There have been various hints and nudges from Government Ministers to the Central Bank, to try to get them to change the mortgage lending rules. These rules say borrowers should generally have 20 per cent of the mortgage loan saved, though with a range of exceptions aimed to help first-time buyers. Minister for the Environment Alan Kelly was the latest into the fray this weekend, reported in the Sunday Independent as saying the Central Bank had "wrecked" the housing market for buyers and that its rules had "hammered" house building.
Realpolitik
Let’s set the argument about the impact of the Central Bank rules aside for one minute and consider the realpolitik of the situation. The new Central Bank governor, Philip Lane, has been appointed and will take office before long. Having being appointed on the recommendation of the Government, he will know he now has to assert his independence. That’s just how it is – remember how Patrick Honohan put clear blue water between himself and the government, notably in the run up to the EU-IMF bailout. Of all the values the public wants in the Central Bank, independence must surely rank highly, particularly after what we saw in the run-up to the crisis.
Lane will know how fatal it would be for the perception of the bank’s independence if – no sooner than he takes the chair on the seventh floor in Dame Street – he is seen to immediately jump to the Government’s tune. To underline the Central Bank’s independence he is now more or less obliged to leave the rules as they are, at least until after the general election.
To heap all the blame on the Central Bank rules for the problems of the housing market is crazy. House prices, in Dublin in particular, had accelerated dangerously after the bust. The new rules, which also impose a limit of 3½ times earnings on loans in most cases, have been one factor in slowing and even reversing the trend in Dublin. To an extent, this is job done. Do we want prices to keep on rising, putting them further and further out of the reach of those on ordinary incomes?
First-time buyers
The rules may not be perfect. No doubt, as Minister for Finance Michael Noonan has suggested, they will need to be reviewed at some stage. However, the new rules were announced only last January – and they already allow exceptions, aimed at helping first-time buyers.
Nobody wants buyers to be “locked out” of the market. But nor do we want to return to the old days when young borrowers were put under pressure to take out unaffordable mortgages to “get their foot on the property ladder.”
The ladder collapsed for many who did, and they still face the consequences. We can’t go back to the old game of ever rising prices fuelled by more and more borrowing, particularly at a time where the general rate of inflation is near zero and interest rates are on the floor, and thus likely to rise at some stage in future.
There are a whole range of other factors playing in to the low level of house building – availability of finance, planning rules, and the length of time it takes to get houses from construction to completion. And we can all see the knock on in the rental sector, where families are getting squeezed.
Rising borrowing
The Government is trying to come up with a plan to tackle these issues, but agreement still seems some way off. The issue of housing supply is central, as highlighted by a report in this newspaper on Saturday, showing falling house completions in Dublin. Suggesting that this trend can be solved by abandoning lending guidelines and going back to the old cycle of rising borrowing fuelling rising prices and thus housing supply does not seem clever. Somehow we have to find a model which can provide starter homes at a price which younger families on normal earnings can afford.
No doubt the Central Bank rules will be adjusted over time.But the current game where different Government departments are blaming each other and everyone is blaming the Central Bank will get us nowhere. Only some “joined up” thinking is going to solve this one – and even then it is going to take time. Loosening lending rules to encourage young families to chase prices back upwards does not seem like a good place to start.
