Report says lending rules lead to decline in housing supply

Central Bank study says limiting the amount households can borrow leads to lower debt

A new study from the Central Bank has found that the introduction of mortgage lending rules leads to a decrease in housing investment and the stock of housing in the long run. The finding comes against concerns that the supply of housing in Ireland is inadequate and is leading to significant property price rises and a rental crisis.

The regulator’s mortgage lending rules were first introduced in 2015, and later relaxed at the end of 2016. Under the rules, first-time buyers can borrow up to 90 per cent of the purchase price and 3.5 times their income, while second-time buyers can borrow 80 per cent of the purchase price and 3.5 times their income.

In an economic letter published on Monday, the Central Bank, in a simulation of loan-to-value and loan-to-income regulation in a model of the Irish economy, says the restrictions can have a negative impact on housing stock in the long run, although this risk may be overstated.

The Professional Insurance Brokers’ Association (PIBA), the country’s largest group of financial brokers, said the finding is an important one that needs to be carefully considered by the Government and the Central Bank.


The study also finds that the introduction of regulatory ceilings on the amount people can borrow leads to deleveraging of households, banks and the economy as a whole in the short and the long run.

“In particular, households reduce their debt, which makes them less risky. This reduces the household default rate in the medium and long run,” the report finds.

Lending rates also decrease and, as households borrow less, banks are less leveraged and also the economy as a whole significantly reduces its foreign debt.

Fiona Reddan

Fiona Reddan

Fiona Reddan is a writer specialising in personal finance and is the Home & Design Editor of The Irish Times