The Irish Times view on easing mortgage lending restrictions: Core housing challenge remains

The Central Bank’s mortgage lending rules have limited the rise in house prices in recent years and stopped buyers taking on too much debt. Scarred by the 2008 collapse, the Central Bank was – correctly – not going to sit back and let the same risks recur. The limitations have served a useful purpose.

Debate in recent years has centred on whether the so-called macroprudential rules have proved too restrictive for people wanting to buy. In this context the change from a loan limit of 3.5 times income to four times income for first-time buyers is reasonable, as is the relaxation of loan-to-value limit for those buying a second or subsequent property. The portion of net income which will go towards paying off a mortgage should still remain reasonable for those who can afford to buy. And the likely sharp increase in interest rates will act in the other direction, hitting affordability and meaning many will not qualify under the stress-tests which banks are obliged to apply.

The key problem remains the chronic lack of supply in the market, particularly of affordable homes. In the rental market the shortage is even more pronounced, feeding into the wider housing problem. The risk from the change in the mortgage rules is that it will increase demand and push up prices further. The Government is already supporting demand via the Help-to-Buy scheme and the new First Home scheme under which the State takes an equity stake. Young buyers need whatever help they can get – but demand will now get another boost, while supply remains inadequate.

This will mean house prices will remain higher than they would otherwise be, though whether they will rise or fall from current levels is very difficult to assess. Economic growth is slowing and higher interest rates will be a powerful factor. The argument is that higher demand from those able to get on the mortgage ladder is important in enabling builders to get funding and thus encourages supply. But the rising cost of building, the shortages of skilled employees and the sclerotic pace of the planning and development process remain key blockages.

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The Central Bank’s mandate only goes so far, of course, and the changes in the rules are unlikely in themselves to lead to problems down the line for banks or lenders. Bank mortgage lending is modest compared to the run up to the financial crash and household finances are more robust. The rules will remain a brake against what former Central Bank governor Patrick Honohan referred to at the time of their introduction as “the credit-chasing-prices-chasing kind of bubble”.

Meanwhile the current governor, Gabriel Makhlouf, was correct when he pointed out as the amended rules were published that an increased supply of housing remains the core challenge in addressing the housing crisis.