As lending grows, the market is increasingly vulnerable in some areas, writes Cliff Taylor, Economics Editor
The indications from the mortgage market are getting more worrying by the month. The latest figures from the Central Bank yesterday, showing annual mortgage lending growth of 24.2 per cent - up from 23.9 per cent the previous month - show that lenders are continuing to dish out money at an ever-increasing rate. The other side of this equation, of course, is that borrowers are taking out bigger and bigger loans. Increasingly, the risk is that for some at least, it will end in tears.
There are arguments to support the increase in house prices and the accompanying rise in mortgage lending in recent years: the economy has grown rapidly; earnings are much higher; and demographic trends support the housing market. All these are valid, but only to a point. The danger now is that house prices - up 15 per cent annually in August, according to the most recent figures - are overshooting levels which would be supportable by the normal balance of supply and demand and that mortgages are moving into the same territory. This would leave borrowers exposed when interest rates start to rise or if one of the wage earners loses a job.
Financial institutions have changed the basis on which they give out home loans in recent years, arguing - with some validity - that the era of low euro interest rates made the old guidelines redundant. The days when loans were based on two times the main earner's income plus the income of the lower earning spouse are long gone. Borrowers can afford to make repayments on larger loans and financial institutions are meant to apply a series of "stress tests" to make sure borrowers can cope if, for example, interest rates were to rise.
This is OK, up to a point and of course we are not privy to precisely what guidelines are now enforced. However the suspicion from the overall figures and from anecdotal evidence in the market is that lenders are going out of their way to compete for what they see as good business.
First, look at the figures. Over the past two years the amount of money outstanding in mortgage loans has risen by 50 per cent - or €17 billion in money terms - to just over €49 billion. Over the same period nominal Gross National Product (the cash amount of national output before adjustment for inflation) has increased by just 10 per cent.
Second, consider the anecdotal evidence. Mortgages of four or five times salary are now being offered by some institutions. In many cases these must involve loans in the €400,000 to €500,000 region.
These trends inevitably create vulnerabilities. First, what if interest rates go up? It is quite possible that short-term, euro rates could edge lower one more time, but from then on the trend will be upwards. With a large mortgage, even a small increase in interest rates will add considerably to the cash repayments.
Second, what if the economy does not recover as expected and unemployment goes higher? The latest indications from the US are contradictory and cast some doubt on the extent of recovery in prospect in the months ahead. Also, many jobs here remain vulnerable as manufacturing activity moves to cheaper locations in the East. This could hit borrowers directly and also indirectly affect those in the buy-to-rent market by hitting demand for rental properties.
As the recent International Monetary Fund study said, it is impossible to "prove" conclusively whether the Irish property market is in bubble territory. But what is now obvious is that the market is increasingly vulnerable in some areas, with parts of the buy-to-let market being an example.
IFSRA, the new financial regulator, is studying mortgage lending practices and is discussing its findings with the institutions involved. Perhaps this will lead to a slowdown in lending growth. If it is not happy with policies being followed, IFSRA can issue directives to individual institutions or can introduce statutory guidelines. There is no indication yet of whether it is considering the latter route.
Whatever IFSRA does now, there is a danger that the bubble is already inflating. The property and mortgage markets may yet manage a soft landing. But the risks are growing.