Controversial new rules restricting mortgage lending are likely to exacerbate the high cost of rent, internal Department of Finance records show. Earlier this month, the Central Bank imposed lending caps on all banks which mean lenders will be able to lend only 80 per cent of the purchase price to a homebuyer.
Records released under the Freedom of Information Act show there was concern among Department of Finance policymakers at the impact of the new rules as soon as they were first flagged by the Central Bank last year.
While the department noted there was “sound rationale” for the measures, officials warned of “wider economic and social impacts” which needed to be taken into account. One document warned: “It will increase the demand in the private rental market . . . which is already experiencing its own demand pressures and supply constraints and such a measure could exacerbate this.”
The same draft position paper said in cases where first-time buyers had a track record of meeting monthly rental payments that were comparable to mortgage payments, there were objective grounds to say planned rules were “unduly restrictive”.
In a memo, an official noted Minister for Finance Michael Noonan also endorsed a more gradual approach to lending restrictions rather than suddenly restricting banks from lending more than 80 per cent of a home's purchase price.
He also said it was important to recognise the social implications of the proposals and the “knock-on implications they may have for the rental sector”.
Latest figures – compiled before the introduction of the new rules – indicate that rents in Dublin are now just 6 per cent below their boom-time peak in 2007. While rental increases have moderated in the capital, they are rising faster in commuter-belt counties around Dublin.
Records show that most officials across the department accepted that while the proposals were sensible in principle, it was not the right time to introduce them.
“At this current juncture, we are nowhere near a situation in which credit growth poses a systemic threat,” a senior official said in an email. “Quite the opposite in fact – so I would hope the measures are designed in such a manner that they do not affect the nascent recovery in the construction sector.
“While mortgage lending is showing moderate improvement, it is coming off a very low base; and there is little, if any, evidence that credit growth is a significant driver of the recent increase in property prices.”
Another official in the financial services division said that at a minimum, there was merit in pushing for some phased introduction of restrictions so the housing market did not “grind to a halt”.
A senior official in the department’s economic division said while the proposals were balanced and sensible in principle, it was not the right time to introduce them.
“Bringing in the rules too soon could result in proper prices stalling. This would be undesirable because the upturn in the prices is bringing many people out of negative equity,” the official wrote. “A reduction in negative equity should help towards freeing up the housing market, because people who were trapped because of negative equity will not be able to move house. In addition, the falling incidence of negative equity is helping to restore banks’ balance sheets.”
