Central Bank publishes research papers on the mortgage market

• First Time Buyers remain less likely to default than second and subsequent buyers.
• The average household drawing down a mortgage in 2019 is spending almost one quarter of net monthly income on repayments, down from the high levels of the past.
• The mortgage measures have become increasingly binding in recent years, as would be expected in a market where house prices have been rising faster than incomes as the demand for housing has outstripped supply.

Today the Central Bank releases four authored Financial Stability Notes on the mortgage market and the functioning of the macroprudential mortgage measures. The measures are aimed at enhancing the resilience of both borrowers and the banking sector. The measures set limits on the size of mortgages that consumers can borrow through the use of loan-to-value (LTV) and loan-to-income (LTI) limits. The measures are reviewed annually by the Central Bank. The primary objective of the review is to evaluate the calibration of the measures based on evidence. These four papers published today form part of the evidence of this year’s review. The outcome of the review will be announced on 4 December with the Financial Stability Review, following the decision by the Central Bank Commission.

In ““Have First Time Buyers continued to default less?”, Raffaele Giuliana highlights that there continues to be a lower likelihood of default for First Time Buyers (FTBs) compared with second and subsequent buyers (SSB). This is a key part of the rationale for the higher LTV requirement for 90 per cent of the FTB group under the measures. The re-testing of the original finding from 2013, which underpinned the calibration of the measures in 2014, forms part of the Central Bank’s commitment to ensure its macroprudential regime is supported by verifiable evidence.

In “Mortgage servicing burdens and LTI caps”, Jane Kelly and Elena Mazza explore the relationship between monthly mortgage repayments and borrowers’ disposable income in the context of the mortgage measures. The paper finds that the average household drawing down a mortgage in 2019 is spending almost one quarter of their net monthly income on mortgage repayments. Today, borrowers face lower debt servicing burdens than in the past, where figures were up to 40% in 2008 for some market segments. The mortgage measures, by regulating Loan to Income (LTI), place an effective maximum on the mortgage-service-to-income ratio that most households will face, thereby improving their resilience to loss of income for example.

Two further papers released today cover ““A Measure of Bindingness in the Irish Mortgage Market”,  by Robert Kelly and Elena Mazza and ““Mortgage borrowers at the loan to income limit” by Edward Gaffney. The research finds that increasing shares of new mortgage holders, almost one in five, are borrowing at the limits. The research points that the mortgage measures have become increasingly binding in recent years, as would be expected in a market where house prices have been rising faster than incomes in the context of housing supply constraints. The share of borrowers close to their maximum drawdown is highest for FTBs, in Dublin and the Greater Dublin Area, those drawing down allowances, and those on household incomes between €70,000 and €80,000. The majority of these borrowers would have taken on higher levels of debt relative to their income in the absence of the measures, suggesting the measures are serving their function of improving household resilience and mitigating pro-cyclicality in the housing market.