The Government and the Irish Financial Services Regulatory Authority should intervene in the housing market to help reverse a sharp loss of confidence among consumers, IIB Bank said yesterday.
Austin Hughes, the bank's chief economist, said increasing mortgage interest relief for all borrowers and reforming the stamp duty system could help kickstart the housing market and have long-term benefits for the stability of the economy.
The financial regulator should also encourage first-time buyers to take out fixed-rate loans, which would leave them less vulnerable to rate rises, according to IIB, one of the largest providers of home loans in the Republic.
The comments were made in a paper by Mr Hughes, Crunch Time for the Irish Housing Market, in which he said it had reached a critical point.
"The Government needs to be careful to avoid an unnecessarily hard landing for the housing market," Mr Hughes said.
Instead of increasing the ceiling on mortgage interest relief for first-time buyers in the next budget, as Minister for Finance Brian Cowen has signalled he plans to do, the Government should increase the rate of relief available to all borrowers from 20 per cent to 25 per cent.
Mr Hughes said now would be a good time to raise the thresholds at which stamp duty becomes payable, because the argument that stamp duty cuts end up in the pocket of the seller didn't hold as true in a buyers' market.
"From an economists' view, at a time when there is no sellers' power, that is the time to do it. Raising the thresholds would provide confidence to the market and be good for its long-term dynamics."
However, Mr Hughes described the Government's handling of stamp duty over the past year as a "fiasco" and said they would be nervous of further change. The financial regulator should ease the stress tests that lenders are told to apply to mortgages so that people can borrow more under three and five-year fixed rates, said Mr Hughes.
Around one in 10 borrowers say their financial position would deteriorate substantially if interest rates were to rise even by less than half a per cent, according to a recent survey by IIB and the Economic and Social Research Institute (ESRI).
The economy would be less vulnerable if these borrowers were locked into mortgages where rates are stable over longer periods, Mr Hughes said.
IIB Homeloans chief executive Tom Foley warned that the loss of confidence among consumers, which has contributed to a 24 per cent drop in the number of movers and investors this year, is now the biggest threat to the property market.
"The one thing that is missing in the market is the confidence factor," Mr Foley said.
Some 22 per cent of the 750 people surveyed for the IIB/ESRI consumer sentiment index in July said the market had turned in the past 12 months because of fears of a property crash.
