The Economic and Social Research Institute (ESRI) has said that the Central Bank’s mortgage lending rules should be modified to ensure more housing is built but that this could also work to prevent an oversupply of housing, as happened during the last decade.
The ESRI supports the Macro Prudential rules the Central Bank introduced in 2015 to reduce house price inflation and stop risky lending practices. But it argues that the policy should be implemented by a different type of rule that would ease borrowing requirements under certain conditions – such as now – and tighten them up if there were signs of trouble.
It contends that the housing supply situation should be an explicit factor in setting lending loan-to-value and loan-to-income rules. Current thresholds set by the Central Bank include 80% loan to value ( 90% up to € 220,000 for first time buyers. Lenders have discretion in 15% of its mortgage cases to go outside this parameter ) and 3.5 times income to loans ( lenders have discretion in 20% of its mortgage cases to go outside this parameter ). With housing supply not expected to meet the annual demand of 25,000 new units until 2018, the ESRI thinks that the stringent rules now in place could hold back the supply of houses and apartments.
But it thinks the rules should automatically become harder, choking off credit, if there was a danger that builders started to produce more homes than the market could handle, as happened in the middle of the last decade. In its latest quarterly economic commentary, the ESRI also says the number of mortgages in negative equity have now fallen below 100,000 for the first time since 2008..that’s still a lot of mortgages.