“Housing policy should focus on the sustainable supply of housing to meet the growing needs of citizens” – Deputy Governor Sharon Donnery

• Challenges for affordability and access to housing are evident across a number of advanced economies in Europe and globally, including Ireland.
• Deputy Governor Donnery emphasised the role of mortgage measures in protecting households and firms from economic and financial shocks.
• Sustainable supply of homes, and not over-indebtedness of households or imprudent lending standards, should be the key focus of housing policy.

Challenges related to the housing market, particularly those around access and affordability, are well known in Ireland but can also be found across advanced economies in Europe and globally, Deputy Governor Sharon Donnery said today (9 December 2021). Speaking at the NUIG Conference on the Future of Europe Event on Housing, the Deputy Governor emphasised the need for housing policy to focus on a sustainable supply of homes to meet the needs of citizens in Ireland and across Europe.

Deputy Governor Donnery cited the European Central Bank’s most recent Financial Stability Review, which highlighted that house prices across the euro area had risen at their fastest pace since 2005 in the second quarter of 2021. Ms. Donnery referred also to the Central Bank’s own research on housing, including last month’s Financial Stability Review 2021:II and Financial Stability Note. Discussing the findings, Ms. Donnery said “for a sample of advanced economies in recent years, relatively high levels of house prices to incomes has been a widespread phenomenon. This, of course, will not provide any great solace to those trying to purchase a home, but it is important to place the Irish experience in its full context.”

Considering the wider role of central banks in housing markets, Ms. Donnery outlined the role of borrower-based measures in protecting households and firms. She noted that these measures have become common across Europe since the financial crisis. Many countries in Europe have a loan-to-value limit, while seventeen countries, including Ireland, have a loan-to-income or debt-service-to-income limit. Ms. Donnery outlined that the aim of these measures is “to increase the resilience of banks and borrowers to negative shocks, and to prevent the re-emergence of a damaging credit-house price spiral.” She added that “the costs of not meeting these objectives were particularly clear when the measures were introduced in 2015 after the global financial crisis. The effects of the crisis in Ireland were particularly severe, with the unemployment rate increasing by over ten percentage points to peak at about 16 per cent in 2011/2012, while property prices fell by over 50 per cent from their peak from 2007-2013.”

Against this background, Ms. Donnery discussed where the focus of policymakers should be. She said, “Looking at the Irish housing market, and considering whether there is enough supply to meet demand, I believe the answer is clear. Demand for housing is strong and supply has not kept pace.” In this regard, the Deputy Governor noted that “unsustainable levels of credit will not lead to a sustainable supply of new homes. If anything, it risks the re-emergence of a credit price spiral and another painful boom-bust housing cycle.” She continued, “The challenges facing the wider housing market, around sustainability of supply and house price affordability, would not be addressed by excessive indebtedness of households or imprudent lending.”

Ms. Donnery concluded by referring to the Central Bank’s ongoing review of the mortgage measures framework, the outcome of which will be published in 2022. She said, “At its core, this review will reflect the Bank’s mission to maintain monetary and financial stability, with the areas of focus determined by: listening to our stakeholders; lessons learned from experiences across the globe; and, an assessment of key changes in the housing market and wider economic environment since 2015. Our decisions will be guided by extensive evidence-based analysis and the public interest.”