IRISH HOUSE PRICES are surging again – a sentence which could have been written at almost any point over the past 10 years.
At this stage, you know the drill. New figures come out showing property prices are shooting up, aspiring buyers are despondent, politicians assure the public that the problem is being dealt with (just not overnight) – repeat, repeat, repeat.
Some of the reasons why this is happening are pretty obvious. Rising population, rising wages, rising economic growth. Add all that up, and house prices will likely rise alongside it.
But then there’s the stuff which is harder to see: the effect of housing policy.
We’ve already discussed several times how government policies providing cash to first time buyers in an already-heated property market is likely doing little other than fuelling the fire.
But a policy decision which is out of the hands of the government and is suspected of contributing to house price rises, was the change in the Central Bank’s mortgage lending rules.
In 2015, the Central Bank introduced a limit on mortgages whereby most housebuyers could borrow a maximum of 3.5 times their gross income.
The regulator’s primary logic for doing this was to improve the “resilience of the financial system”.
Essentially, because most loans Irish banks give out are tied to residential mortgages, borrowers getting into huge debt and being unable to repay their loans – as happened during the financial crisis – is bad for business.
So many people were confused when the Central Bank decided to loosen its rules in October 2022, letting first time buyers borrow four times their gross income.
The timing of the move was regarded as particularly odd. With inflation surging across the continent, European interest rates were hiked for 10 months in a row to September 2022.
The logic is that higher borrowing costs would mean people would spend less money in the economy, reducing inflation.
So when the Central Bank decided to loosen lending rules at virtually the exact same time, a move which acted in opposition to the interest rate hikes, people were a little surprised.
The reaction of the general public was probably best encapsulated by a question asking the regulator if its move was “bonkers”.
The Central Bank admitted at the time that the eased rules could lead to a ‘modest’ rise in house prices.
However, it said then, and repeatedly since, that the changes were focused on ensuring the “resilience” of borrowers and lenders.
So there might have been some concern over a recent study from the ESRI (Economic and Social Research Institute).
It said that the Central Bank’s decision to ease its mortgage lending rules had been “premature” and had likely led to households taking on more debt and higher property prices.
The ESRI found that loan-to-income ratios (LTIs) are back at Celtic Tiger levels. LTI is a ratio of a person’s mortgage debt versus their income. For example, if a person on a €50,000 salary takes out a mortgage loan of €200,000, their LTI is 4.
The higher the LTI, the more debt a person has relative to their income.
At the peak of the Celtic Tiger in late 2007, the average LTI in Ireland was 4.46. The ESRI found that as of the end of 2023, the average LTI was 4.54.
As you can see from the graph above, the figure has been trending up over the years, briefly dipping under 4 in Q2 2020 after Covid hit.
It then rose steadily again afterwards, fuelled by increased saving during the pandemic, but would likely have been expected to trend downwards in late 2022 and early 2023 after the round of rate hikes should have discouraged people from taking on more debt.
But then the Central Bank announced its mortgage rules change, suddenly allowing people to take on more debt.
The LTI did not rise significantly afterwards – it was 4.54 at the end of 2022 and stood at exactly the same rate, 4.54, one year later.
But this means the higher interest rates essentially had no impact on the amount of debt house buyers have taken on.
Speaking to The Journal, Kieran McQuinn, an ESRI research professor and one of the authors of the report, said the organisation is now concerned that higher LTIs are now more baked into the property market.
“It was unfortunate that the Central Bank rules were eased at the same time there was a build up of savings from Covid and there was strong economic growth. It means we’ve had strong price growth,” he said.
“There is still a big difference between now and 2007 – the number of loans issued by banks then is far greater than it is now.
“We don’t think there are systemic issues, but it means you have people who are highly leveraged with debt so they’re more susceptible to shocks.
“Like if interest rates shot up again or there was an economic crash, they would be the sector of the market most exposed due to high debt levels. It’s more something to keep an eye on.”
The ESRI was right to question the impact of the Central Bank’s rule change.
Deciding to let people borrow more money, at a time when interest rate hikes were trying to discourage people from doing exactly that, looks just as strange a call now as it was then.
It is also worth considering that interest rates are starting to get cut again – so will the lending ratio once more be reduced?
Why the Central Bank seemingly helped facilitate rising LTIs is unclear – the regulator claimed it had access to ‘more granular’ data than the ESRI.
It is apparently yet to release such information and did not respond to multiple requests from The Journal asking for this data.
Much of the public seemed confused when the Central Bank eased its mortgage rules in late 2022.
‘Don’t they know this will lead to higher house prices?’ was a common response.
Again, to stress the point of how this was not the Central Bank’s main concern, here’s some examples of direct quotes from the regulator itself at the time of the rule change.
“House prices are not in and of themselves a target of the mortgage measures, as they are determined by multiple factors in the wider market.”
“Wider housing market affordability issues [are] beyond the scope of the mortgage measures and the mandate of the Central Bank.”
It serves as a good reminder to the Irish public: the Central Bank is not trying to control Irish house prices.
The Central Bank largely acts in the interests of the ‘financial system’ – ie, in the interests of the stability of the banks. By extension, its focus is on whether borrowers can pay back their loans – not on the cost of property.
For housing to become more affordable, the policy levers have to be pulled by the government.
Because if the Central Bank pulls one, it will only have been by accident. It was never the intent.
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