Remarks delivered virtually at
Ladies and gentlemen, it is a pleasure to be with you today to speak about the important topic of macroprudential regulation in the mortgage market, a topic that has grown hugely in importance to central banks in
The measures - a recent history
One of our key goals in the
Over the last half-decade we have had two main pillars of our macroprudential policies, the bank capital measures and the mortgage measures. More recently, we have also increased our analysis on macro-prudential policies for the non-bank sector, reflective of the relative size of the international industry in
The Irish mortgage measures were introduced in
While unsustainable mortgage lending and the ensuing arrears crisis had direct effects on bank balance sheets and on households themselves, there were also wider effects: many
Learning lessons from the past, since their inception in 2015, our measures regulate both loan to income and loan to value ratios at mortgage origination. They have had two objectives since 2015: increasing the resilience of banks and borrowers to negative economic and financial shocks, and dampening the pro-cyclicality of credit and house prices so a damaging credit-house price spiral does not re-emerge.
The measures - analytical support
Evidence-based policymaking is crucial for the
Firstly, the data showed clearly that originating loan to income and loan to value ratios had risen sharply in the years running up to the crisis, and that both were associated with higher default rates during the crisis.8
Secondly, the data showed that there was a substantial difference in default rates between first-time buyers and those moving home (referred to locally as second and subsequent buyers), with the latter much more likely to default, even when controlling for a wide range of observable factors.
Motivated by these research findings, our measures apply a loan to value limit of 90 per cent for first-time buyers while a loan to value limit of 80 per cent is in place for second and subsequent borrowers.9This approach has also been taken to address concerns regarding fairness, access to mortgage finance and homeownership for first-time buyers.
The performance of the measures against their objectives, 2015 -
Since their introduction, the measures have undoubtedly had an effect on the Irish mortgage and housing markets. Mortgages are among the longest maturity loans on banks' balance sheets, but even after just six years, close to 40 per cent of loans on bank balance sheets have been issued under the measures.10
The measures have underpinned an improvement in credit quality. It is clearly very difficult to ascertain how borrowers and lenders would have reacted in the absence of our measures during a period characterised by weak housing supply and rapid growth in housing prices, following a more than 50 per cent decline from 2007 to 2013. However, we can look at the distribution of loan to income ratios among loans originated in recent years, and in the run-up to the previous crisis for an indication. The constraining role of the measures is clear, with a large bunching of borrowers at the loan to income limit of 3.5 in recent times, compared to a longer right tail of higher risk loans in previous times.
Aside from underpinning the resilience of borrowers and lenders, the measures have also guarded against the re-emergence of a credit-house price feedback loop. In the short run, this is evident both in survey data of house price expectations of market participants, which shifted downward immediately after the introduction of the measures. This indicated an understanding that previous cyclical dynamics in the housing market would be less likely with such restrictions in place. Similarly, the effects were evident in observed price data, with regions more acutely affected by the calibration of the loan to income and loan to value limits experiencing disproportionate slowdowns in price growth in 2015 and 2016.11Looking over the entire period since the measures have been introduced, counterfactual exercises suggest house prices may have been up to 25 per cent more expensive had the measures not been introduced to guard against looser lending standards.12
Performance through a crisis
The COVID-19 pandemic was the first major crisis since the introduction of the measures and our assessment is that, on the eve of an unprecedented shock, we arrived in
To mitigate the threat to public health,
Research on the take-up of payment breaks by mortgage borrowers is instructive on the role of the mortgage measures during this period of stress.16Data show loans granted after the introduction of the measures had substantially lower levels of payment break take-up compared to those issued before the Global Financial Crisis. This is likely indicative of stronger underlying borrower resilience and more prudent levels of credit assessment by banks since the crisis, which have been copper-fastened by the measures.
Data on the relationship between payment breaks and the underlying level of loan to income and loan to value ratios provide further supportive evidence. Take for example, a borrower with a loan to income ratio of 2, who was half as likely to request a payment break compared to one with a loan to income ratio of 4. These comparisons reassure us that the measures played a role in preserving borrower resilience in the face of this extraordinary shock.
The resilience benefits are more directly visible in metrics such as default rates and payment break take-up rates. However, an equally important but less obvious benefit of the mortgage measures related to the resilience of the housing market to adverse shocks that could have resulted from overvaluation leading into the pandemic. As mentioned earlier, counterfactual estimates from Bank staff show that housing could have been much less affordable in
Our framework - taking a step back
I will now take a step back to discuss our framework. Each year since 2016, we have reviewed the mortgage measures against their stated objectives. In the past, changes implemented during these reviews have included an increase in the loan to value limit for some first-time buyers, and changes to the size and composition of allowances above the limits. While we will do this again in 2021, we are currently in the process of doing something significantly different in parallel: an overarching review of the entire framework around the mortgage measures. In this framework review, we are assessing deeper, longer-term issues to ensure our policy framework remains fit for purpose, not just now, but into the future.
At its core, this review will reflect the Bank's goal of serving the public interest, with the areas of focus determined by: listening to our stakeholders, lessons learned from experiences across the globe; an assessment of key changes in the housing market and wider economic environment since 2015; and, focused evidence from our extensive analysis.
The macro-financial environment in
The first step to inform the review is to ensure we understand how the environment in which our measures operate may have changed since 2015. Research published today looks at how the housing and mortgage markets have evolved in
Domestically, much has changed in the housing market since 2015. The historical relationship between credit and house price dynamics is shifting, indeed weakening as the post-crisis increase in non-mortgaged actors in the housing market has maintained. The price elasticity of housing supply has remained very low in
Housing affordability pressures appear to be a challenge facing a number of societies globally. Some of the research published today, for example, suggests that a number of countries have seen house prices growing faster than incomes in recent years. And while, of course, it is difficult to have a consistent comparison of the level of house prices relative to incomes across countries, the same research suggests that estimates of the house price to income ratio in
Looking across countries at the experience of individual households in the mortgage market, it is clear that the era of the mortgage measures has been associated with a decrease in mortgage repayment burdens among those drawing down new mortgage finance.18This in part reflects the coincidence of the era of macroprudential mortgage policies with that of low global interest rates. This has had an influence in lowering mortgage borrowing costs across the continent.
However, the particularly large reductions in repayment burdens in
Our research published today also tries to assess housing costs across the population in the round, using a range of survey sources, rather than focussing solely on house price and rental indices, which measure new transaction activity only. This research suggests that loan to income ratios across the mortgaged population are similar in
The objectives of macroprudential mortgage policies
Aside from analysing how the Irish housing market has changed in recent years, a key aim of our overarching framework review is to reassess whether the objectives of our policies remain appropriate. As I've said, the current objectives of our policies are two-fold. Firstly, increasing the resilience of banks and borrowers to negative economic and financial shocks. Secondly, dampening the pro-cyclicality of credit and house prices so a damaging credit-house price spiral does not re-emerge. Collectively, these can be thought of as 'benefits' of mortgage measures. Research published today by my colleagues with Professor
Macroprudential mortgage policies achieve the above benefits through a range of channels. They restrain the effective demand for owner-occupied housing by limiting the contribution of mortgage finance to growth in house purchases relative to incomes. They also limit the role that exuberant expectations can have in amplifying house price growth, with a number of knock-on benefits, for example in lowering the risk of unsustainable growth in borrowing backed by property to fund consumption. Our own experience in
Our research with
Overall, while there are potential downsides to macroprudential mortgage policies, our view is that the benefits heavily outweigh the costs. The benefits may at times not be as visible as the direct effects on individuals or households, but as we saw recently in a time of great crisis, the resilience built for both borrowers and lenders through the measures was crucial to avoid the financial stresses and economic hardships that could have emerged. In addition, for supply-constrained housing markets, it is important to remember there are many other policy levers that can be used to influence housing construction such as planning levies, building regulations and the tax system. As our research outlines, the economy is likely better served by a policy mix that stimulates additional housing supply through reductions in construction costs, rather than through increased price levels resulting from higher borrower indebtedness.21
Distributional effects
One topic I would like to discuss before I conclude relates to the distributional effects, or the effects that are particular to specific groups of the borrower population, of macroprudential mortgage measures. Looking at data on borrowers, it is clear that the market in
However, these findings must be set in a wider context. Firstly, the Irish population at large is ageing, and a range of societal and economic trends have been contributing to the rising age of mortgage market participants. Secondly, incomes at large have been rising during the economic recovery, as evidenced by the similar growth rates among new first-time borrowers and the population under 50 since 2015. Thirdly, there has been a continual and, in a cumulative sense, expanding gap between demand and supply in the housing market. This has exerted continued upward pressure on house prices and has caused an increase in the number of borrowers, especially at lower incomes, who are bound by the measures.
While a loosening of mortgage borrowing limits may seem attractive as a way to address such distributional outcomes by improving access to the mortgage market among those most constrained, there is much uncertainty as to how this would work in practice. In a supply-constrained market, the increased purchasing power of all borrowers could result in similar levels of access to the mortgage market, coupled with higher levels of prices and, as a result, more highly-indebted households. Simply put, more money chasing the same number of homes resulting in higher debt for households and individuals.
As things stand, there are two features of our framework that address issues relating to borrowing by specific cohorts. Firstly, the difference in the loan to value limit on first-time buyers relative to second and subsequent borrowers acknowledges both that the evidence suggests first-time buyers are lower-risk, but also that accumulation of down-payments can be more challenging for this group, for whom access to a mortgage implies access to homeownership.23
Secondly, the existence of allowances for lending above each macroprudential limit allows for flexibility and the consideration of the circumstances of individual borrowers. This means that the allowances act as a separate channel through which effects on certain borrower groups can be considered. Of course, lenders make their own commercial decisions on the borrowers receiving these allowances but the research up to now suggests that borrower groups constrained by the measures do indeed receive allowances.24However, the data also suggest that higher-value properties are more likely to receive an allowance, with this effect driven by the predominance of borrowers in urban centres among those accessing allowances. Taken in the round, the evidence base suggests that allowances play a role with respect to the distributional consequences of macroprudential policy, but cannot be a substitute for government policy to address wider issues in the housing market.
Conclusion
I have outlined a wide, but non-exhaustive, list of issues currently being considered by the
A challenge for all macroprudential policy makers is to continue to make the case that the benefits of our policies justify the existence of the measures. These benefits are of course invisible to citizens day-to-day as they relate to the mitigations of risks relating to economic recessions and financial crises. This is a challenge the
As the
I thank you all for your attention.
1I would like to thank
2Donnery, Sharon. Macroprudential Policy - Lessons in the Pandemic Era. Address to
3 Donnery, S., Fitzpatrick, T., Greaney, D., McCann, F., and O'Keeffe, M., 2018. Resolving Non-Performing Loans in
4 McCann, F. and McIndoe-Calder, T., 2014. Property debt overhang: the case of Irish SMEs. Central
5LeBlanc, J. and Lydon, R., 2019. Indebtedness and spending: What happens when the music stops?
6Addison-Smyth, D. and McQuinn, K., 2010. Quantifying Revenue Windfalls from the
Irish Housing Market. The Economic and Social Review, Vol. 41, No. 2, Summer, 2010, pp. 201-223.
7 Kennedy, G. and
8Hallissey, N., Kelly, R., and O'Malley, T., 2014. Macro-prudential Tools and Credit Risk of Property Lending at Irish banks. Central
9Buy-to-let buyers need to have a minimum deposit of 30%, further details on the mortgage measures can be found here.
10Mortgages issued under the mortgage measures framework are those mortgage loans approved and drawn down since
11Acharya, V.V., Bergant, K., Crosignani, M., Eisert, T. and McCann, F.J., 2020. The anatomy of the transmission of macroprudential policies (No. w27292).
12The range of estimates in the local literature is reflective of the uncertainty inherent in such exercises, with some estimates closer to 10 per cent.
13For example, the Basel III reforms.
14Supports included the pandemic unemployment payment (PUP), the temporary wage subsidy scheme (TWSS), the employment wage subsidy (EWSS) and support via the live register.
15See
16Gaffney, E., and Greaney, D., 2020. COVID-19 payment breaks on residential mortgages. Central
17Donnery, Sharon. Perspectives on the Irish Housing Market - the past five years. Address to Annual ESRI/
18Kelly, J., Kennedy, G., and Lambert, D., 2021. The cost of housing and indebtedness across European and
19Aikman, D., Kelly, R., McCann, F., and Yao, F., 2021. The macroeconomic channels of macroprudential mortgage policies. Central
20See for example Richter et al. (2019), who show that LTV restrictions do indeed reduce economic output, but that a relatively large reduction of 10 points in the LTV ratio is required to reduce output by as much as a 25 bps hike in monetary policy rates.
21Aikman, D., Kelly, R., McCann, F., and Yao, F., 2021. The macroeconomic channels of macroprudential mortgage policies. Central
22Gaffney, D., and Kinghan, C., 2021. Mortgage lending in
23Kelly, R., O'Malley, T., and O'Toole, C., 2015. Designing Macro-prudential Policy in Mortgage Lending: Do First Time Buyers Default Less?
24Kinghan, C., and McCann, F., 2019. Lending above macroprudential mortgage limits: The Irish experience since 2015. Central
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