation to unsustainable credit growth, emerged.

External shocks

Prof Lane said the highly-open nature of the Irish economy meant that income and employment levels, which typically supported rising house prices, were highly sensitive to external shocks.

“For instance, slowdowns in output growth in our major trading partners, major currency movements and adverse shifts in global trading regimes could trigger a reversal in the currently benign growth and employment environment,” he said.

In his address, Prof Lane said the growth outlook for Ireland was characterised by uncertainty about the external environment with Brexit and changes to the international tax and trade environment seen as the two main risk factors.

The bank recently downgraded its growth forecast for the economy here to 3.3 per cent to reflect the weaker outlook for exports.

“Both in the short term and the longer term, the economic impact of Brexit on Ireland is set to be negative,” he said.

In the absence of any weakening in the UK economy, the impact of Britain’s EU decision has mainly been experienced through the sizeable depreciation of sterling, he said.

“Over the longer term, Irish firms will have to adapt to the post-Brexit environment,” Prof Lane said, while noting the current uncertainty about the future UK-EU relationship would delay many investment plans.

“In response to higher trade barriers between the UK and the EU, some firms may plan to serve UK customers through foreign direct investment (FDI) into the UK, while others may search for new export markets.”

Without mentioning US president Donald Trump directly, Prof Lane said any increase in protectionism was sure to pose a challenge for Irish-resident exporters and especially the multinational sector.

“Shifts in tax policies and exchange rates are additional factors that may influence the strategies of multinational firms in the coming years,” he said.

Mr Trump has pledged to end the so-called off-shoring of profits by cutting US corporation tax rates, a move that would have implications for US multinationals based here.

The Central Bank is overseeing an industry-wide investigation into how lenders wrongly denied tracker rates to certain mortgage customers.

In an earlier address at University College Cork, Prof Lane said some two million mortgage accounts were being examined at part of the review.

He said lenders would have to pay redress and compensation to affected customers and are facing enforcement action by the Central Bank.

One lender has already been fined €4.5 million and directed to compensate customers €5.8 million, while two other enforcement cases are ongoing, Prof Lane said.