We have just completed our annual review of the mortgage measures, which is now an established part of our annual work programme. Our review considered the current risks in the mortgage and housing markets and confirmed that the measures continue to be effective.
The review found that while the pace of growth in new mortgage lending remains strong, the volume of mortgage lending remains below the levels associated with a fully-functioning housing market. It follows that there is still scope in the market for further sustainable increases in mortgage lending activity.
Our analysis of new lending has shown that there has been no deterioration in mortgage lending standards, with the average loan to value and loan to income ratios remaining stable.
Based on this analysis, we have concluded that the measures are working as intended and so no changes will be made. The current requirements will remain in place for 2019.
While we recognise the impact that the measures have on individual borrowers, the limits on the amount that can be borrowed relative to income and the value of the property are in our collective interest by deterring imprudent lending standards by banks and avoiding excessive household debt.
The 3.5 times loan-to-income limit is the anchor of our framework: it means that borrowers cannot borrow more than their income would reasonably enable them to repay.
In addition, the requirement for significant deposits (10% for first-time buyers, 20% for subsequent buyers and 30% for buy-to-let investors) protects buyers from the risk of negative equity in the event of a reversal in property prices.
However, we recognise that people who take out mortgages have varying circumstances: banks are permitted to lend above these limits in some cases. This ensures that the measures are flexible enough to take account of exceptional circumstances without threatening overall financial stability.
The maintenance of these measures since 2015 has been an important step in guarding against the return of a credit bubble in the housing market. If similar measures had been in place before 2008, the crisis would have been less severe and the suffering endured by so many people could have been much more limited.
The Central Bank fully recognises that the current levels of house prices and rents pose substantial affordability problems. The key to improving affordability is a sustained and substantial expansion in housing supply. A fully-functioning and sustainable housing market is not achieved by tolerating risky lending by banks or over-borrowing by households.
It is important that we build resilience in the economy now, especially given the international risks facing the Irish economy.
- The risk watch list includes:
- a disorderly Brexit;
- an unexpectedly-sharp tightening of international financial conditions;
- revisions in international tax arrangements that dis-favour smaller economies;
- a scaling up of international trade tensions.
Ireland also remains vulnerable due to the high debts of the household sector and the government, with many outstanding troubled mortgages not yet resolved.
The mortgage measures are just one part of our strategy for building financial stability. In the summer, we activated what is known as the countercyclical capital buffer that requires banks to accumulate extra capital during phases of good economic performance, with the aim that the financial system will be better placed to absorb the impact of future downturns.
The actions we have taken show that the lessons from the crisis have been learned: the Central Bank has to be pro-active in managing credit during good times in order to avoid the costs of uncontrolled boom-bust cycles. While it is not possible to forecast the future state of the economy, it is our role to ensure that the financial system has the resilience to absorb negative shocks, so that consumers and the wider economy are less severely harmed by downturns.
The Central Bank plays an important role in Irish society and we recognise our responsibility to deliver on our mandate in the most effective way possible. The mortgage measures are one of the many ways we are working in the public interest by safeguarding financial stability and working to ensure that the financial system operates in the best interests of consumers and the wider economy.
* Philip Lane is governor of the Central Bank of Ireland
MyMortgages.ie have said that the current mortgage lending rules do not work for people living in cities who have to pay high rents.
Joey Sheahan, head of Credit at MyMortgages.ie, said: “The rules appear to have worked as intended and while they might be challenging for prospective homeowners, they seem to be reasonable for first-time buyers outside the major cities.
"However, the cash deposit required for a basic €300,000-plus property is simply too high for city dwellers who are struggling with high rents.
On the back of this, we believe a case could definitely be made for city-based first-time buyers to avail of the 90% rule, regardless of the purchase price.
"The current dual levels between 80% and 90% are ok in rural areas, particularly where the land is gifted by a third party such as a parent.
"Homeowners who have outgrown their starter home, such as an apartment, or who are in negative equity are being unfairly subjected to the 80% rule, on the assumption that they have equity from their existing house to put toward the price of the property they’re trading up to, but that hasn’t been the case for more than 10 years for many homeowners, even with the current house price rises.
"Those without sufficient equity to relapse a deposit from their existing home should also be able to avail of a 90% loan.”
From our friends over at the : Irishexaminer.com
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