Borrowers with bigger debts twice as likely to seek payment breaks

Borrowers with higher debt burdens than the current Central Bank of Ireland's rules allow are more likely to have sought payment breaks during the current crisis, the Central Bank's deputy governor Sharon Donnery has said.

This was proof that the regulator’s mortgage lending rules had helped the financial sector “absorb rather than amplify the shock of the pandemic”, she said.

The Central Bank’s rules curtail consumers to borrowing within strict loan-to-value (LTV) and loan-to-income (LTI) limits.

Banks are, however, allowed to apply exemptions in some cases, and many borrowers will have secured loans prior to these rules being enforced.

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Ms Donnery said there was clear evidence that higher debt burdens have been associated with greater take-up of payment breaks.

“For example, those borrowers with an LTI of 4 were twice as likely to opt for a payment break as those with an LTI between 2 and 2.5, reflecting the link between borrowing levels and repayment difficulties,” she said.

Counterfactual analysis also shows that “house price levels could have been approximately 25 per cent higher in the year prior to the pandemic had the mortgage measures not been in place”, she said.

Ms Donnery was speaking as the Central Bank published a financial stability note, suggesting the arrival of institutional property investors here in the wake of the financial crash had brought risks as well as benefits.

It also noted that the Central Bank was actively exploring new policy interventions to regulate the commercial property investment market.

Wide distribution

The research stems from a survey of property funds . The funds looked at are known as “alternative investment funds”. There were 171 of them holding €23.3 billion in property assets in the final quarter of 2019, according to the Central Bank survey.

The total value of investment in Commercial Real Estate (CRE) here was calculated at €53 billion, which means Irish property funds are estimated to hold more than 40 per cent of the market.

The Central Bank survey found the holdings of property assets were distributed quite widely in terms of sector, with 37 per cent in office space, 26 per cent in retail and 15 per cent in residential. It said there was greater concentration in terms of geography, with 87 per cent of property assets located in Dublin.

“The growth of Irish property funds since the global financial crisis has brought with it many benefits, including the diversification of financing channels for CRE away from domestic investors towards international investors and a reduced reliance on debt financing intermediated by Irish retail banks,” Ms Donnery said.

“This increases risk sharing and reduces domestic interconnectedness,” she said. On the other hand, the influx of foreign funds left the Irish market more exposed to global shocks. “An implication of this structural trend is that it increases the sensitivity of the Irish CRE market to global shocks,” she said.

Ms Donnery also noted reforms introduced since the last financial crisis had improved the quantity and quality of capital on bank balance sheets globally.