Relaxing mortgage rules could fuel another credit bubble, warns top banker

The State's strict mortgage lending rules are necessary to prevent another credit price spiral, Central Bank deputy governor Sharon Donnery has said.

"House prices are going up for many reasons – supply and demand, land availability, planning, building constraints – and we don't want credit to be adding fuel to that," she told a webinar event on the economy, hosted by University College Dublin.

There have been calls to loosen the rules limiting how much banks can lend to allow more people to buy homes.

They currently restrict buyers from borrowing more than 3.5 times their annual salary or, in the case of second-time buyers, from borrowing more than 80 per cent of the value of the property.

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Ms Donnery said the rules were there not just to stop banks from over-lending but to protect society from another credit bubble.

“What’s at the heart of the mortgage measures is affordability and not having people take on debts that they ultimately can’t afford to repay,” she said.

The 2008 crisis left the country with a legacy of arrears “which has taken us years to deal with”, she added.

Undergoing change

Banking markets were nonetheless undergoing change in terms of the different mortgage products being offered, she said. There was also the introduction of new, non-banking players.

The Central Bank has begun a major review of its mortgage lending rules, the first since the measures were introduced in 2015.

The review will consider the effectiveness of rules, whether they have achieved their aims, and the evolution of the housing and mortgage markets since their inception.

It comes amid another acceleration in house-price growth, with two recent separate reports putting the level of annual price growth at 13 per cent.

The official rate of annual house price growth – as recorded by the Central Statistics Office, which bases its calculation on stamp duty data filed with Revenue – was put at 4.5 per cent in April.

On the wider economic debate about whether the recovery from Covid will trigger inflation, Ms Donnery said the Central Bank saw the current price pressures here and in the wider euro zone as “transient”.