House price rises will cool next year, especially in Dublin, as banks hit the limit on money they can lend outside of the current mortgage lending rules, stockbroking firm Davy predicts.
Banks are close to exhausting their allocation of unrestricted money, Davy chief economist Conall Mac Coille says. That will act as a brake on price growth.
As it stands, lending rules allow only 20 per cent of new mortgage loans to exceed the current loan-to-income regulatory threshold, which limits people to borrowing 3.5 times their income.
Recent Central Bank data shows that 18 per cent of new mortgage loans exceeded this threshold in the first half of 2017, up from 13 per cent in 2016.
“So Irish banks have now almost fully utilised this allocation,” Mr Mac Coille said. “This moment has come sooner than we had expected, given only 13 per cent of loans exceeded the 3.5 limit in 2016,” he said.
When banks start hitting the 20 per cent ceiling, mortgage lending would be curtailed, Mr Mac Coille said, dampening the current rate of property price inflation, which is running at 12.2 per cent year on year.
“What’s going to happen is that banks are going to feel the rules. They can’t increase [this allocation] from 18 per cent to 25 per cent in the next 12 months,” he said. “Therefore house price inflation is going to cool and it’s going to cool in Dublin because that’s where the high-mortgage lending is,” he said.
“The reason house price inflation is in double-digit territory is because people are taking out higher levels of mortgage debt and their loan-to-income ratios are on the up,” Mr Mac Coille said.
Central Bank figures show the average mortgage loan in second quarter of this year was €206,000, up 9 per cent year on year from €189,000, with median incomes among first-time buyers up only 2.6 per cent to €65,000.
Mr Mac Coille's prediction comes ahead the latest property price numbers for September from the Central Statistics Office later today, which are expected to show property price inflation still running at close to 12 per cent nationally.
In Dublin, where prices have bounced back more quickly than elsewhere, the annual increase was 11.9 per cent in August.
In November last year, the Central Bank removed a €220,000 cap on mortgage lending for first-time buyers who have a deposit of 10 per cent. The relaxation of the rule, combined with the Government’s help-to-buy scheme for first-time buyers, has been linked to the acceleration in property prices.
Davy acts as a broker for mortgage lenders Bank of Ireland and Permanent TSB.