IMF warns of risks over phasing in mortgage lending cap

Fund also says State should look at universal welfare entitlements

The Central Bank. The IMF has reservations about proposals to phase in the Central Bank requirement for a 20 per cent deposit for residential mortgages.

The Central Bank. The IMF has reservations about proposals to phase in the Central Bank requirement for a 20 per cent deposit for residential mortgages.

 

The International Monetary Fund has warned of “risks” in measures discussed by the Central Bank to phase-in new caps on mortgage lending.

The Washington-based institution has also called for restraint in public pay talks later this year and said the Government should examine the universal welfare entitlements such as the child benefit payment.

The fund’s intervention this evening comes at the end of a formal review of Ireland’s economic prospects over the medium-term.

Although IMF mission chief to Ireland Craig Beaumont welcomed manoeuvres by the Central Bank to prevent another property bubble, he had reservations about proposals to phase in the requirement for a 20 per cent deposit for residential mortgages.

“The phasing in over time of loan-to-value limits has a number or risks. We can see there’s very widespread expectations of price increases,” Mr Beaumont said. Some 97 per cent of respondents to a Central Bank’s review believed property prices would rise, he added .

“In that environment, there’s a very strong incentive if you know that in future it’ll be difficult to obtain lending or a larger deposit will be needed, there’d be a significant incentive to try and bring that forward.

“And that lumpiness of borrowing and mortgage transactions could lead to inappropriate risk evaluation, including not only by banks but also by borrowers. So the concentration of activity itself has its own financial risks- and the ultimate goal of this policy is to ensure that households are resilient to future property cycles.”

Phasing-in

The phasing in approach is one of a number of possible steps to ease pressure on homebuyers arising from an immediate loan-to-value (LTV) limit of 80 per cent, which has been resisted by the Department of Finance .

This was scheduled to be discussed on Tuesday at a meeting of the Central Bank Commission, its controlling board. Another proposal is to introduce a special LTV limit for first-time buyers whose average rate of default is lower than second-tie buyers.

Mr Beaumont declined to comment on that, but a six-page IMF report on Ireland said “any differential treatment of borrower categories should ensure their financial resilience remains as strong as other borrowers.”

The report also said such a step “should be kept under review based on default experience”.

On public pay, the IMF said savings made had a major contribution to Ireland’s fiscal consolidation. “Any future developments must recognise the very tight fiscal constraints in coming years.”

On welfare, the IMF said it was important that spending now declines as the economy recovers after a large expansion in the crash. Mr Beaumont said the IMF was referring to universal benefits and not benefits paid to help people on low incomes.

Asked about child benefit payments, he said: “We have commented in the past on child benefit and that would be the most obvious candidate to consider further targetting.”