The Economic and Social Research Institute’s intervention in the debate on mortgage caps follows Central Bank data showing house prices in Dublin advancing at a rate close to the pre-crash peak in the middle of the last decade.

The bank, concerned that the surge could compromise financial stability, has proposed steps to dampen the market with loan-to-income (LTI) and loan-to-value (LTV) caps.

This has prompted anxiety that young people could be shut out of the market, a view shared by the Department of Finance. It wants a “graduated” application of loan limits.

The ESRI has now urged caution, saying the deployment of “quite powerful” LTI and LTV levers could aggravate an already sharp shortage of new homes. Its submission to Dame Street is grounded in house values measured at the end of 2013. The market has risen steadily since then – particularly in Dublin – but the body insists its observations remain relevant.

Although research professor Kieran McQuinn accepted that “further analysis” of the Dublin market might be required, he said prices nationally were warranted by fundamentals.

“Credit levels, as people are probably aware of, are still very very low,” he said. “In many instances repayments are still exceeding drawdowns.”

Supply level

“But also – importantly at the present point in time – is the level of supply in the market. Most people would agree that supply is the major issue as far as the housing market is presently concerned.”

While research points to an annual requirement for as many as 25,000 new residential units to meet demand, construction has run at some 9,000 a year since 2011. “Taking all those factors in consideration, there would be a significant and major question mark as to whether you should apply those measures.”

Dr McQuinn asked if there would be any harm in applying the measures anyway. He said such a move could prompt potential borrowers, lenders and property developers to rethink their plans. “We would be slightly concerned about implementing the measures given the present levels of housing supply because we feel that these measures send a very, very strong signal to all agents in the market.”

Still, he entered a caveat. “When we say now . . . that we feel that maybe these measures aren’t warranted by developments in the market, that, of course, could change in the first six months of the new year and going on from that.”

Reservations

The ESRI has reservations about the element of discretion in the Central Bank proposal, saying a rules-based system calibrated to meet market conditions at any time would be much better.

The objective is to include transparent, built-in stabilisers to ensure the appropriate application of caps. “It is regrettable that no such rule has been outlined by the Central Bank in proposing these measures,” the ESRI submission said.

“The rule should be counter- cyclical in nature, with policy measures being tightened if the rule indicates the presence of too much credit, for example, in the market and loosened if the opposite is the case.”

Dr McQuinn favoured regular assessment of market conditions, possibly every quarter. He was open, too, to the notion of regional variations to take account of conditions in the Dublin market. An alternative was to capture regional differences by varying loans caps according to price band.

The Central Bank has signalled that the new regime will come into force next month.