November 24, 2016 / Market

CBI Mortgage Rules Loosened – Goodbody Stockbrokers

The long-awaited review of the macro prudential rules was published yesterday.  While surprising, the modest loosening of the rules appear sensible and take account of the some of the unintended consequences of the original design.

Surprising easing of macro prudential mortgage rules…

After an extensive evidence-based review of the macro prudential mortgage rules first introduced in February 2015, the Central Bank (CB) has announced some minor adjustments, mainly to the Loan-to-value restrictions, that will come into force on 1st January 2017.  There is no change to the loan-to-income cap of 3.5x.  The changes amount to a modest easing of lending conditions and will support further growth in mortgage lending and house price growth in 2017 and beyond.  The market impact will be larger for the Dublin market in particular, while the new homes market will be boosted by the recently announced Help-To-Buy scheme.  As a reminder, we have already increased our forecasts for house prices, rents and mortgage lending in recent weeks.  The announced changes suggest further upside risks.

…with a focus on the LTV rules

The specific changes are as follows.  For first-time buyers, a simple 90% LTV cap has replaced the previous graduated scheme whereby a 90% limit applied to the first €220,000 with an 80% on the excess above this level.  Only 5% of loans can be written outside of this cap (down from 15% previously).  For non-FTBs, the 80% LTV cap is maintained, but the exception limit has been increased from 15% to 20%.  Coupled with the Help-To-Buy scheme, the cumulative reduction in the deposit for a FTB of a new home, priced at €300,000 in Dublin is €23,000 (60%).

Changes deal with unintended consequences of the rules

Although the announced changes come as a surprise, they address some of the issues that we discussed as part of a submission to the CB we contributed to in the review.  Specifically, a survey of potential buyers suggested an “inequality of opportunity”, with FTBs struggling to raise the required deposit in the absence of family support, especially those in the rental market.  Secondly, the larger deposit requirement for higher value mortgages had a disproportionate impact on the market in the capital and was also contributing to urban sprawl as some buyers were forced from the capital due to the higher deposit requirements.  Thirdly, the changes now mean a more simplified regime.  Fourthly, the CB can now maintain consistency going forward with no need to change the cap in line with movements in prices.

The impact on mortgage lending is small, but incremental

The effect on mortgage lending will be at the margin in our view.  Importantly, all lending is not done at the caps; in fact, the Central Bank notes that 73% of FTB lending since the introduction of the new rules was done at a level below the regulation LTV. Moreover, for non-FTBs, only 11% of mortgages were written above the 80% LTV cap, despite there being a 15% limit.  This limit now goes to 20% but there is no guarantee that it will be utilised.  We estimate that the positive impact on mortgage lending could be of the order of 2%-3%, but this comes on top of recent stronger trends of late.

Follow through on supply-side initiatives needed to increase new housing

The easing of the mortgage rules is likely to push up prices which should impact positively on credit and housing supply.  Importantly, it is not the Central Bank’s responsibility to address the level of prices.  It is its responsibility to maintain financial stability and a prudent level of household borrowing.  The maintenance of the 3.5x LTI limit ensures this.  Supply-side initiatives such as those announced in the Government’s Action Plan for Housing will be largely responsible for ensuring an adequate level of supply to deal with a growing population.