Central Bank mortgage controls: Looking beyond lending rules

Key to making market sustainable is a sharp rise in house building, and this must remain a key focus of Government policy

 

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.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
GO BACK
Error Image
The account details entered are not currently associated with an Irish Times subscription. Please subscribe to sign in to comment.
Comment Sign In

Forgot password?
The Irish Times Logo
Thank you
You should receive instructions for resetting your password. When you have reset your password, you can Sign In.
The Irish Times Logo
Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.
Screen Name Selection

Hello

Please choose a screen name. This name will appear beside any comments you post. Your screen name should follow the standards set out in our community standards.

The Irish Times Logo
Commenting on The Irish Times has changed. To comment you must now be an Irish Times subscriber.
SUBSCRIBE
Forgot Password
Please enter your email address so we can send you a link to reset your password.

Sign In

Your Comments
We reserve the right to remove any content at any time from this Community, including without limitation if it violates the Community Standards. We ask that you report content that you in good faith believe violates the above rules by clicking the Flag link next to the offending comment or by filling out this form. New comments are only accepted for 3 days from the date of publication.