Central Bank targets second-time buyers amid property price risks

Governor Philip Lane opts to retain main elements of mortgage-cap rules

The Central Bank has moved to restrict second-time home buyers' ability to breach a key loan-to-income borrowing restriction as its governor, Philip Lane, warned that house prices face the risk of falling over the medium term.

Prof Lane said that the case can be made that rising home prices – running at an annual rate of 12.8 per cent as of September – reflect the strong Irish economy, rising household incomes, low interest rates globally and home supply shortages.

“But from our point of view there’s downside risk,” Prof Lane said. “There’s downside risk from a reversal in incomes – think Brexit, changes in the world trading system, world tax system. There’s downside risk in the interest rate environment. And while expansion in housing supply would be good news, it would put downward pressure on housing prices.”

The Central Bank governor added that there are “plenty of concrete signals out there – and that’s not a hypothetical risk – that... some of these bad outcomes could happen.”


Interest rates

Separately, the Organisation for Economic Cooperation said on Tuesday that if the European Central Bank starts to increase interest rates before the OEDC expects, in 2020, it could threaten the euro zone’s economic recovery.

The Central Bank on Tuesday opted to retain most elements of its mortgage-cap rules, though it tweaked a measure to restrict the amount to which second-time and subsequent buyers can breach a key loan-to-income cap.

While up to 20 per cent of new mortgage lending for first-time buyers can continue to be above the 3.5 times loan-to-income limit, only 10 per cent of second-time and subsequent buyers can breach this level from January, the Central Bank said. Prof Lane said banks are currently lending along these lines and the new modification is unlikely to have an impact on house prices.

However, the change should further safeguard banks and borrowers from another potential drop in values, he said.

The Central Bank introduced rules in February 2015 to limit the amount of money lenders can give out to mortgage borrowers, in order to avoid a repeat of Europe’s world’s property crash.

20 per cent deposit

It tweaked the measures in November last year to ease first-time buyers’ access to loans, meaning they are now required to build up a 10 per cent deposit, having previously been required to accumulate 10 per cent on the first €220,000 of a loan and 20 per cent on the balance.

The 20 per cent deposit requirement for most second-time buyers remained unchanged.

Some commentators have said that the easing of restrictions for first-time buyers and a Government help-to-buy scheme, both of which took effect in January, have fuelled home prices when there is already a dearth of supply.

However, Minister for Finance Paschal Donohue opted in Budget 2018, unveiled last month, to keep the controversial help-to-buy plan for first-time buyers of new homes, which gives taxpayers relief equivalent to 5 per cent of a property's value, capped at €20,000.

A Government-commissioned report from consultants Indecon concluded that abolishing the help-to-buy scheme would create uncertainty and damage confidence in the housing market as builders' development plans.

Mark Cassidy, head of financial stability at the Central Bank, said on Tuesday that Government’s help-to-buy scheme is having a “relatively small” impact on house prices, given how targeted the measure is.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times