Philip Lane boosts ECB job case with mortgage rules tweak

Patrick Honohan, picked by the Government in 2009 to sort out the Central Bank and the State's lenders as it grappled with the financial crisis, settled over three years ago on his parting gift to the nation as he planned retirement: the mortgage-lending limits that everyone has an opinion on.

His successor, Philip Lane, who's said to covet one of the vacancies up for grabs at the European Central Bank from early next year, this week used what may be his last annual review of the rules to do a bit of tinkering of his own.

The change was minor: making it more difficult for second or subsequent home buyers (SSBs) to secure large mortgages relative to their incomes. But the tightening bias is clear.

While up to 20 per cent of new mortgage lending for first-time buyers (FTB) can continue to be above a 3.5 times loan-to-income limit set in early 2015, only 10 per cent of SSBs can breach this level from January.

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Davy analysts concluded the rules will deliver a “moderation” in house price growth to the 8 per cent it is forecasting for next year, which would mark an easing from the current rate – running at almost 13 per cent as of September.

The Central Bank insists at every opportunity that it is not in the game of setting house price levels of rates of growth. But home values are central to its work – from setting the mortgage rules to supervision of banks as they calculate what provisions they need to set aside to cover losses when loans turn sour.

Rallied

Home prices nationally have rallied by 70 per cent from the 2013 lows, but remain about 24 per cent off their 2007 peak, according to the Central Statistics Office.

Data published by the Central Bank alongside the outcome of its latest review shows that the rebound has pushed prices to 23 per cent above the historical average rate relative to borrowers’ income. That’s using figures going back to 1980. (The corresponding price-to-rents index is about 10 per cent above the long-term average, but this rate has been stable in recent years by virtue of soaring rents.)

In order to establish whether we’re on the verge of another house price bubble, the number crunchers in the bank’s gleaming new offices in Dublin’s IFSC have been pouring over the spreadsheets looking at disposable incomes, housing stock per capita, interest rates, employment figures, household formation and size trends as well as loan affordability.

The verdict? While prices were almost 38 per cent below their average “fundamental” value in early 2013, the gap has since narrowed to 6 per cent.

And while there are no signs of a credit bubble yet and cash buyers account for more than half of all purchases, Lane isn’t waiting for one to emerge as he seeks to protect borrowers and bankers from themselves.

It won’t do a pitch for an ECB executive role any harm.

Bitcoin

The elusive Bitcoin creator Satoshi Nakamoto would probably say, in many ways, his work is done as the chorus of financial illuminati decrying his digital currency went into overdrive this week as its value scaled new highs.

In the past few days billionaire US activist investor Carl Icahn warned the crypto currency was akin to an 18th-century Mississippi land bubble that ended in tears; Goldman Sachs chief executive Lloyd Blankfein described it as a "vehicle to perpetuate fraud"; and Nobel prize-winning economist Joseph Sitglitz proposed that it be "outlawed".

Set up in 2009 by an as-yet unidentified person using that alias of Satoshi Nakamoto (PayPal co-founder and Tesla chief executive Elon Musk is the latest to deny he is the mysterious inventor), bitcoin gained traction in a post-crash world where faith in cash had plummeted.

The whole concept, after all, was about cutting out central banks, which can control exchange rates to a large extent, and fee-grabbing middle men like bankers by creating a finite 21 million units of the currency. It is accepted by more than 100,000 companies and merchants worldwide, including Microsoft and Subway.

The problem is, bitcoin has become more of an asset class of its own than a payment method, and a highly speculative one, at that.

Tumbling

On Wednesday, the price of bitcoin reached $11,434, marking a 1,400 per cent surge in the space of a year – before quickly tumbling by about a fifth within hours. While it has since recovered some of the ground (trading around $10,700 on Friday afternoon), the volatility itself is alarming and shows how skittish those trading it are.

Wall Street grandee Jamie Dimon made headlines in September when he described bitcoin as a "fraud" and that he would fire any of his staff caught trading the currency. Others are terrified of missing an opportunity. The world's largest futures exchange, CME, plans to offer contracts before Christmas allowing investors bet on its future value.

Regulators on both sides of the Atlantic this week highlighted their concerns. US Federal Reserve’s vice-chair of banking supervision warned digital currencies pose “serious financial stability issues” if they are more widely adopted, while ECB executive board member Yves Mersch that the price will be paid sooner or later for “excessive speculation” around such assets.

The best way to counter the rise of cryptocurrencies, according to Mersch, is for banks to develop faster payment systems.

Ironically, the technology behind bitcoin – known as blockchain – is seen by many of the world’s largest banks as the best route for this.