Central Bank concerns about changing mortgage rules

Deputy governor says any move must be backed up by evidence

29th September, 2016
Central Bank of Ireland deputy governor Sharon Donnery Pic: RollingNews.ie

The deputy governor of the Central Bank has said it is concerned that mortgage restrictions aimed at preventing another property bubble would be undermined by being routinely tweaked.

The bank is reviewing the mortgages caps it introduced last year, as industry groups complain the rules are too restrictive. It is due to announce the outcome of the review later this year.

Current lending rules dictate that first-time buyers must have a 20 per cent deposit if borrowing any more than €220,000, with a minimum deposit of 10 per cent below that threshold.

“Stability in rules like that, stability in regulation is very important in terms of managing expectations both of buyers and of banks and how they operate the system,” Sharon Donnery said in a Bloomberg Television interview.

Donnery added that the central bank would “absolutely” change the rules on loan-to-income and loan-to-value ratios on home loans if evidence backed up such as a decision. The bank introduced the guidelines after the property market bounced back in the wake of the crash which devastated the economy from 2008.

The Central Bank received 50 submissions to its review of the mortgage rules – 24 from individuals, 26 from institutions and academics. In its submission, the Association of Expert Mortgage Advisors(AEMA) called for the €220,000 threshold to be significantly increased, to better reflect average property prices.

But recent comments from the bank’s governor Philip Lane suggests a change is unlikely. When asked about the potential for a rule change at a recent Central Bank briefing, Lane said that change would “require a high evidence threshold”.

Recent ESRI research on the impact of the Central Bank measures on the housing market found restrictions on loan-to-value and loan-to-income ratios had reduced new mortgage lending by around 10 per cent.

Last week, Donnery told an economics conference that Central Bank research had shown that younger, lower income borrowers were more likely to be granted an exemption to the Central Bank’s rules by banks.

Bad loans improvement key to improving lending

Separately, the deputy governor told the Global Interdependence Center Central Banking Series in Dublin that the Irish economy, while not growing by 26 per cent as suggested by revised CSO figures for 2015, was expanding at "a reasonably healthy pace". She said the bank would publish updated forecasts next week.

She said financing conditions across the Irish economy had eased as a result of the ECB's monetary policy stimulus. But she added that mortgage rates and interest rates for loans to small businesses were still higher in Ireland than in the rest of the euro zone.

Donnery said non-performing loans were still impeding bank lending, and continued work on these would reduce their burden on banks and support new lending to the real economy.

She concluded that the outlook for the economy was complicated by the outcome of the Brexit referendum in Britain, adding that the impact would be "negative and material". She added that the long-run economic impact of Brexit on Ireland would be influenced by the nature of the agreement reached between the EU and Britain.

Additional reporting from Bloomberg

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