Mortgage limits left unchanged as more households borrow to the max

Bank estimates house prices would have been 26% higher if the rules had not been in place

 Governor of the Central Bank Gabriel Makhlouf has decided to stick with existing mortgage limits. Photograph Nick Bradshaw

Governor of the Central Bank Gabriel Makhlouf has decided to stick with existing mortgage limits. Photograph Nick Bradshaw


Mortgage lending limits will stay as they are, the Central Bank’s new governor Gabriel Makhlouf announced on Wednesday. The moves comes as house price growth is outpacing that of incomes and signs that households are increasingly borrowing at the maximum level allowed.

The bank estimates that Irish house prices would have been 26 per cent higher in March – above Celtic Tiger levels – had the rules not been introduced in 2015.

“The mortgage measures are working and because they’re working, we don’t propose any changes to them,” Mr Makhlouf, who took over as governor in September, told reporters.

“I want to be very clear that they are a permanent feature of the Irish market. The rules are not going away.”

While the bank did consider tweaking the caps, “we have not found a way that is more flexible than the exiting regime while at the same time meeting the objectives of the measures”, he added.

The mortgage measures have become more binding as prices have grown faster than income, according to the Central Bank. “More households are borrowing at, or close to, the maximum available implied by the limits,” it said.

“The Central Bank analysis suggests that, in the absence of the mortgage measures, both the proportion of highly-indebted mortgage borrowers and level of house prices would likely have been significantly higher in 2019 than current observed levels.”

The decision to limit most new home loans to 3.5 times borrowers’ gross income and also to cap loans as a proportion of property values comes as the regulator warned in its latest financial stability review, also published on Wednesday, that Brexit poses economic risks to Ireland – regardless of whether there is an orderly and disorderly UK withdrawal from the EU.

The bank said that, in the absence of chaotic Brexit, the Irish economy, which is already running at close to full capacity, may be exposed to risks of overheating, with lenders and borrowers engaging in “elevated risk-taking”.

Home prices rose nationally at an annual rate of 1.1 per cent in September, down from 2.2 per cent in July, according to the latest Central Statistics Office figures. In Dublin, residential values declined by 1.3 per cent in September.

Overall, house and apartment prices have increased by 85 per cent from their low point in 2013, but they remain almost 17 per cent below their highest level in 2007, before the property crash.

The Central Bank said that its latest annual review of the mortgage rules was informed by ongoing growth in mortgage lending, housing market activity and house prices in 2019, albeit they are increasing at a slower pace than recent years.

The bank resisted calls from some quarters to loosen the lending caps. That included Taoiseach Leo Varadkar, who said in July that renters should be given some leeway to build up deposits, and comments by AIB chief executive Colin Hunt in October that the rules had served their purpose and should be eased.

“The measures have been effective in maintaining prudent underwriting standards in the mortgage market in recent years, despite the upward pressure on house prices relative to incomes due to supply constraints,” the Central Bank said.

While the bank said that it is not an objective of the mortgage rules to target house prices, its analysis suggests that affordability pressures for borrowers would have been “more acute” had they not been in place.

The Central Bank in its financial review said the main risks to the Irish economy are from overseas, including Brexit, global tax reforms and risks that a financial shock following a prolonged period of low interest rates globally “could lead to sharp falls in asset prices”.

Mr Makhlouf said that Minister for Finance Paschal Donohoe’s move on Tuesday to set targets to run budget surpluses over the coming years and lower the Government’s debt burden “is welcome news”, amid fears that current record corporate tax receipts are unsustainable.

The Department of Finance sees corporation tax receipts hitting a high of €11 billion this year.