It is clear that Gabriel Makhlouf, the incoming governor of the Central Bank, will come under pressure from the property industry to relax the regulator's mortgage lending caps, which appear to be putting a brake on house prices.
Mark FitzGerald, chairman of Sherry FitzGerald estate agency, criticised the caps at a property conference in Dublin on Friday. He said that Makhlouf, who is slated to begin in September, “needs to be told” that he has a broad remit of responsibility. The rules are “too binding”, he said.
Makhlouf’s job, first and foremost, is to ensure the stability of the financial system. He is also mandated to ensure that the system operates in the best interests of the wider public. It is difficult to see how it is his job to tweak credit rules to paper over cracks in the housing market caused by distortions in other parts of the economic system.
The Central Bank’s loan-to-income and loan-to-value mortgage caps were put in place to prevent over-borrowing by househunters and to prevent the promiscuous sale of credit from distorting the market.
The housing crisis exists because of problems elsewhere that have crimped the supply of new houses. It is precisely for moments such as this that the caps were created.
Building new houses needs to remain profitable if supply is to be stepped up to meet demand and ease the shortage. Relaxing credit rules would allow prices to rise, thus increasing profits and attracting more developers into the fray.
But we know how that story ultimately ends; we found out 12 years ago when the last credit-fuelled housing bubble burst.
The answer to increasing housing supply lies in controlling the cost of construction and in reining in galloping land prices. In a booming economy, that will not be easy. But it must be done.
It will be interesting to see if Makhlouf will be as resistant to quick fixes as his predecessors.
