Central Bank governor warns of potential fall in house prices

John McGuinness says so-called vulture funds ‘running rings’ around the Central Bank

The governor of the Central Bank has warned that house prices could fall as supply picks up over the next two to three years and other factors such as higher interest rates and Brexit come into play.

In one of his starkest warnings to date, Philip Lane told the Oireachtas Finance Committee that there was now a "material risk of a reversal in house prices" . He was speaking as the latest official figures showed property prices accelerated by nearly 13 per cent year-on-year in March.

There were multiple reasons why this current momentum could “go into reverse”, Mr Lane said. “In the mid 2000s there was a very big house-building response here and that’s part of the reason why house prices eventually tumbled so much – the overhang of so much supply.”

He warned that a period of higher interest rates in Europe, a possible slowdown in income growth, Brexit and risks to international trade could similarly halt the current trajectory.


“This is why we have our mortgage rules – in order to avoid the risk of excessive debt being taken on at exactly the wrong time,” he told the committee.

“I am troubled by the temptation in some quarters to believe it’s one direction only. Over time house prices tend to rise in line with incomes, but over a shorter period it’s not a one-way bet.”

Affordability crisis

Mr Lane acknowledged there was an “affordability crisis” in the Irish housing market that could only be resolved by building more affordable homes either privately or with the State’s backing.

While the increase in house prices in recent years in part reflected the strong increase in employment and aggregate household incomes, the “primary influence has been the limited supply response”, he said, noting that the number of residential properties listed for sale was still at its lowest level since early 2007.

He said Central Bank research pointed to house completions of approximately 23,500 units in 2018 and 28,500 in 2019. “However, these projections are below current estimated housing demand of 30,000-35,000 per annum outlined in Project Ireland 2040.”

During his appearance at the committee, Mr Lane repeatedly clashed with committee chairman John McGuinness and Fianna Fáil’s Michael McGrath on the issue of regulating so-called vulture funds.

Mr McGrath said current Central Bank powers to regulate service providers rather than the funds themselves was not sufficient to protect consumers, and this point had now been accepted politically even if the Central Bank refused to acknowledge it.

Mr McGuinness went a step further, claiming that funds were “running rings around the Central Bank in order to push people out of their homes”.

However, Mr Lane disputed these assertions, claiming there was no real difference in repossession rates between banks and non-banks, and that its regulatory powers over service providers was enough to stop funds from acting inappropriately.

The spat comes as several banks gear up to sell more non-performing loans to third-party funds.

Tracker mortgage scandal

Separately, Mr Lane said the ongoing tracker mortgage scandal had cost banks nearly €1 billion so far. He said provisions by lenders caught up in the overcharging controversy increased to €969 million in March. Some two-thirds (€626m) was attributable to redress and compensation, and €343 million to costs. “ In short, the cost to lenders is fast approaching the €1 billion mark.”

To date, 37,100 customers have been identified as having been wrongly moved off tracker mortgages or overcharged on their existing accounts.

Prof Lane told the committee that the Central Bank’s investigation into the overcharging controversy was “the largest, most complex and significant consumer protection review” undertaken by the regulator.

“This work is extensive and complex: while we are confident that most of the affected customers have been identified, we expect that there will be some further increase in the numbers affected before the examination is concluded.”

The governor indicated that the Central Bank has initiated enforcement proceedings against six lenders: Permanent TSB, Ulster Bank, Bank of Ireland, KBC Bank Ireland, Allied Irish Banks, and EBS.

“In these investigations the Central Bank is considering all possible angles, including potential individual culpability.

“It is important to stress that numbers alone cannot give the full picture of the detrimental, and in some cases, devastating effects that the failures of lenders have had on tracker mortgage customers, up to and including the loss of homes and properties.”

Eoin Burke-Kennedy

Eoin Burke-Kennedy

Eoin Burke-Kennedy is Economics Correspondent of The Irish Times