The Central Bank’s new deposit and loan-to-income rules will not affect house prices or supply when demand is based on fundamentals, but they will have a significant impact on speculative demand, according to Central Bank economist Lars Frisell.
“If the housing market has become speculative, where credit and house prices grow partly based on expectations of further house price increases, the rules will have a significant effect.
“The reason is that, at that stage, buyers’ incomes will neither pass the loan-to-income rule, nor will they support sufficient savings to accumulate future deposits,” said Mr Frisell, speaking at the Irish Economy conference in Dublin yesterday.
“Hence, the irrational expectation of ever-increasing prices is thwarted, and credit and house price growth will revert to a sustainable path.
“Hence, macroprudential regulation, by putting prudent norms in the credit market on a legislative footing, can counteract financial bubbles without significant side effects in normal times.”
Last October, the Central Bank announced that it planned to introduce deposit and income caps for mortgage lending in order to prevent another property bubble from forming.
Banks would be limited to 80% loan-to-value mortgages for 85% of lending each year and 3.5 times loan-to-income for 85% of mortgage lending.
Following an extensive consultation process, the new rules that were introduced last month were modified. First-time buyers could secure a 90% mortgage for the first €220,000 of the value of the mortgage.
Mr Frisell said research shows loan-to-income caps has only a small and temporary effect on house prices, lending and housing supply. However, it does have a “distinct impact” on market turnover as the number of transactions decreases.
Consequently, the main opposition to the introduction of these rules does not come from the banks or consumer organisations, but real estate brokers, added Mr Frisell.
Moreover, the higher deposit requirements will mean that prospective buyers will wait longer before making a house purchase. This does not alter the overall level of income in the economy or affordability, with the result that “both housing demand and supply should instead shift to rental accommodation.”
The biggest factors weighing on housing supply, “including zoning restrictions and fraught relationships between lenders and builders. It is of course important to resolve these problems, however the Central Bank regulations neither mitigate nor exacerbate them.”
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