The Central Bank has learned from past mistakes and its failure to ensure financial stability and to protect consumers in the financial crisis. The bank has since put in place policies offering better protection against future economic shocks. The measures are designed to prevent excesses developing in the property and credit markets.
Deputy governor Sharon Donnery has pointed out that had such measures been in place 15 years ago, the scale of Ireland's financial crisis "would have been much more limited". The bank's regulatory – or macro-prudential – policies are meant to mitigate the risks to financial stability by strengthening the resilience of households and the banking system to any adverse financial developments.
The Central Bank introduced regulatory measures last year to cap mortgage loans. These limited the amount that could be lent to mortgage borrowers and set a threshold for the loan-to-income ratio at 3.5 times gross income.
The legacy of the financial crisis, caused in part by loose credit and excessive leverage, has resulted in a high level of household debt which has been slowly reducing.
Nevertheless, the debt remains sizeable. Last March, some 85,989 mortgages on primary residences – 11 per cent of total mortgages – were in arrears. The link between excessive credit based on higher loan to value or loan to income ratios, and the subsequent huge mortgage defaults and large bank losses incurred on these loans, has been clearly established.
Hence, the Central Bank’s mortgage measures which are devised to prevent a repetition of past mistakes; by capping loans to minimise the risk of unsustainable household debt and by reducing the risk of a new house price- credit cycle developing.
Despite the credit constraints now operating in the mortgage market, Irish house prices, according to a recent international survey, have appreciated. Figures from Global Property Guide show prices rising by almost 8 per cent in the year to March, making Ireland the sixth fastest-growing housing market in the world. At a time of limited housing supply, tight credit conditions are needed to contain house price inflation.
After a public consultation process, the Central Bank introduced regulatory measures in February 2015 to limit new mortgage lending. It is now reviewing those measures and has invited the public to make submissions to inform the its reassessment. Central banks rarely involve the public in policy consultations and its initiative in this instance is commendable.
However, the bank has made clear its adoption of prudent lending standards is not a temporary response to restore financial stability. These measures are now permanent structural features of the Irish mortgage market. And for any policy change to be made, evidence presented would have to be compelling.