Sunday 25 September 2016

ESRI: Mortgage rules have cut supply in the housing market

Published 21/09/2016 | 02:30

Central Bank limits discourage development because they limit the profits that builders can make. This will lower the number of houses built by 5pc every quarter, according to a leading think-tank. Stock Photo
Central Bank limits discourage development because they limit the profits that builders can make. This will lower the number of houses built by 5pc every quarter, according to a leading think-tank. Stock Photo

Fewer houses will be built due to the mortgage lending limits introduced by the Central Bank, a leading think-tank says.

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The rules restrict the amount that can be borrowed for a mortgage - and now the ESRI is warning that it is having a knock-on effect on the dire supply of family homes.

It warns that the Central Bank limits discourage development because they limit the profits that builders can make.

This will lower the number of houses built by 5pc every quarter, the think-tank says in a new academic paper today.

The findings have emerged against a backdrop of a chronic shortage of homes to buy, which is pushing up prices and has sent rents to levels even higher than before the crash.

The new ESRI academic paper is the first empirical assessment of the lending limits. This means the findings are based on data rather than theory.

The Central Bank is currently reviewing the rules, which were introduced in February 2015.

However, Governor Philip Lane has previously said the restrictions could be further tightened, instead of loosened. He said he will need strong evidence to change them.

Read more: 10 steps to getting on the property ladder (in just six months)

The loan-to-income and loan-to-value rules are supposed to make the financial system safer, and prevent consumers overloading themselves with debt.

But the rules have been criticised by property industry groups for depressing the growth of house prices, and stopping first-time buyers getting mortgage approval.

Under the loan-to-value limits, first-time buyers can borrow 90pc of a property's value, up to €220,000. For amounts over this they need a deposit of 20pc.

With the loan-to-income restrictions, mortgages for homes are subject to a limit of 3.5 times the loan value to gross income.

This means that a couple, where both earn €40,000, can borrow no more than €280,000.

ESRI economists said the deposit - or loan-to-value - rules were proving more restrictive.

But the two sets of restrictions had reduced new mortgage lending by 10pc, when compared in an economic model with no lending limits being in place, the ESRI said. The real impact of the limits will be over three to four years, the economists, including Dr David Duffy, wrote. Over the longer period, mortgage lending will fall by 15pc every quarter.

"This decline in mortgage lending leads to a reduction in house prices. They are approximately 3.5pc lower relative to the baseline level," it warns.

The decline in house prices will make it less profitable for builders to construct houses, leading to 5pc fewer homes being built every quarter.

The authors said it was clear the Central Bank lending limits would have a contractionary impact on the mortgage market.

In the short term, there has been little impact on housing supply, but that is not the case over three to four years. "The analysis also suggests that, over the longer period of time, housing supply levels will be less than they otherwise would have been in the absence of the macro-prudential rules," the report says. It will be next year before the Central Bank decides any changes to the lending limits.

Irish Independent

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