Central Bank of Ireland deputy governor Sharon Donnery warned on Tuesday against using a relaxation of mortgage rules to boost house-building activity, suggesting the economy would fare better from Government measures to reduce construction costs through planning levies, building regulations and the tax system.
“The economy is likely better served by a policy mix that stimulates additional housing supply through reductions in construction costs, rather than through increased price levels resulting from higher borrower indebtedness,” Ms Donnery said in a virtual presentation at a Bank of Lithuania conference, referring to new research from the Irish bank’s economics division.
“For supply-constrained housing markets, it is important to remember there are many other policy levers that can be used to influence housing construction such as planning levies, building regulations and the tax system.”
With the Central Bank currently carrying out a major review of the effectiveness of mortgage restrictions introduced in 2015, Ms Donnery highlighted previous Central Bank research that indicated Irish house prices could have been 25 per cent higher prior to the Covid-19 pandemic had the limits not been in place.
In addition, there could have been a sharp house-price slump during the pandemic, if the market had entered the crisis "with credit-fuelled overvaluation", she said. House prices remained stable last year and are currently rising at an annual pace of almost 9 per cent, according to Central Statistics Office data.
Loan limits
As things stand, the rules restrict the loan-to-value limits on a private residential home loan to between 80 per cent and 90 per cent of the value of a property while a separate loan-to-income (LTI) rule restricts consumers to borrowing 3.5 times their salary – with lenders having limited scope for exceptions.
The State’s biggest housebuilders – Cairn Homes and Glenveagh Properties – have said in recent weeks that the rules are dampening industry output, as they affect the viability of certain projects for smaller builders, who are largely reliant on alternative finance providers after mainstream banks retrenched from development lending in the wake of the crash.
Both companies say that there is a public misconception that high land costs are driving construction prices, with the average costs of their housing plots ranging €26,000-€30,000.
The Government’s new Housing for All strategy, unveiled last month, is targeting the delivery of 300,000 new homes in the Republic by 2030. It includes an average 9,500 new social homes and 2,000 “cost-rental” homes – where rents are targeted at 25 per cent below the market level – a year.
About 22,000 houses and apartments will be built this year and 27,000 in 2022, according to Banking and Payments Federation Ireland (BPFI) estimates – still well shy of the 35,000-40,000 economists reckon are needed every year.
Ms Donnery said Central Bank research has shown that “substantially lower levels” of borrowers that took out home loans under the mortgage rules needed to rely on temporary payment breaks from banks during the Covid-19 shock last year than those who borrowed before the global financial crisis.
Still, she said the bank will be looking at a number of areas in its review, which is due to complete next year. These include the fact that house-price rises in recent years have not boosted building, and how rents have been surging, “increasing affordability issues in the face of a continued imbalance between the demand and supply of housing services”.
Interest rates
The new Central Bank research paper on the economic impact of the mortgage rules, co-written by bank economists and Prof David Aikman of King's College London, said that the regime has coincided with a period of low interest rates internationally, "weak" housing supply growth across many countries, and increased difficulty in housing affordability.
“Many of the affordability challenges facing potential borrowers have a range of solutions, and in many cases policy measures that increase the supply responsiveness of housing, for example through lowering of construction costs and barriers, may be of more long-term benefit than policies that loosen credit access during periods of tight housing supply,” it said.
It noted that mortgage rules may harm the productive capacity of the economy if they affect the building of homes to meet sustainable demand.
"However, if macroprudential policies limit unsustainable construction booms – booms that result in an overhang of houses for which there is little demand, as was the case in Ireland, the US and Spain following the global financial crisis – then the economy's supply potential will be enhanced over the long term," it said.
