A lot of attention will be paid to the amendments to the mortgage lending rules announced by the Central Bank. Perhaps too much attention. A key point is that there are many problems in the housing, rental and banking markets and there is only so much the Central Bank can do about them. A variety of other policies – particularly measures to boost housing supply – are vital elements of a coherent response and are the responsibility of others.
Of course the Central Bank needs to ensure prudential lending and borrowing and so it was correct to move last year to introduce new rules. Experience suggests – unfortunately – that it is unwise to leave this all to the market. And the last thing we want is a return to the days of 100 per cent mortgages and borrowers taking on loans which leave them overly exposed.
The details of the rules have been the subject of much debate. Inevitably, they create some anomalies and have had an impact on mortgage lending. They also appear to have had some moderating impact on prices, though rises are continuing in most areas. An unfortunate side-effect to some moderation in the demand for housing is that this has contributed to more pressure on – and rising costs in – the rental sector.
The key message from the Central Bank is that the rules remain in place. Borrowers will still be required to save a substantial deposit –and will be subject to income limits. However the bank has announced a significant change for first-time buyers who, in future, will only require a 10 per cent deposit in all cases.
This is, in part, a recognition by the Central Bank that the existing requirement was too onerous. Combined with the Government’s new help-to-buy scheme, this will significantly cut the requirement to save before taking out a mortgage for many first-time buyers.
It is difficult to say definitively what impact the rule changes will have. The Central Bank argues that they are appropriate, clear and will not lead to significant prudential risks. The danger is that the combination of the new Central Bank rules and the Government scheme will send house prices higher, largely because supply is so tight. The separate rules on the amount of loans which lenders can give in relation to income have not changed, however, and this will remain a restraining factor.
The other side of the argument is that higher demand is needed to encourage more housing supply. The risk is that it will take time for supply to come on stream and, in the interim, house price growth may accelerate. In the meantime we must hope that all the gains in terms of ability to buy are not lost in higher house prices.
Either way, the key to making all this sustainable is a sharp rise in house building, and this must remain a key focus of Government policy.