The decision by the Central Bank to ease its mortgage lending regulations for first-time purchasers has resulted in a surge in house prices and an escalation in the number of borrowers adopting “highly leveraged positions,” the Economic and Social Research Institute (ESRI) has stated.
In a stark appraisal of the regulator’s decision to relax the lending rules, the ESRI highlighted that the average loan to income ratio in the Irish mortgage market has reached levels “only previously witnessed during the height of the Celtic Tiger boom”. The average loan was noted as being 4.6 times disposable income by the end of 2023, a figure unmatched since 2006.
Although the housing price inflation since 2012, which saw a 126 per cent rise in nominal terms, can largely be ascribed to economic recovery and a lack of supply, the ESRI’s study argues that changes in credit standards are once again inflating prices, in recent years.
The Central Bank’s decision in 2022 to raise the maximum limit on the loan-to-income ratio for first-time buyers from 3.5 to 4 was directly linked to this, a move the ESRI termed as “premature”.
“The outcomes of our research are rather stark and suggest that the credit channel has in recent years become more critical in affecting Irish house prices,” indicated the think tank.
Kieran McQuinn, one of the report’s authors, commented that the regulator’s softening of the regulations had “baffled many at the time”. When merged with the surplus savings accumulated during the pandemic, this action has “intensified” house prices, he noted.
“Increasing wages and improving economic conditions can lead to a positive credit shock, as seen by the enhanced loan-to-income ratio, which can stimulate and increase the pressure on housing prices,” Mr McQuinn stated.
He added, “This wasn’t the wisest move to make,”.
The ESRI report cautioned that there is “an expanding group of mortgage holders in the Irish residential market adopting highly leveraged positions”. If economic fundamentals, such as lower income levels or higher mortgage rates, were to deteriorate significantly, these households could face difficulties in mortgage repayment, it warned.
Though the quantity of current mortgage loans is much lower than during the Celtic Tiger period, the declining loan-to-income ratios aren’t a major threat to Ireland’s financial ecosystem. It is crucial, however, that any rise in property prices doesn’t get influenced by alterations in credit conditions, particularly since the actual housing supply in the country is slightly lower than the structural demand.
Gabriel Makhlouf, the governor of the Central Bank, stands by the decision to lighten up the mortgage lending rules. While he conceded that this would mildly push up property prices, he posited in 2022 that external inputs such as escalating interest rates and living costs would offset this.
The change in regulation doesn’t only benefit first-time purchasers, but also existing homeowners. Previously, the regulator stipulated that all subsequent buyers should bolster their mortgages with a 20% down payment. That requirement has now been downsized to 10%, aligning it with the stipulations for first-time buyers.