Central Bank Rules to Reduce Housing Supply by 5% in the next 3-4 Years


Yesterday’s special article by the ESRI entitled An Empirical Assessment of the Macroprudential Measures in the Irish Housing and Credit Market has confirmed the adverse impact the Central Bank’s lending rules will continue to have over the coming years unless they are re-calibrated to better reflect market realities.

The ESRI’s analysis shows that the impact of the mortgage restrictions only began to take hold in the second half of 2015 and early 2016. The ESRI found that by Q1 2016, the combined effect of the LTV and LTI restrictions have been to reduce new mortgage lending by approximately 10% relative to the baseline scenario of no mortgage restrictions. The effect on the housing market has been quite muted with house prices being only approximately 0.05% lower relative to the baseline, while the impact on housing supply has been effectively zero. However, the ESRI also conducted a more long-term impact analysis which revealed that the effects of the restrictions will not fully manifest for another 3-4 years. When they looked at regulations effects over this time span, they estimate that new mortgage lending will be 15% lower in each quarter relative to the baseline and result in an 8% drop in the overall mortgages held by the banks. According to the ESRI’s analysis, this decline in mortgage lending will lead to reductions in house prices of approximately 3.5% each quarter relative to the baseline level according. Based on their analysis, it is understood by the ESRI that the resulting decline in house prices lowers the profitability of housing construction and will thereby reduce the number of housing units completed by 5% relative to the baseline each quarter over the coming years.

 Knight Frank’s View

The view of Knight Frank is that while the Central Bank regulations were introduced to increase the financial stability of the banking sector, it can be argued that they have in fact increased the instability of the sector. The European Central Bank stated at the beginning of the year that the biggest threat to Europe’s banks was not a lack of capital to absorb economic shocks but rather their ability to make a reasonable level of profit; the profitability of banks has been hammered by the prevailing low interest rate environment and also by increased solvency regulations surrounding Basel III. By imposing another layer of regulation in the form of the macro prudential measures relating to property, the Irish Central Bank, according to the ESRI analysis, will cut mortgage lending significantly thereby curtailing the bank’s ability to profit through mortgages issuance’s. We understand that the mandate of the Irish Central Bank is not concerned about its role in the housing crisis and its impact it may have on reducing new housing supply. However, the Irish Central Bank should be concerned that its own rules may be undermining the banks stability by limiting their ability to make profitable loans in the absence of such regulation. By paying attention to this fact it may reduce the collateral damage the regulations are causing to the wider housing market by reducing the lack of supply.

In a separate development, the CSO have launched their new Residential Property Price Index today, which revealed the true extent of Ireland’s housing crash. Incredibly, the new data – which now includes cash buyers – showed that prices fell by even more than previously thought during the recession. Already counted as one of the worst housing crashes in history, the new data shows that Ireland’s residential property fell by 54.4% and not the 50.9% as previously estimated. The second important development to emerge from the CSO release is the inclusion of new sub-indices for different regions of Ireland. While previously the results were just split between Dublin and the rest of Ireland, the new data allows comparisons of price increases of various regions across the country and at the postcode level within Dublin. ‘’This enhanced data offering by the CSO is to be welcomed as it is the latest step towards addressing the informational deficit that the Irish property market has suffered from in the past. By providing this information the CSO immensely increases the transparency of the market, thereby reducing the overall market risk’’ John Ring, Investment Analyst, Knight Frank.  ‘’The next step that needs to occur is to improve the reliability and information included in the Property Price Register to include key variables such as the number of bedrooms, the sq ft of the property and the site size.  We will then have a clearer picture of what is going on in the market and avoid repeating the mistakes of the past.’’ John Ring, Investment Analyst, Knight Frank.


Knight Frank

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