Address to Financial Stability Department, Sveriges Riksbank, by Lars Frisell, Advisor to the Governor

22 March 2016 Speech

'Some reflections on the potential effects of the Central Bank of Ireland’s mortgage regulations[1]'

It is just over a year since the Central Bank of Ireland introduced regulations on mortgage lending. Similar to other countries that have introduced this kind of regulations there is a vivid, on-going debate in Ireland as to their potential effects on the housing market.[2] The Central Bank is committed to reviewing the rules on a periodic basis, in order to ensure the continued effectiveness of the rules and take due account of their effect. The first review is expected to be published in November this year. However, I would like to address some general issues regarding their potential effects on prices, market activity and supply.

To recap, the regulations provide that Irish residents may borrow up to 80 per cent (90 per cent for first-time buyers up to €220,000) of the value of a primary dwelling and up to 3.5 times the household’s gross income. Lenders are permitted to make exceptions to these rules in a certain proportion of cases, provided it is prudent to do so. The loan-to-value limit does not apply to home owners in negative equity.

First, the objective of the regulations is not to steer prices - the Central Bank has no target for house prices or the pace of house price inflation. The regulations are there to protect households against over-indebtedness and the stability of the banking system. Markets are volatile and with a loan-to-value ratio close to 100 per cent even a small drop in prices may result in an unmanageable debt if one has to sell at the wrong moment. However, it is almost certain that the regulations, combined with other factors beyond the control of the Central Bank, such as planning rules, have had an effect on price developments. Annual house price growth in Dublin has decreased from an unsustainable rate over 20 per cent in 2014 to a modest 3 per cent in 2015, with small decreases recorded in recent quarters[3] This is viewed by some as a damaging outcome.

It is a common phenomenon that increasing property prices is perceived as desirable. Even if a household has no intention of moving or is actually planning to trade up - in which case the price increase on their new home will exceed the gain on their existing home - the rise in housing equity makes you feel richer. In fact, even those who do not yet own a property often prefer a steeply rising market, as it feels safer to buy in the conviction that prices will continue to rise. Obviously, with a standard amortising mortgage the only time you profit from a price boom is the day you trade down or exit the market entirely.

Second, some fear that market turnover will decrease due to the regulations. Low turnover can be a symptom of high switching costs, i.e., that it is financially, informationally, or psychologically burdensome to trade or change supplier. In many countries borrowers tend to stay with their bank despite they could benefit from switching, either because they find the financial information too difficult to penetrate, or simply because they dread having their financial circumstances scrutinised anew. Capital gains tax, stamp duties and legal costs also work as deterrents to moving.

But high turnover is not an end in itself. The mortgage regulations will at least temporarily be a slowing factor as it will take longer for households to accumulate the necessary deposit. Hence, households who look to sell or trade down will on average have to wait longer before they find a buyer who can pay the desired price. This effect is an anticipated, if not necessary, result of the regulation.[4] And in so far as longer lead times stem from households taking more time to reflect on how they invest their own, hard-earned money, it is arguably a good thing. However, it is too early to try to quantify the impact. The number of residential property transactions in Ireland actually increased in 2015, but from a low level, with a turnover rate of only around two per cent.[5] 

Finally, some critics argue that the mortgage regulations will exacerbate the shortage of housing in the capital. The rising population in the capital, in combination with declining household size, means that the housing market faces severe pressures. It has been estimated that more than 7,000 homes need to be built annually in the larger Dublin area to meet demand; last year less than 3,000 units were completed.[6] The well-known causes include a smaller set of developers and builders after the crisis, tighter financing conditions, rigorous building standards, and lacking infrastructure to support new housing estates.

The mortgage regulations neither add to nor mitigate these problems. However, they should contribute to a shift in both housing demand and supply towards rental accommodation. This highlights the need to remove unnecessary barriers to the provision of rental housing as well as the need for an appropriate framework of rights and obligations for tenants.[7]

One thing is clear – allowing lending and prices to spiral off again is not a solution, and would be a betrayal to the next generation of Irish home buyers. Ideally, banks and mortgage brokers should be capable of upholding prudent credit standards on their own. But experience in Ireland and many other countries has shown they are not. Higher deposit requirements slow individual households entry into the property market, but for borrowers collectively they are beneficial, as they prevent us from overbidding each other with ever-increasing amounts of borrowed money.


[1] Speech at the Financial Stability Department of the Swedish Central Bank on March 21, 2016. I thank Gabriel Fagan for valuable comments.

[2] The Swedish Financial Supervisory Authority (Finansinspektionen) introduced a flat loan-to-value limit of 85 per cent on residential mortgages in 2010.

[3] In the rest of the country however, house price growth has continued to increase.

[4] Reduced market turnover has been documented in several countries following the introduction of LTV regulations. See Igan and Kang (2011) for the case of Korea, Ahuja and Nabar (2011) for Hong Kong and Price (2014) for New Zealand.

[5] According to, in 2015 some 43,400 residential property transactions occurred in Ireland, implying a turnover rate of 2.2%, whereas in 2014 the number of transactions was 40,200. This is about half the turnover in the pre-crisis years and an important factor is arguably the relatively large proportion of households still in negative equity.

[6] Society of Chartered Surveyors Ireland (2014)

[7] Before supply adjusts one can expect rents to increase relative to prices, a development already evident in the Dublin area. Several factors including taxes, building regulations, and the relative propensities to let and rent may cause a permanent wedge between rents and user costs. See Kennedy and Stuart (2015) for a discussion.