Central Bank lending limits part of perfect storm in property market threat

The Irish property market is set for a very uncertain period in the months ahead.

First, generous Capital Gains Tax exemptions on property are due to expire at the end of December. These were introduced at a time when property prices in Ireland were in free fall. Nationally, prices here collapsed 60% from their peak. The impact of tax incentives to lure investors back into the market had an immediate impact with an estimated 50% of property transactions resulting from investor cash deals. This in turn drove prices with Y-O-Y rises of 18%.


Second, and of more significance are new Central Bank lending guidelines. Beginning January, homebuyers using mortgage finance to fund the purchase of their property must have a 20% deposit. To date, lenders had sought between 8% and 10%.

Nothing wrong with prudent lending. Most people automatically get the logic and generally, people welcome a lending regime that is based on sustainability. But the problem with rigid LTV limits is they risk tossing the baby out with the bath water. Many excellent mortgage candidates will be refused a mortgage under the 20% rule even though in countries across the globe, including Germany, the UK and beyond, they would be approved. In modern finance, few countries are truly isolated and lending has generally evolved on the concept of risk pricing. Internationally, borrowers with less than 20% deposits pay a small risk premium designed to protect the bank for the increased lending risk. Where credit histories are excellent, risks to banks are much lower (but yes, there is always a risk of a collapse in personal income for a myriad of reasons).

Of course, the Central Bank is its own master and smarting from years of being accused of being too soft on bank lending, it seems to have a winner with the LTV restrictions; lots of existing, older, mortgage holders get it and support it with a sort of self-referencing logic being applied.

From January, unless you can cough up the 20% deposit (or have a rich aunt or uncle that can get you over the limit), you’ll be bang out of luck. The problem with LTV restrictions is they are far more protective of bank capital than they are of consumers since the 20% deposit is lost first in the order of repayment (if and when it comes to that!).

A more ideal restriction could have been built around the debt ratio of borrowers as this is a much more clinical measure of affordability with long-term caps on rate increases.

Anyway, following comments earlier this week, it seems that the Governor of the Central Bank is not for turning on the LTV debate, 20% it is come hell or high water!

Which brings us back to the property market.

Government policy (and by default, Central Banking policy) must serve the people. Its construction must be for the betterment of the citizens and hopefully over time, the wisdom of the new Central Bank restrictions will become obvious. However, in January, coupled with the ending of the CGT benefits, there is no doubt that a perfect storm is brewing at a time when the national consumer mood is showing signs of recovery.

Property prices have a major influence on the national mood of consumers and it property prices stumble, so too could the national mood!



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