The Central Bank is to begin a major review of its mortgage lending rules next month. It normally reviews them every year but this will be a bigger exercise assessing whether they have done their job since first introduced in 2015.
can give the answer to that already. Yes they have. The mortgage caps are not so much about stopping people from paying too much money for houses. They were designed to stop people borrowing too much money to buy houses.
In 2014, the year before they were brought in, house prices rose by more than 16pc. After their introduction, house price growth the following year was 6.6pc.
In Dublin, where the biggest problems were arising, house prices were growing at a rate of more than 16pc in 2014 but that fell back in the capital city to just 2.6pc in 2015.
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It all seems a long time ago now, but back then there were two big issues. Cash buyers were snapping up houses, while at the same time banks were freeing up their lending criteria to enable punters to borrow more.
The Central Bank felt it was all getting out of hand, and mortgage lending caps were introduced, as much to prevent the banks from cutting loose again as anything else.
However, so much has changed in the housing and mortgage market since then. Housing shortages have not been resolved. Those who cannot save enough money for a deposit or meet the 3.5 times loan-to-income ratio, are forced into renting for longer.
Rents shot up above pre-crash levels several years ago, while houses prices are still not quite there yet.
If the sole job of the Central Bank is to protect the banks financial stability, then there is no chance it will alter its mortgage lending caps in any significant way.
If the Central Bank takes a wider perspective on the housing landscape and how so many first time buyers are disadvantaged by not being able to qualify for mortgages, while being screwed on rent, it could come up with different conclusions.
And there are some interesting comments from the Central Bank in relation to this review, which may signal a somewhat broader approach.
It also comes at a time when you can smell the political fear in government circles about how the housing crisis will play out at the next election
The review will consider the effectiveness of rules, whether they have achieved their aims but significantly, it will go a little further. It will also consider the evolution of the housing and mortgage markets since their inception.
The context for this review is more acceleration in house prices and a lot of anger about international investment funds bulk-buying properties.
It also comes at a time when you can smell the political fear in government circles about how the housing crisis will play out at the next election.
The Central Bank won’t be swayed by politicians but the political temperature is rising.
According to the minutes of the Central Bank’s latest macroprudential meeting in April, “a plan for proposed listening and engagement events regarding the mortgage measures was discussed and agreed”.
These events will form part of an “overarching framework review” of the mortgage measures.
Could the overarching framework imply a closer look at the impact that problems in the housing sector are having, and what role the mortgage caps may be playing in that?
Another part of the backdrop to the review is the fact that two significant mortgage providers are pulling out of the market. Ulster Bank and KBC are selling up. This will change the market further with greater concentration of market share resting with Bank of Ireland and AIB in particular.
Government policies since the crash have favoured a switch towards renting. This has shown itself through institutional investors co-funding or simply buying up large numbers of apartments to rent them out.
There is nothing wrong with long term renting, especially if you have the kind of rights, security of tenure and rent controls that have applied in other countries with relatively little home ownership.
Similarly, the property and construction sectors need the investment capital brought in by large funds to ensure rental properties get built.
But having big investment funds come and buy up large swathes of housing estates, shortly before they would be due to go on the market to individuals, is quite different.
Whatever about the Central Bank’s references to considering the “overarching framework” of the mortgage market, frustrated potential first-time buyers should not get too excited just yet.
The review will take place throughout the rest of 2021 and 2022. The Central Bank is not in a hurry on this one.
Also, it is not the Central Bank’s job to use macro-prudential tools to ensure greater fairness in the housing market, or to encourage more house building.
The Central Bank must be conscious of the lack of competition in the market
Rising prices, rip-off rents, a lack of affordable or social housing are all issues for Government policy, rather than the Central Bank.
However, the Central Bank must be conscious of the lack of competition in the market which is about to get worse and the dysfunctionality of the housing market.
Is there room for a significant easing up on the mortgage lending caps while still ensuring people do not borrow too much to buy houses and banks do not lend too much? I think so.
This has to be seen in context too. Ireland’s comparatively stricter rules mean the share of new mortgages with loan-to-income values greater than five was the lowest across the Eurozone.
Banks are leaving the Irish market because they cannot generate a sufficient return on capital, given the very high capital ratios that banks here have to maintain. Customers will end up paying for this.
Maintaining the status quo will ensure we have very financially stable banks, but they just might not be much good to a whole lot of people.