Brendan Burgess
Founder
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I think it's worth teasing out the objectives of these proposed restrictions. From the Consultation Paper
Objective of macro-prudential policy for residential real estate
Primary objective
Increase the resilience of the banking and household sectors to financial shocks
SEcondary objective
Dampen the pro-cyclical dynamics between property lending and housing prices
Irish households and banks are very exposed to the residential real estate sector, with over eighty per cent of the total stock of lending to households being for the purpose of purchasing housing and mortgage loans making up almost sixty per cent of the total stock of loans by Irish banks.
[FONT="]Property lending is prone to cyclical fluctuations, with increased lending driving increases in asset prices which can fuel expectations of further price increases and prompt additional lending. Poorly managed property lending increases the economy’s vulnerability to boom-bust cycles. Furthermore, the behaviour of each[/FONT] [FONT="]lender in such circumstances can be strongly influenced directly and indirectly by[/FONT] [FONT="]the lending behaviour of others. This pro-cyclicality can be exacerbated if lending standards are loosened during an upswing, as occurred during the past decade when lenders increased the LTV and LTI ratios and the durations at which they were prepared to lend even as housing prices became increasingly disconnected from fundamentals. Such behaviour weakens the resilience of both borrowers and lenders to future shocks, whether to the economy as a whole or to the housing market. Macro-prudential policy measures that impose lending standards on the system as a whole throughout the credit cycle can help remove this dynamic and enhance the stability of the financial system.[/FONT]
[FONT="]There is little indication at present of bank credit being an important driver of the recent increase in property prices in Dublin, with the volume of new lending still very low. However, the introduction of precautionary measures will help ensure that the recovery of the property market is not destabilised by the re-emergence of a dangerous credit-driven price dynamic. Prudent LTV and LTI ratios should be the outcome of a well-managed credit decision process in each lender; unfortunately, experience shows such prudence cannot be relied on and that a policy overlay which would inhibit the emergence of imprudent lending is desirable. This overlay should be in place even in normal times and its introduction will in itself help dampen unrealistic expectations.[/FONT]
[FONT="]The macro-prudential tools proposed in this consultation paper are consistent with sustained growth in aggregate credit supporting the effective functioning of the housing market and on terms that do not place financial stability at risk.[/FONT]
Objective of macro-prudential policy for residential real estate
Primary objective
Increase the resilience of the banking and household sectors to financial shocks
SEcondary objective
Dampen the pro-cyclical dynamics between property lending and housing prices
Irish households and banks are very exposed to the residential real estate sector, with over eighty per cent of the total stock of lending to households being for the purpose of purchasing housing and mortgage loans making up almost sixty per cent of the total stock of loans by Irish banks.
[FONT="]Property lending is prone to cyclical fluctuations, with increased lending driving increases in asset prices which can fuel expectations of further price increases and prompt additional lending. Poorly managed property lending increases the economy’s vulnerability to boom-bust cycles. Furthermore, the behaviour of each[/FONT] [FONT="]lender in such circumstances can be strongly influenced directly and indirectly by[/FONT] [FONT="]the lending behaviour of others. This pro-cyclicality can be exacerbated if lending standards are loosened during an upswing, as occurred during the past decade when lenders increased the LTV and LTI ratios and the durations at which they were prepared to lend even as housing prices became increasingly disconnected from fundamentals. Such behaviour weakens the resilience of both borrowers and lenders to future shocks, whether to the economy as a whole or to the housing market. Macro-prudential policy measures that impose lending standards on the system as a whole throughout the credit cycle can help remove this dynamic and enhance the stability of the financial system.[/FONT]
[FONT="]There is little indication at present of bank credit being an important driver of the recent increase in property prices in Dublin, with the volume of new lending still very low. However, the introduction of precautionary measures will help ensure that the recovery of the property market is not destabilised by the re-emergence of a dangerous credit-driven price dynamic. Prudent LTV and LTI ratios should be the outcome of a well-managed credit decision process in each lender; unfortunately, experience shows such prudence cannot be relied on and that a policy overlay which would inhibit the emergence of imprudent lending is desirable. This overlay should be in place even in normal times and its introduction will in itself help dampen unrealistic expectations.[/FONT]
[FONT="]The macro-prudential tools proposed in this consultation paper are consistent with sustained growth in aggregate credit supporting the effective functioning of the housing market and on terms that do not place financial stability at risk.[/FONT]
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