The housing boom which preceded the economic crash was driven by lax bank lending practices and a complete lack of regulation. So the move by the Central Bank to impose new limits on mortgage lending is welcome. There is scope for debate over the detail, but the principle is sound. The proposed new rules would mean that history will not repeat itself – or at least not in exactly the same fashion. The 100 per cent mortgage has been consigned to history, while new limits will be put on the amount of higher risk residential loans which banks can take on their books. Lending to buy-to-let investors will also be limited.
We might have avoided some of our problems if such rules had been in place as the price bubble inflated from 2000 onwards. There will be a debate about the way the new regime is structured and how it should be implemented – and time has been left for this in a consultation period on the Central Bank proposals. They may be tweaked. The banks may even argue that they are already implementing similar, or tougher, policies themselves.
However history suggests that rules are needed in relation to bank lending. In general the new proposals are sensible, particularly the restrictions on the size of the mortgage loan in relation to the borrower’s income. Once in place, implementation of the new regime will also be key; another lesson of the crisis was that many rules which did exist were simply not enforced in any effective way.
The housing market is in a strange place, so the immediate impact of the new measures, due to come into effect on January 1st, are hard to predict. There is no credit “bubble” – in fact the banks are, at best, slowly returning to normal lending practices. The surge in prices, particularly in Dublin, has been caused by a whole range of other factors, principally a lack of new housing supply. The new rules will affect some potential buyers, but the more significant immediate impact will come through the signal they send to the market.
By dampening down future demand to an extent, the restrictions should have something of a calming impact on the market in the years ahead. New lending rules alone are not the answer to the sudden rise in house prices in many areas. The key issue is the lack of new supply coming onto the market and an element of pent-up demand, much of it – to date – from cash buyers, some of them returning emigrants. We are thus not seeing anything like normal market conditions and it will be quite some time before we do. There are a range of complex policy issues here for the government and local authorities, notably trying to speed the supply of new house provision. The new Central Bank rules are a move to try to stop problems developing in future. We still have the current problems of a dysfunctional housing market to deal with.
