The mortgage crisis and house price bubble was driven in part by banks’ ability to manipulate so called “affordability” measures for borrowers in order to increase lending.
It happened when banks were able to lend more because of the increased supply of credit globally thanks to deregulation, new research from the Central Bank shows.
The research by Central Bank economists Yvonne McCarthy and Kieran McQuinn looks at mortgages issued by the four main banks here between 2000 and 2011.
It found that during the boom banks allowed a sharp rise in the so called “income fraction,” the share of a households earnings regarded as appropriate to repay the home loans.
The income fraction rose from 16pc in 2000 to 25pc in 2007. It meant lenders were able to “significantly increase” the size of mortgages available.
Home buyers who arranged mortgage through brokers were given even bigger loans relative to income, according to the report called “Credit Conditions in a boom and bust property market”.
First-time buyers and low income borrowers “benefited to a greater” extent than other groups from the easier credit during the boom, the research found.
In many cases it left them unable to keep up with mortgage repayments when their income was squeezed by tax hikes and wage cuts after the boom.