Relaxing the Mortgage lending Rules as interest rates rise will increase prices and stress

The Central Bank last week announced that they were changing the Macroprudential Rules with effect from 1st November 2022. This means that the income limits for First Time Buyers (FTB) will increase from 3.5 times their salary to 4 times, while Second and Subsequent Borrowers (SSBs) will need a deposit of just 10 per cent, down from 20 per cent. This move comes as a result of the Central Bank's review of the Macroprudential Rules, first introduced 2014, but what will it mean in practice?

 

The Macroprudential Rules were introduced to protect the financial system from the impacts of poor lending practices. This had the consequent impact of protecting would-be borrowers from over-borrowing to meet inflated house prices and had a knock-on effect of dampening increases in this area, with Central Bank exercises estimating that prices could have been up to 25 per cent higher without them. Further Central Bank research showed that loan-to-value (LTV) and loan-to-income (LTI) ratios had both increased during the Celtic Tiger years and were both associated with higher rates of default when the crash happened. Since the introduction of the rules, when caps were placed on both LTV and LTI, there has been an improvement in credit quality, reducing risk to the sector and the economy overall. Rowing back on these protections as house prices continue to rise seems ill-advised.

At a household level, the impact of lax credit regulation in the run up to the financial crash in 2008 resulted in households with very high levels of credit they could not afford, particularly those who experienced significant income shocks as a result of the crash. The inflation of house prices, contributed to in large part by the accessibility of easy credit, meant that households were essentially “stuck” as they could not move due to negative equity, so people who had got the foot on the property ladder with a one-bed apartment were still living there years later with their partners and children. Research undertaken by MABS National Development Ltd in 2013 found that the financial pressures and feelings of failure resulted in relationship breakdown; deterioration in mental and physical health; employment issues; and increased addiction, while a 2011 Report of the Mental Health Commission called for Guidelines to be published on debt and mental health here, modelling similar initiatives in the UK. 

Interest rates increased by 125bps so far this year, with another increase of 75bps anticipated.

Right Problem, Wrong Solution

House prices increased by 12.2 per cent in the year to August 2022. But is meeting higher prices with higher loans at higher rates the right solution? No.

The relaxing of the macroprudential rules is trying to fix the problem of housing affordability in the wrong way. This follows a pattern in recent housing policy, such as the Help to Buy Scheme and the Affordable Purchase Shared Equity Scheme, in that it is placing all of the responsibility with the purchaser to meet increasing prices, rather than looking for supply-side solutions to reduce them. The changes to the Macroprudential Rules mean that purchasers will be able to borrow more than they were previously – FTB because of the increase in income limits and SSBs needing half the deposit they would have before the change. This opens up competition for properties in higher price brackets (that is, if your income allowed for a maximum value up to €250,000, you might now start looking at properties valued at €270,000 or above). Increased competition increases prices, as anyone who has ever bid on a house will know. So, rather than “increasing affordability”, all this will do is increase debt and further inflate an already inflated housing market. No matter how much four times your salary, or an extra 10 per cent on your loan will get you, if you’re bidding against institutions (and we know that the proportion of institutions, even public ones, currently purchasing new homes is increasing), you’re more likely to be outbid, while the effect on house prices overall will be to increase them.

The winners here won’t be the “ordinary” purchasers, they’ll be speculators. At a time of such economic uncertainty, when forecasts for growth are low (some even pointing to recession), this is a move that will leave borrowers over-extended, damaging society and the economy.

We need to learn from the past, not repeat it.