The financial services regulator is deepening its investigation into bank-lending policies as house prices continue to rise at a record rate. Siobhán Creaton, Finance Correspondent, reports.
The monthly house price index compiled by the Economic and Social Research Institute and Permanent TSB, published yesterday,showed a 15.6 per cent increase in house prices nationally during the 12 months to the end of July. This compares with a 14.7 per cent rise in the 12 months to June .
The increase in the seven months to the end of July of 8.1 per cent was the highest in three years.
The Irish Financial Services Regulatory Authority confirmed yesterday that it had sent letters to all mortgage-lenders to query issues about lending policies uncovered during a preliminary investigation.
The regulatory authority is concerned that banks and building societies are relaxing lending policies when the economy is slowing and job losses are increasing.
Its chief concern is that some borrowers may have over-extended themselves and could find they are unable to afford their mortgage repayments.
A spokesman for the authority said it expected the financial institutions to respond to its latest queries within a month.
The expanded inquiry follows warnings from economists and the International Monetary Fund that the risk of a collapse in house prices is increasing.
The house price index revealed that the rate of increase was 1.1 per cent in July, which was unchanged on the rise in June but is weaker than that recorded in earlier months.
At 1.1 per cent, the rate of house price growth slowed since April and May when the index recorded rises of 1.3 per cent and 1.7 per cent respectively.
However, the July figure is higher than for July 2002, which was 0.4 per cent. The average price paid for a house nationally was €222,628, compared with €192,591 in July 2002.
The rate of house price increases in Dublin was 16.5 per cent year-on-year, compared to 13.7 per cent throughout the rest of the Republic.
Mr Dermot O'Brien, economist with NCB stockbrokers, said it looked like the overall rate of increase in house prices for 2003 would be in high double digits.
"We don't believe that this is sustainable and are expecting some correction in the market with price increases moving back to more realistic levels." Mr O'Brien suggested that any correction would result in a 2 to 3 per cent reduction in the rate of price increases rather than a substantial collapse in house prices.
Earlier this month, the IMF warned that there was a significant risk that Irish house prices were overvalued, leaving the property market vulnerable if unemployment rises sharply.
It stated that it was impossible to say for sure whether there was a price "bubble" as fundamental factors, such as a housing shortage and strong demand, were behind much of the price rises. It identified a risk that market "psychology" could have pushed prices to unsustainable levels.
Permanent TSB's head of marketing, Mr Niall O'Grady, said the latest index showed signs for optimism, particularly the slowdown in price rises in Dublin.
"The most important thing to emerge in this month's report is the considerable easing in the rate of growth of Dublin prices. If this continues it should feed into a lower rate of growth for prices nationally over the coming months," he said.
In Dublin, house prices rose by 0.6 of a percentage point in July, while outside of the capital, the rate of growth in house prices was double, at 1.2 per cent. In June, Dublin house prices rose by 2.5 per cent, while price increases outside the city were around 0.5 of a percentage point.
The average price paid for a house in Dublin last month was €294,189, while elsewhere the average price was €192,520.
The price paid for houses by second-time buyers increased by 1 per cent, while first-time buyers faced a 0.8 of a percentage point rise. This compared with a 1.3 per cent appreciation for second-time buyers in the same month last year and a 1 per cent rise for first-time buyers.
The average price paid by a first-time buyer was €195,843, while second-time buyers paid an average of €249,509. The price of new houses increased by 1.4 per cent, while second-hand house prices rose by 1.4 per cent.