Most economic indicators are pointing to a slowdown. However there is one notable exception. The latest Central Bank figures, published yesterday, show that mortgage lending continues to grow at an annual rate of almost 24 per cent. Despite slowing growth and the rise in unemployment, it appears that low interest rates are continuing to encourage borrowers to take out sizeable loans.
Meanwhile the financial institutions, all seeking to maximise their share of the market, are apparently happy to extend ever-larger mortgages both to home-buyers and to investors purchasing property.
The Central Bank is clearly concerned about this trend. It has written to the banks and building societies on a number of occasions. Now IFSRA, the new financial regulator which shares a supervisory board with the Central Bank, is completing a study of the lending policies of the financial institutions. Discussions with the institutions are likely to follow and the findings will be published.
The pace of mortgage growth is of concern. As the Central Bank pointed out in its recent annual report, rapid growth in lending - and the resulting rise in asset prices - is a warning signal that danger may lie ahead. The risk is that both borrowers and lenders become overexposed and that problems emerge when either interest rates rise or the circumstances of the borrowers change.
Interest rates here are likely to remain low over the next couple of years. The bigger risk in the short term is that the economy takes a turn for the worse. This would mean rising unemployment, which would leave some borrowers in difficulties. It would also lower the demand for rental properties, causing problems for investors who have taken out large mortgages in the hope of a steady income and a capital gain.
Such a downturn may not happen, of course. So far the economy has performed quite well against a difficult international backdrop and more optimistic forecasters anticipate an early recovery in the world economy.
There are, however, serious risks to this relatively benign outlook. For this reason it is essential that IFSRA completes - and acts on - its study of lending practices as soon as possible. Unfortunately the financial institutions appear to have paid little heed to the warnings from the Central Bank to rein in lending. The danger now is that IFSRA, which has only been established in recent months, will be acting at a time when considerable damage is already done in terms of borrowers having taken out overly-large mortgage loans.
Banks and building societies ought to be able to conduct their business responsibly. However, history shows that in chasing short-term profit they can take undue risks. There is now a risk that this is happening in the housing market. Dealing with this situation will be the first major test of the new regulatory structure. It is to be hoped that its intervention will not be too late.