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Categorized | Banks, Property

Ireland resists political pressure to relax mortgage restrictions

Posted on November 23, 2016

The Irish central bank has defied political pressure to relax restrictions it had imposed on mortgage lending that critics complained put purchasing a home out of reach for many families.

After a review of the limits on borrowing and lending for mortgages that took effect in February last year, the Central Bank of Ireland said on Wednesday it would allow first-time buyers to borrow a little more but would not change other restrictions designed to avoid another damaging house-price bubble.

Philip Lane, the central bank governor, said the bank was prepared to intervene to tighten the borrowing and lending limits further if Irish house prices rose significantly. The bank’s failure to cool surging house prices in the middle of the last decade is seen as a significant factor in Ireland’s banking and house-price crash between 2008 and 2010.

“For those who said there should be a rolling back of the macroprudential framework, the message is that the framework is here for the long term. It’s a permanent feature of the system,” Mr Lane said as he unveiled the results of the bank’s review, which he said would take place annually.

An employee of Quillsen estate agents changes the window display of available properties for sale in this arranged photograph in Dublin, Ireland, on Thursday, Jan. 7, 2016 © Bloomberg

The review, published on Wednesday, has been keenly anticipated by the government, which is struggling to spark life into the housing market after years of austerity, the reluctance of banks to lend, and the collapse of large parts of the construction industry after the financial crisis. A series of initiatives to boost social housing construction and to make houses more affordable for families has yet to produce results.

The central bank’s main concession means that from January 1 2017, first-time buyers can borrow 90 per cent of the value of a home with a 10 per cent deposit, compared with a 20 per cent deposit and a tiered borrowing rate. Michael Noonan, the finance minister, said he was “not unhappy” with the central bank’s announcement.

Property developers and some politicians had blamed the central bank’s borrowing and lending ceilings for forcing many buyers out of the housing market, which made it less attractive to build new homes. The resulting scarcity of affordable and quality housing has led to rising prices for the few houses on the market, higher rents and an increase in homelessness.

According to a 2014 study by Davy stockbrokers, Irish house prices rose 400 per cent between 1994 and 2007, and fell by more than 50 per cent between 2007 and 2013. © Bloomberg

However, with some Irish households in long-term negative equity, the central bank is determined to avoid another house-price bubble. According to a 2014 study by Davy stockbrokers, Irish house prices rose 400 per cent between 1994 and 2007, and fell by more than 50 per cent between 2007 and 2013. Many of the houses built at the height of the price bubble were in far-flung towns in the midlands and the north west, where demand has now disappeared, giving rise to the phenomenon of “ghost estates”.

Demand is now concentrated in Dublin, where the median price of a home has risen in the past two years from €220,000 to €280,000. Few new houses are being built, however, which is driving prices for the few homes available up even further. That is what prompted the bank to act in 2015.

Mr Lane said Irish house prices corresponded broadly to Irish economic fundamentals but “it is important not to take too much comfort from that”.