Statement by Governor Philip R. Lane on the Review of Mortgage Measures 2017

This morning, the Central Bank Commission discussed the outcome of the 2017 review of the mortgage measures. As you are aware, the measures were introduced in 2015 to improve bank and borrower resilience by mitigating the risks of credit-driven price spirals in the property market, in order to ensure that households and the financial system can better withstand future economic shocks. The measures are central to the Central Bank’s macro-prudential policy framework, which is a key element in delivering our mandate to safeguard financial stability and protect consumers.

The primary focus of our annual review is to evaluate whether the calibration of the measures matches our assessment of the risks in the mortgage and property markets. Our analysis indicates that aggregate mortgage credit dynamics remain subdued, with increases in new lending offset by the paying down of existing mortgages. The limited volume of transactions also indicates that the recovery in the housing market remains far from complete. Moreover, the distribution of new lending in relation to loan-to-income (LTI) and loan-to-value (LTV) ratios is in line with expected patterns, with our measures limiting the scale of higher-risk types of loans.

Turning to the property market, the recent increases in house prices reflect strong current and expected macro-economic conditions, with gains in employment, incomes and population (together with the international low interest rate environment) boosting demand for housing purchases. In addition, high rents add further pressure on property prices, in terms of the incentives facing owner occupiers and investors.

However, the property market is not a one-way bet for purchasers. At the macro-economic level, reversals in Irish economic conditions or in the international interest rate environment would trigger a re-assessment of the fundamental determinants of long-term property prices. Furthermore, future expansions in housing supply will put downward pressure on house prices both directly and indirectly through the impact on the rental market. The mortgage measures limit the financial risks associated with downward movements in house prices , by requiring down payments in the form of minimum deposits and guarding against over indebtedness through limiting the size of mortgages relative to income levels.

Our assessment is that the current ceilings on LTI and LTV ratios remain appropriate, given our risk analysis of the credit and housing markets. The 3.5 LTI limit is the anchor of the system, reinforced by the ladder of LTV limits for first-time buyers (FTBs), second and subsequent buyers (SSBs) and buy-to-let investors (BTLs).

We are making one revision to the system of allowances that permits a limited degree of lending in excess of the LTI and LTV limits. From January 2018, there will be separate LTI allowance pools for FTBs and SSBs: up to 20 per cent of the value of new lending to FTBs and up to 10 per cent of the value of new lending to SSBs will be permitted above the 3.5 LTI limit.

These allocations broadly reflect current lending patterns in excess of the LTI limit to FTBs and SSBs. Separate allowances for the FTB and SSB populations will provide greater clarity for borrowers and lenders in terms of the operation of the mortgage market. It will also enhance stability compared to the current setup, which (in principle) could give rise to swings in the allocation of allowances between the two groups. In combination with the separation of LTV allowances for FTB and SSB groups that we introduced last year, this revision delivers a simpler, more sustainable long-term policy framework. The higher allowance for above-ceiling lending to FTBs compared to SSBs reflects the different characteristics of these two groups. In particular, first-time buyers are typically younger, with current income levels lower relative to expected future income levels.

We are also making one technical amendment to the Regulations regarding collateral valuation, with the purpose being to provide clarity on the appropriate valuation to use for mortgages that relate to construction works being done on a property, such as in the case of renovations. This amendment aligns the Regulations with the prudent practice that is most common in the market, so as to ensure that prudent practice continues into the future, and it is not expected to have any material impact on the market.

We will continue to monitor developments through our annual cycle of reviews and stand ready to adjust these borrower-based measures and/or other macro-prudential policy tools as may be appropriate to safeguard the long-term sustainability of Irish mortgage lending and the stability of the wider financial system.

Finally, the Central Bank is intent on playing its part in supporting a sustainable housing market by limiting the risk of pro-cyclical credit dynamics that would put further upward pressure on housing prices (in excess of fundamental values). However, policies to boost housing supply remain the key to tackling the affordability and availability gaps for purchasers and renters of homes.

Tracker Mortgage Examination

Before I conclude, let me reiterate that our work on the Tracker Mortgage Examination continues to be a major priority. We expect more customers to be included, given the pressure that we are bringing to bear on banks to ensure that all those affected receive redress and compensation. We have already seen evidence of this in recent announcements and we continue to challenge robustly all lenders on disputed cases, using our mandate and powers as a regulator to stand up for those affected.

To end-September, lenders had identified 13,000 affected customers as part of the Tracker Examination. €163m has been paid out so far to customers in relation to tracker-related issues. Most redress and compensation schemes will have started by early December with all schemes up & running by year end.

The end result will be an Examination that delivers hundreds of millions in redress and compensation for affected customers, an outcome that would not have been possible without the Central Bank’s intervention.

Let me reiterate that, while much of our supervisory work continues in the background, we are committed to using all our powers, and enforcement actions as appropriate, to pursue redress and compensation for the people affected and to hold the banks to account for their unacceptable behaviour. Our enforcement work continues in parallel to the Examination and is at varying stages of completion. But, as has already been made clear, I expect that all the main lenders will be subject to enforcement investigations.