IMPOSING REGULATORY limits on the size of mortgages relative to the value of properties they are being used to purchase may limit the risk of future banking crises, according to a research paper published this morning by David Duffy of the Economic and Social Research Institute.

Internationally, rising loan-to-value ratios are associated with property bubbles and crashes.

Reviewing the experiences of countries that have introduced such limits on loan-to-value (LTV) ratios, the ESRI economist finds that regulatory limits do not prevent bubbles, but they “may contribute to reducing house price volatility and limit the extent of damage to the banking sector at the end the boom”.

Ireland did not have a regulatory limit on LTV ratios during the property bubble. Yesterday, the Central Statistics Office published data on residential property prices for January. The figures show that the decline in national property prices, which began five years ago, continued to accelerate into the new year. The peak-to-trough decline is now almost 50 per cent nationally.

In Ireland in the period 1970-2004, LTV ratios remained within a relatively narrow band – fluctuating between 52 and 65 per cent. In the second half of the last decade, they suddenly soared, reaching almost 90 per cent at the peak of the bubble.

Dr Duffy will present his findings this morning at the third in a series of half-day seminars organised by the ESRI on the post-crash economy. The theme of today’s event is Financial Stability after the Crisis.

Also presenting a paper at the event is Dr Peter Lunn, another ESRI economist. His paper focuses on the regulation of retail financial services more generally.

He finds that “the evidence points to the need for a tougher regulatory regime that incentivises providers to assist consumers, failing which more rigid product regulation may ultimately be called for”.

Dr Lunn notes that, prior to the financial crisis that erupted in 2008, regulators had assumed that people behaved as “infinitely capable yet naively selfish calculating machines”. Now, however, regulators are increasingly of the view that consumers need greater assistance in making decisions on financial services issues, and regulators will play a role in helping.

Among other speakers at today’s event is deputy governor of the Central Bank Stefan Erlach and Ann Fitzgerald of the National Consumer Agency.