In the aftermath of the global financial crisis in 2008, policy makers sought to learn lessons about what Ireland did wrong, and whether we could have avoided the severe effects we suffered from that credit shock.
One of the problems they saw was how high house price inflation in the 2000s, in part fueled by easy access to cheap credit, allowed people to borrow with few limits.
For some this was a personal disaster as they simply could not pay their debts or were stuck in homes unsuitable for their needs. For the country it was a disaster as the banks were nationalized, saddling the taxpayer with the banks’ bad debts.
The response of the Central Bank of Ireland (CBI) was to introduce strict regulations on residential mortgage lending. Where banks were previously allowed to lend up to 100pc of the value of a property, since 2015 loan-to-value limits allow first-time buyers to borrow 90pc of the value, and existing homeowners can borrow 80pc. There are also strict limits on how much you can borrow linked to your income.
These measures, it was hoped, would stop borrowers overextending themselves and stop banks engaging in risky lending. By limiting borrowing in these ways the Central Bank could suppress house price inflation.
Some might say the large rises in house prices show it hasn’t worked, but credit availability is just one determinant of house prices. The cost of credit, wages, availability of supply and construction costs are also important.
Although it might not seem so, house price inflation has actually been pretty moderate. Real prices are still well below the highs of 2007. Where the policy might have failed is in an area it wasn’t trying to address – rents.
By making it more difficult for people to get mortgages, those people have to find another way to get a home. Anyone who would be in the market for a mortgage is unlikely to be able to avail of social housing, and so these would-be owner-occupiers are forced into the third pillar of housing, the private rental sector.
This has had an impact. Eurostat data shows that while Ireland’s house price inflation from 2010 has been 30pc – about the EU average – rent inflation is over 60pc, four times the EU average. Many studies show the link between restrictions on credit and rents, so it is likely this is the cause.
So, many people who could afford a home if they were allowed to borrow are stuck in private rental accommodation with increasing rents. Tánaiste Leo Varadkar last week said the fact people in their 20s and 30s could not expect to buy homes in the way their parents did is a “social disaster”. Might the CBI rules have caused this?
Recent research by Cairn Homes, a large house-builder, claims the current lending rules are the most restrictive in Europe. Where most countries use the cost of debt servicing to the borrower’s income, Ireland uses loan-to-income rules that limit loans to 3.5 times their income.
It doesn’t consider affordability, so young people’s parents may have paid eye-wateringly small amounts to buy a house in the 1980s or 1990s, but paying those mortgages was difficult when interest rates were high and volatile.
Today someone on a good income of € 60,000 a year would require a deposit of over € 150,000 to buy a ‘starter home’, at about € 370,000. Few of us could manage that. So people rent. But the rent they pay for that home, according to Cairn, is about € 2,300, whereas if they could borrow 90pc of the value for a mortgage they pay just € 1,300 over 30 years.
Forcing people who want and can afford a mortgage to spend much more of their income on rent instead seems deeply unfair.
The Central Bank can point out that by not easing the macro-prudential lending rules they are preventing house price inflation. This is certainly true. If you ease up these rules in the absence of a significant new supply of homes, people will borrow extra to compete against each other, driving up prices. Still, if they are going to overpay, people may prefer to be overpaying for homes they will ultimately own than overpay on rent.
The Central Bank is currently reviewing its rules. It can point out that mortgage lending growth has been strong despite the rules, though the share of lending for first-time buyers that is at the limit of the bank’s rules has gone up from below 5pc in 2015 to 30pc last year, which suggests the rules are now stopping some from getting mortgages. The bank might see that as the rules doing their job.
The Central Bank is concerned about emerging bubbles so as not to repeat the last crisis. But instead we’re getting a new crisis, where relatively well-off people are locked into private rental, causing a rental bubble there.
It won’t take away from the need for more supply, but the Central Bank might help those in the so-called ‘squeezed middle’ more if the rules focused on people’s ability to pay a mortgage, not the size of the mortgage itself.
Eoin O’Malley teaches politics and public policy at Dublin City University
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