Former Central Bank of Ireland Governor Patrick Honohan launched a scathing critique of the government’s housing policy, describing it as “reactive”, “short-term” and ultimately inflationary.
He said the purchase aid package was an “ill-conceived response” to the Central Bank’s mortgage measures, which had aggravated existing price pressures in the market.
Speaking in a two-day webinar on Central Bank mortgage rules, Professor Honohan explained how mortgage measures were introduced under his watch in 2015 in response to a rapid spike in house prices and “the fact that mortgages were again granted at very high loan-to-value ratios”.
House prices in Dublin rose by 46% in just 18 months before the rules were introduced, he said. “There was a clear danger that a spiral in credit prices would return.”
Prof Honohan, who was governor of the Central Bank from 2009 to 2015, said the loan-to-value restriction was designed “to protect the operational sovereignty of the banking system” while the loan-to-income restriction was introduced to protect the banking system. borrower “from the crippling effects of over-indebtedness”.
The ratios, criticized by some industry players as too restrictive, were informed by a huge chunk of loan data obtained from banks as part of post-crash stress tests, Prof Honohan said.
He also noted that there was “a lot of pushback” against the measures, including a written submission from the finance ministry, but that the Dáil was relying on the regulator to pass the legislation.
Prof Honohan insisted the measures had had ‘macro-economic bite’ in dampening house price inflation, noting that prices had risen just 4% in the 18 months since their introduction , even if price control was not the main objective.
However, he said a number of factors had since propelled prices up again, including the purchase assistance scheme.
“They [the then government] just paid part of the down payment for certain classes of borrowers and that and other things caused prices to rise again,” he said.
He admitted, however, that the rapid rise in house prices relative to income had made the rule limiting buyers to borrow to just 3.5 times their income “problematic”.
However, raising that cap to four or five could just drive prices up, he said. Professor Honohan also wondered – in retrospect – whether the rules may have increased the pressure on rents.
He said a number of factors were boosting house prices here, including population growth, immigration, the strength of the economy and, most recently, Covid-19.
Another factor, he said, was government policy, which had been “very reactive, very short-term with subsidies introduced only to relieve certain pressure points without sufficient consideration of their systemic effect and who will really benefit or lose”.
The webinar, part of the Central Bank’s review of the policy framework, also heard from Reserve Bank of New Zealand (RBNZ) Deputy Governor Christian Hawkesby, who described the country’s experience .
“What we have seen in practice is that house prices are determined by many factors, with the level of interest rates being a much stronger determinant than macroprudential settings,” Hawkesby said.
“The main benefit we have found in imposing loan-to-value restrictions on the flow of new mortgages is how it has helped over time to strengthen the quality of the asset portfolio in the banking system,” said- he declared.
Mr Hawkesby said the stock of high loan-to-value mortgages had fallen from around 20% to around 5% since the rules were introduced.
“The measures have strengthened the resilience of our financial system to withstand a shock,” he said.
New Zealand was one of the first countries to impose restrictions on mortgage lending in an effort to manage rising property values.
House prices have surged in New Zealand over the past decade, creating significant affordability issues similar to those seen in Ireland.
The situation has been aggravated by extremely low interest rates and, more recently, by a faster than expected economic recovery from the pandemic.
The reasoning is that housing is a highly financialized asset and low interest rates increase the value of future income streams.
This incentivizes banks to lend more, investors to invest more, and people to borrow more, thereby inflating home values.