Mortgage rules likely to hit supply of new homes, warns ESRI

Body predicts a fall in house prices, reduced profits in construction and fewer units completed

Over the next three or four years house prices are likely to be on average 3.5 per cent lower than where they would have been without the Central Bank mortgage rules, an ESRI report forecasts

Over the next three or four years house prices are likely to be on average 3.5 per cent lower than where they would have been without the Central Bank mortgage rules, an ESRI report forecasts

 

The Central Bank’s mortgage lending rules are likely to curtail the supply of new homes by up to 5 per cent over the next four years, the Economic and Social Research Institute (ESRI) has warned.

In a research paper published with its latest quarterly report, the institute found the impact of the restrictions had yet to fully play out because of the lag effect in construction, albeit there has been a sizeable dip in new mortgage lending.

However, it said this would change over the next three to four years with house prices likely to be on average 3.5 per cent lower than where they would have been without the rules.

This decline will lead to reduced profitability in construction, which will lower the number of housing units completed in each quarter by about 5 per cent, and reduce the State’s overall housing stock by about 0.5 per cent.

The finding comes as the Central Bank conducts its first review of the rules, which were introduced in February 2015 to prevent the housing market from overheating again.

They require first-time buyers to have a 10 per cent deposit for the first €220,000 of a house price and 20 per cent for the balance while all other buyers must have a 20 per cent deposit in place.

In addition, the Central Bank requires that income limits of 3.5 times are applied by the banks before approving mortgages.

A recent consultation process, which will inform the bank’s review, yielded 50 submissions, several of which called for the threshold below which first-time buyers have to pay only a 10 per cent deposit to be raised from the current level of €220,000.

Kieran McQuinn of the ESRI said the measures had had a contractionary impact on the housing market in terms of reducing prices, supply and mortgage lending below levels the would have otherwise pertained.

He said they had made it more difficult for potential buyers to raise downpayments and pushed more people into the rental market. This explained why rents were rising at an even greater rate than property prices.

Boom years

Dr McQuinn said the ESRI fully supported the need for macroprudential measures but the rules needed to incorporate room for a “counter-cyclical dimension”to reflect the current supply shortages.

The institute does not expect housing completions to increase to 25,000, the level needed to meet demand, until after 2018. Property Industry Ireland, the Ibec group that represents the sector, predicts that completions this year will only amount to about 14,000.

In its latest quarterly commentary, the ESRI downgraded its growth forecasts amid concern over global demand linked to weakness in the Chinese economy and because of Brexit-related issues.

It predicted GDP, the standard measure of economic growth, would expand by 4.3 per cent this year and by 3.8 per cent in 2017.

On the 26 per cent GDP growth recorded for last year, the think tank acknowledged nobody could take this rate seriously.