The International Monetary Fund (IMF) has warned of "new imbalances" in the commercial property sector in its latest report on Ireland.
The Washington-based body, which reiterated its support for the Central Bank’s controversial mortgage rules in the study, called on the regulator to urgently proceed with the roll-out of a central credit register to monitor the creditworthiness of borrowers.
The organisation said that as with residential real estate, the Irish commercial property sector had largely rebounded but warned that “foreign investment inflows or equity funding like Real Estate Investment Trusts (REITs) can easily reverse if market sentiment changes”.
It said such a scenario could lead to a sharp drop in commercial property values, leaving lenders facing “another hit from a collapse in collateral values via financial ‘decelerator’ mechanisms, as observed in the post-crisis period”.
“The authorities will need to continue to closely monitor commercial real estate lending and evaluate any early signals of a build-up of new market imbalances,” it said.
Highly indebted
The organisation said while a large number of Irish households have deleveraged in recent years, many are still highly indebted. It warned that should interest rates rise, many borrowers – particularly those with standard variable mortgages – could face difficulties servicing their debts.
The IMF also said there was evidence that the residential property market was "close to or moderately below its equilibrium level". It said the analysis supported the role of proportionate limits of loan-to-value (LTV) and loan-to-income (LTI) ratios and that therefore the Central Bank should maintain its measures to protect against possible future disruptions.
“LTI limits reduce the probability of defaults; LTV limits without a complementary role of LTI limits could leave borrowers’ capacity to service their mortgages vulnerable to income shocks. LTV caps bolster borrowers’ resilience to house price shocks by increasing the equity in the residential property. LTI caps without LTV measures could leave lenders highly exposed to severe house price shocks, as occurred in Ireland after 2008,” the IMF said.
Credit register
The organisation said a national mandatory database is needed to help the Central Bank to gather data on the Irish mortgage market so as to identify possible risks.
The aim of a credit register is to provide lenders with a more comprehensive analysis of creditworthiness of borrowers, with information on their credit profile.
The previous government committed to introducing a register as part of the Financial Measures Programme in 2013. However, its introduction has been delayed a number of times due to data protection concerns. The Central Bank published regulations governing the operation of the register earlier this month.
The law underpinning the register requires lenders to submit personal and credit information on loans of €500 or more. Lenders are also required to consult the register when considering a loan application for €2,000 or more.
In its study, the IMF followed the European Commission in urging Ireland to introduce the register as a matter of urgency.
