Macroprudential mortgage rules in Ireland – responsible bank lending
The provision of mortgage credit to households by financial institutions has a major impact on the sustainability of home purchases and affects housing prices. Poor financial regulation was at the core of the Global Financial Crises of 2007/08 and had roots in irresponsible lending in the housing sector.
Description
This not only had implications for national and global financial stability, it also affected households, their economic recovery and social well-being.
Ireland experienced a significant residential property boom before the financial crisis of 2007/08, mostly fuelled by vastly increased mortgage lending by financial institutions. House prices increased by 127 per cent in real terms from 1998-2007. The OECD average for the same period was 39 per cent.[1]
In response to the crisis, as well as supporting a strong rebound in residential prices, the Central Bank of Ireland introduced macroprudential mortgage rules in 2015. These rules introduced greater mortgage lending oversight and imposed stricter borrowing limits on households.[2]
This was achieved through two primary measures. Firstly, a “loan-to-value” (LTV) limit was placed on lending, meaning first-time borrowers could not receive more than 90 per cent of the value of the property they were purchasing. Secondly, a loan-to-income (LTI) limit was introduced, meaning a borrower or borrowers, could not receive a mortgage which exceeded 3.5 times their gross income. Even tougher limits were placed on the buy-to-let sector. While the measures have been adjusted over the years, these two regulatory “pillars” have remained. The Central Bank conducts a detailed annual review of the efficacy and appropriateness of the measures.[3] Importantly, the independence of the Central Bank means that its reviews are evidence-focused, rather than being unduly influenced by public or political opinion.
In terms of the measures’ impact, the Central Bank estimates that by the end of 2019, if the macroprudential measures were not in place, residential property prices in Ireland would have been at least 15-25 per cent higher than observed in the market. The assessed potential risk of mortgage default has also declined. Furthermore, research has shown that if Ireland had similar lending rules in 2003-2010, then house prices would have been up to 39 per cent lower in 2010.[4] Therefore the measures would have significantly reduced the impact of the financial crisis on the Irish economy and on ordinary households.
While the measures have been criticized for making it harder for some households to become homeowners, as they struggle to save the required 10 per cent deposit, for example, the measures also dampen prices and mitigate the risk of irresponsible lending. The issues faced by some households are rather symptoms of failings in other areas of the housing sector, including insufficient regulation of the private rental market, leading to strong year-on-year growth in prices in many areas, and a lack of availability of social and affordable housing.
Actors involved
Central Bank of Ireland
Scale
National
[1] OECD, “Analytical house price indicators”. Available at https://www.oecd-ilibrary.org/economics/data/prices/analytical-house-price-indicators_cbcc2905-en
[2] Central Bank of Ireland, “Review of residential mortgage lending requirements”, Available at https://www.centralbank.ie/docs/default-source/financial-system/financial-stability/macroprudential-policy/policy-documents/2016-review-of-residential-mortgage-lending-requirements.pdf?sfvrsn=12
[3] Central Bank of Ireland, “Financial Stability Review 2020”. Available at https://www.centralbank.ie/docs/default-source/publications/financial-stability-review/financial-stability/financial-stability-review-2020-ii.pdf?sfvrsn=9#page=85.
[4] Robert Kelly and others, “Credit conditions, macroprudential policy and house prices”, Available at https://www.eba.europa.eu/sites/default/documents/files/documents/10180/1289723/0075c8b5-1909-4d03-9270-102339e2518a/V.de%20Bruyckere%20-%20Discussion.pdf?retry=1.
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