IMF urges control of commercial property inflation

The International Monetary Fund has warned that Central Bank interventions may yet be required to tackle “strong developments” in the commercial property market.

In a report which welcomed Central Bank measures to contain the rapid advance of the residential property market, the Washington-based institution said prices were rising quickly in the commercial sector.

“In future, if warranted by financial stability risks, the Central Bank should deploy macroprudential tools to preserve the resilience of the financial sector,” said Craig Beaumont, IMF mission chief to Ireland.

The IMF report pointed out losses on commercial property accounted for more than half bank capital needs in the wake of the crash.

Risk management

“Supervision should focus closely on banks’ risk-management, underwriting standards and valuations in this sector,” it said.

“Deployment of macroprudential tools, such as loan-to-value rules and capital add-ons, should be kept under review.”

The IMF said financial and property-related policies should foster sound lending while tempering cycles to facilitate an enduring turnaround.

“Ireland’s recovery calls for rising investment with growing needs for financing over time,” the report said.

Strong momentum

“Yet it is essential that past boom-bust patterns be avoided. Given the strong momentum in property prices and an emerging rise in mortgage lending, coupled with large international financial flows in search of yield, it is appropriate to move forward now to keep macro-financial risks in check.”

The IMF said moves to address weakness in housing construction would help dampen price increases over time. In addition, it said a more developed rental market would support labour mobility and help moderate property cycles.

The fund also said the process of resolving loans in default “must now tackle the most entrenched cases”.

Saying the number of residential mortgages overdue by two years or more continued to rise and that buy-to-let arrears remain very high, the IMF said was important to secure borrower re-engagement on lasting structures.

Such efforts should also include “timely legal proceedings”, the IMF added.