What is the Central Bank trying to achieve?

Brendan Burgess

Founder
Messages
51,910
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=&quot]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=&quot]lender in such circumstances can be strongly influenced directly and indirectly by[/FONT] [FONT=&quot]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=&quot]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=&quot]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]
 
Last edited:
If I can translate this, it means

We want to protect the stability of the financial system generally
We want to protect the solvency of the banks by stopping their reckless lending.
We want to protect the solvency of borrowers by stopping their reckless borrowing.

In particular, we want to stop reckless credit causing a property bubble (as it did recently)


Increased lending causes increased property prices, which causes,
increased demand for lending, which increases property prices, upwards and upwards

We can stop this by imposing standards on the lenders, which they are unable to impose on themselves, due to their need to compete with other lenders


So the Central Bank is not trying to control prices as such. They are trying to make sure that a property bubble does not emerge.

The key point is that this is to protect lenders and borrowers from themselves.

It's very hard to argue with this principle, although one could argue with the proposed limits (as too strict or too generous) or with the timing of the introduction, although there will never be a good time to introduce such restrictions.
 
The Central Bank have acknowledged that they can't stop a bubble or cyclical crashes, they just want to reduce the impact that it will have. As they can't increase interest rates, this is what they can do.

It looks very unfair for people trying to move house, especially in Dublin, but the Central Bank does not influence housing demands.


Steven
www.bluewaterfp.ie
 
Similar restrictions were indeed very effective in preventing the sort of melt-down which affected. France which went unscathed while we imploded is a prime example. France also has a very stable residential property market, with property- price inflation generally mirroring inflation in the wider economy (Paris, and coastal property, being the exception due to peculiarities of demand - but this doesn't get away from the general picture).
A stable market would particularly benefit Dubliners - once the demand issue has been dealt with. At the moment, market instability is exacerbating the problems caused by shortage of suitable housing.
 
The Central Bank have acknowledged that they can't stop a bubble or cyclical crashes, they just want to reduce the impact that it will have. As they can't increase interest rates, this is what they can do.

It looks very unfair for people trying to move house, especially in Dublin, but the Central Bank does not influence housing demands.


Steven
www.bluewaterfp.ie

I don't understand why it's unfair to people moving house. Are they not the ones who will have deposits and low LTVs, from sale of the existing house? I thought it was FTBs who would feel the impact of the new restrictions?
 
You will see in the coming weeks a storm of special pleading by every group with a vested interest in property-price inflation - and the sense of insecurity and panic it induces in potential home-buyers. They will of course, and without a hint of irony, be pleading, not their own self-interest, but the plight of the poor first-time buyer.
The fact that the proposed restrictions are drawing such a howl of pain from the banks, estate agents, developers, financial advisors and mortgage agents, means the restrictions are already doing their job.
First-time buyers will be the main beneficiaries of a stable and orderly market because it means they won't be leapfrogged by house-price inflation while they save enough to borrow prudently - just like their parents did.
Hopefully, the government or Central Bank won't neuter the restrictions by insurance schemes or by backing down in the face of self-interested lobbies.
 
Back
Top