Mortgage measures were never designed to limit house prices, says Donnery

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Central Bank mortgage rules were never designed to limit house prices, but to increase the resilience of banks and borrowers, said the bank’s Deputy Governor Sharon Donnery.

Speaking at the start of a two-day webinar on the measures, Ms Donnery insisted the rules had reduced the risk of another credit-fueled property boom by dampening house price expectations and limiting credit growth.

Lending to the housing sector here has occurred at much lower loan-to-income ratios than in the pre-2008 cycle, she said.

Ms Donnery also noted that borrowers with lower loan-to-income and loan-to-value ratios were less likely to demand payment breaks in response to the pandemic shock.

However, she acknowledged that affordability remained a major challenge, with average house prices in Dublin now exceeding half a million euros and house price inflation exceeding 15%.

Distinction

“We need to be clear that there is a distinction between our goal of mitigating the detrimental role that credit can play in housing markets and an explicit targeting of house prices, Ms Donnery said.

“Housing markets are complex, with many different stakeholders and prices are influenced by a variety of factors, both domestic and global, that are beyond the control and mandates of central banks,” she said. .

“Targeting house prices is not the goal of macroprudential mortgage measures,” Ms Donnery said.

Mortgage rules prevent buyers from borrowing more than 3.5 times their annual salary or, in the case of second buyers, from borrowing more than 80% of the value of the property.

However, much of the real estate industry sees them as too restrictive in the context of the recent rise in house prices.

Price growth in the state’s housing market has increased almost continuously since the start of the pandemic, fueled by factors such as increased savings, remote working and weaker-than-expected supply.

Ms Donnery said the measures were introduced at a time when housing supply has been slow to respond to rising prices, both globally and in Ireland.

“Several factors are likely contributing to the slower response of housing supply to house prices, exacerbated by prolonged cost pressures in the construction sector,” she said, noting that these factors have been aggravated more recently by the supply chain related to the pandemic. issues and the Russian invasion of Ukraine.

Societal risks

However, she warned that there are societal risks in simply allowing households to borrow more, only so they can buy a home at even higher prices due to high building costs.

“A policy framework that can deliver lower construction costs, greater supply, lower property price-to-income ratios and less debt is far superior to one in which a higher cost base and a high indebtedness are hard-coded into the system,” she said.

The webinar event is part of a framework review of mortgage measures. Ms Donnery said a public consultation last year prompted the biggest response ever to a Central Bank inquiry.


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