Mortgages: Central Bank’s prudent call

The Central Bank’s decision to leave the mortgage borrowing rules largely unchanged is appropriate, given the state of the housing market and rapid rise in prices. Loosening the rules now would only threaten to push housing inflation yet higher, driven by rising credit. Another bubble, inflated by lending growth, is just about the last thing the economy needs.

In common with a recent analysis by an economist at the Economic and Social Research Institute, the Central Bank reckons that, in general, house prices are broadly in line with economic fundamentals. The point now is to avoid driving price growth even faster, pushing them back into danger territory. Interestingly, the bank is less optimistic on the future trend in house prices than the ESRI research, identifying significant downside risk. Time will tell, but the bank points to the possible impact of slower growth due to Brexit and other factors, including the likelihood of rising interest rates in the years ahead.

While close attention tends to be paid to the loan to value ratio, the key rule imposed by the Central Bank is that mortgages should in general be no more than 3.5 times income. This plays a vital role in guarding against future risk, particularly if the economy hits another rocky period and a tweak in the rules will tighten the number of exceptions for second and subsequent buyers.

Some borrowers will argue that the rules are unfair and are effectively locking them out of the market or stopping them from moving. It is impossible to design a perfect system, but the problems in the housing market are not the responsibility of current Central Bank policy. A lack of housing supply is the vital constraint. Against this backdrop, the key goal of the Central Bank is to ensure that banks operate prudently.

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The need for a comprehensive national policy response to the housing crisis remains. In the meantime the job of the Central Bank is to oversee lending and to ensure that we do not go back to the credit-fuelled bubble that contributed so significantly to the economic crash.