Mortgage rules create stable system but less home ownership

Cantillon: Is it time to debate Ireland’s highly conservative lending practices?

The Central Bank’s mortgage lending rules were not put in place as an immediate reaction to the financial and property crash of 2008. They weren’t introduced until 2015.

With the banks in such a precarious state straight after the crash, restrictions around credit might not have been seen as a priority. Nonetheless the rules are undoubtedly one of most significant policy measures undertaken in reaction to the crisis. Their job, in the Central Bank’s words, is to enhance the resilience of both borrowers and the banking sector and to reduce the risk of bank credit and house price spirals.

By virtue of the fact that we haven't had a major build-up of credit in parallel with recent periods of rising house prices, you could say they've worked. A Financial Stability Review published by European Central Bank researchers last year confirms as much.

House price spirals

It found that 11 eurozone states, including Ireland, had borrower-based macroprudential policies as of 2018. It noted that "house price booms are more prone to end in busts when associated with deteriorating lending standards that feed a credit and house price spiral".


The study found that lending standards – as measured by average LTV (loan-to-value) and LSTI (loan service-to-income) ratios – deteriorated less in countries with borrower-based macroprudential policies in place.

However, the other side of this equation – and of Ireland’s comparatively stricter rules – is a more conservative lending environment. The study shows the share of new mortgages with loan-to-income (LTI) values greater than five in Ireland was the lowest across the euro zone.

Supply-side factors

This has, to some extent, produced the current tenure mix which involves more people renting and fewer people owning.There are, of course, supply-side factors, like the cost of construction, which also make it more difficult to buy.

The price of financial resilience is more conservative lending practices and part of the price of that is lower home ownership. We shouldn’t shrink from an open and honest debate about this – one that can be had as part of the Central Bank’s “overarching” review of the rules, due to commence next month.