The Central Bank’s decision to relax its mortgage lending rules for first-time buyers has driven house prices higher and increased the number of borrowers in “highly leveraged positions”, according to the Economic and Social Research Institute (ESRI).
In a highly critical assessment of the regulator’s move to soften the rules, the ESRI said the average loan to income ratio in the Irish mortgage market was now back to multiples “only previously seen at the peak of the Celtic Tiger boom”.
The average loan size was 4.6 times disposable income at the end of 2023, a level not seen since 2006, it said.
While much of the increase in house prices since 2012 (they have grown in nominal terms by 126 per cent) has been attributable to economic recovery and supply shortages, the ESRI’s report said that over the past few years it is evident that changes in credit standards were once again driving prices. It linked this directly to the Central Bank’s move in 2022 to lift the upper limit on the loan-to-income ratio requirement for first-time buyers from 3.5 to 4, which it described as “premature”.
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“The results of our analysis are somewhat sobering and suggest that the credit channel has once again in recent years become somewhat influential in impacting Irish house prices,” the think tank said.
One of the report’s authors, Kieran McQuinn, said the regulator’s relaxation of the rules had “perplexed many at the time”.
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When combined with excessive savings built up during the pandemic the move has “amplified” house prices, he said.
“Economic conditions are improving anyway, incomes are going up; if you’re providing a positive credit shock, which is what you’re doing by increasing the loan-to-income ratio, then that’s stimulatory and putting upward pressure on house prices,” Mr McQuinn said. “It just wasn’t the most prudent thing to do.”
The ESRI’s report warned that there was “a growing cohort of mortgage holders in the Irish residential market who are taking out highly leveraged positions”.
“A significant deterioration in economic fundamentals such as reduced income levels or higher mortgage rates could result in these households experiencing some difficulties in repaying their mortgages,” it said.
However, because the amount of mortgage loans being issued in the current period is significantly less than during the Cetlic Tiger era the deteriorating loan-to-income ratios do not pose an overall systemic risk to the Irish financial system.
Nonetheless it warned that “with actual levels of housing supply in the Irish market somewhat below estimates of the structural demand for housing, it is particularly important that any upward movements in house prices are not additionally fuelled by changes in credit conditions”.
Central Bank governor Gabriel Makhlouf has defended the decision to ease mortgage lending rules. While acknowledging the relaxation would lead to a “modest increase” in property prices, he insisted in 2022 that other factors such as rising interest rates and cost of living would work in the other direction.
As well as relaxing the rules for first-time buyers, the regulator, which had previously required most second and subsequent buyers to put down a 20 per cent deposit against a property to secure a loan, also lowered this to 10 per cent in line with its requirement for first-time buyers.
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