When the Central Bank first floated the idea of mortgage lending restrictions last October, many estate agents were taken aback. Their grass roots experience was that strict bank lending was preventing mortgage-approved house buyers from competing effectively with cash buyers. Therefore, there was no inkling that the banks' own lending policies needed any reinforcement.
This week's announcement of a massive quantitative easing programme for Europe sheds new light on the Central Bank's decision to implement tough mortgage lending rules. By flooding the balance sheets of commercial banks with ready cash, the ECB hopes that QE will stimulate lending and jump-start a euro area recovery. However, central bankers are selective about the type of lending they want. Ideally, they would like to see an increased flow of credit to the productive economy, to fund business start-ups, expansions and jobs growth.
What they don't want is the new liquidity to be diverted into real assets as this would provide a less effective stimulus and could lead to an asset price bubble. When viewed from this perspective, the Central Bank's new mortgage limits suddenly make sense, and they are certainly consistent with the regulator's mandate of ensuring financial stability. What is less certain, however, is whether or not these new rules will have any meaningful impact on house prices.
Many commentators have suggested that the lending restrictions will dampen housing demand and bring a welcome return of more orderly price growth. On the face of it, this seems plausible. The average Dublin house costs around €270,000. With first-time buyers currently able to borrow 92pc of the purchase price, a deposit of €21,600 would be enough to secure such a property. Under the new rules, however, a down payment of at least €32,000 will be necessary. With average gross earnings hovering around €35,000, saving this amount is going to be tough - particularly after taxes, rent and other living expenses .
Therefore the reality is that many young people - particularly those that are buying in Dublin or on their own - will now find themselves excluded from home ownership for a lengthy period while they save for a deposit.
While I agree with the analysis so far, a critical point that gets overlooked is that these people do not disappear from housing demand as soon as they are frozen out of the home ownership race. Sure, they may no longer be in a position to buy, but they have to live somewhere. And, until they can save enough to get onto the housing ladder, most will end up renting. This will drive up rents and push up yields on investment properties. In turn, investors, who are generally not reliant on mortgage finance, will be attracted into the market where they will compete with the diminished pool of owner-occupiers to buy properties.
When the dust settles, the demand for house purchases will be unaltered, and prices will be unaffected. The only impact will be an increased ratio of investors to owner-occupiers.
It is unfortunate that the Central Bank rules have been widely misinterpreted as a mechanism for controlling house price growth. However, this does, at least, demonstrate a level of public concern about the current rate of property price growth and raises questions about the appropriate policy response. With so much cash seeking a return, with falling interest rates depressing yields on alternative investments, and with an acute shortage of rental accommodation driving rents higher, investors are sure to fill any vacuum left by the loss of first-time buyers. In this context, no mortgage lending regulations are going to curtail house price growth.
Instead, the solution must come from the supply side. For six years, we have been building too few properties to meet the demand arising from population growth, declining household sizes and dilapidation of the existing housing stock. This has driven down vacancy rates and forced owner-occupiers to compete with each other for scarce properties, just as it has forced them to compete against cash investors who have been attracted in by strong rents.
The solution to these problems is to build more houses. The obstacles to new housing construction are manifold and complex. But they include scarce development finance, inviable planning requirements, concentrated land ownership, prohibitive local authority levies and the 13.5pc VAT rate on new homes. It is critical that our policy effort to control house prices is now firmly fixed on these problems and not distracted by side-issues like mortgage lending restrictions, which were designed for an entirely different purpose.
Dr John McCartney is Director of Research at Savills Ireland