Ibec group says Central Bank’s mortgage rules need to be replaced

The Central Bank’s mortgage rules restrict home ownership opportunities for a generation of first-time buyers, young families and lower-income households, and need to be replaced, according to the Ibec group that represents the property and construction sector.

Property Industry Ireland (PII) has written to the regulator with a submission to its review of the macroprudential mortgage measures that were first introduced in 2015 to provide stability and ensure prudent lending to consumers following the global economic recession.

PII says in its submission that the rules are now “outdated and need to be amended to reflect new economic realities”.

It says the measures “have had their desired effect” over the past six years, but that the economic context in Ireland has “changed significantly” since the rules were introduced.

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“Ireland’s mortgage measures are now restricting home ownership opportunities for a generation of first-time buyers, young families and lower-income households,” it says. “PII believes debt service ratio should replace the current loan-to-income limit.”

PII director David Duffy said the group was "not calling into the question the importance or the benefits" of the mortgage measures. "They are an important pillar to managing the systemic and cyclical risk within the sector," he said.

“However, the design and calibration of these measures needs to be amended to reflect that the economic landscape is significantly different to when the existing measures were introduced in 2015, including the significant reduction in and much wider availability in fixed long-term interest rates.”

Ireland’s current mortgage measures are among the strictest in the EU. The existing loan-to-income model limits mortgage lending to 3.5 times the income of the household.

“The average price of a new home sold to household buyers in Ireland in 2020 was €350,000, requiring the purchaser to have a single or combined income of €90,000 to qualify for a 90 per cent loan-to-value mortgage,” said Mr Duffy.

“Only about 4 per cent of households in Ireland have incomes at or above this level. This restrictive mechanism is locking out a generation of young families and average-income households from home ownership.

Affordability

“A debt service ratio mechanism calculates how much a household has available to spend after taxes and other loan repayments are taken into account. This sets a limit on how much a household can pay in mortgage repayments based on affordability.”

Mr Duffy said a debt service ratio system would be “fairer on households” because it is focussed on how much a household can repay instead of what their income is.

“Difficulties in accessing home ownership is leading to greater demand and inflation in the rental market,” he said. “One consequence is that in many areas rents are at levels higher than a private market mortgage repayment could be.

“Declining home ownership amongst our younger age cohorts and increased rental costs significantly impair their ability to own a home and save for a pension at the same time, leading to long-run implications for Irish society and Irish pension and fiscal policy.

“Addressing the housing crisis will require a suite of policies. Amending these mortgage measures will be an important step.”