A verbal dispute has emerged between the Economic and Social Research Institute (ESRI) and Gabriel Makhlouf, the governor of the Central Bank, about the bank’s decision to loosen borrowing restrictions for homeowners.
Makhlouf strenuously pointed out this week that the regulator’s 2022 choice to deregulate the rules for first-time purchasers hasn’t increased house prices in a manner detrimental to the financial system’s stability.
This came in response to ESRI’s reproach claiming that more lenient loan conditions lead to a surge in house prices. The institute stated that the regulator’s action had been impulsive, especially considering the significant pile-up of savings during the pandemic era.
In today’s ESRI annual budget perspectives conference, economist Kieran McQuinn affirmed the think tank’s view. He alleged that the bank’s governor and chief economist had conceded at the time that the rules’ relaxation would incite inflation.
“In the process of transforming the macroprudential provisions, they did admit to the potential risk of price surges,” McQuinn pointed out.
In 2022, the Central Bank increased the maximum loan-to-income ratio requirement for first-time purchasers from 3.5 times to 4.
During the conference, McQuinn, a former Central Bank economist himself, cautioned that the average loan-to-income ratios have resumed to their previous high levels during the Celtic Tiger peak.
He highlighted that the past decade’s quick house price growth was primarily facilitated by basic factors like income growth. However, lax lending conditions are now again a driving factor behind inflated house prices.
“We’ve seen a growth in that ratio over the past two or three years, reaching nearly the same level of the financial crisis peak…this is a clear warning sign,” he added.
Nonetheless, McQuinn observed that the quantity of mortgage loans currently being allocated is significantly lower than during the financial boom, suggesting a widespread credit bubble threat is minimal.
During the unveiling of the Central Bank’s most recent biannual Financial Stability Review this Tuesday, Mr Makhlouf expressed that the amendments implemented had no considerable impact on house prices that would destabilise the system or hinder household stability.
Mr Makhlouf added that his institution has a deeper level of data access than their counterpart, the ESRI. He discussed a graph from the report, indicating that the median loan-to-income (LTI) ratio for first-time buyers stood steady at about 3.5 times in the years 2022-2023. This remained the case even when nearly 40% of fresh loans to these consumers fell between the 3.5-4 range. During the booming period, the median exceeded 4 times.
In Mr Makhlouf’s view, there’s no testament, that the instituted measures are leading to a surge in credit, commonly known as a ‘credit boom’.
On a prior note, Paschal Donohoe, the Minister for Public Expenditure, expressed at the ESRI conference that the Irish economy had maintained resilience in the aftermath of the two primary global crises; the pandemic and the energy cost explosion. He stressed that by strengthening the public finances, the Government managed to provide the necessary support to the economy during these crises.
In his closing remarks, Mr Donohoe mentioned that the upcoming budget would aim to uphold the stable anchor concerning public finances.