herald

Thursday 14 December 2017

Dan White: Honohan must not bow to banks on 20pc deposit rules

Patrick Honohan, Governor of the Central Bank.
Patrick Honohan, Governor of the Central Bank.

With Dublin house prices up 24pc in the past 12 months there is no doubt but that we are in the early stages of a new bubble.

The latest figures from the CSO show that average house prices rose by 16.3pc nationally in the 12 months to October.

The increase in house prices was even steeper in the capital, with the average up by 24.2pc.

Is this is a bubble? The Central Bank, stung by criticism that it failed to prevent a house price bubble during the Celtic Tiger years, definitely seems to think so.

Last month, it published a "consultation" paper on mortgage lending standards. The Central Bank wants to cap most new mortgages at 80pc of the value of the home being purchased (ie a 20pc deposit) and to restrict homeloans to 3.5 times the borrower's income.

Given the excesses of the banks during the Celtic Tiger era, which has left them with €46bn of distressed mortgages on their books, one would have thought that the Central Bank's move to prevent a new house price bubble would have been broadly welcomed.

consequences

After all, the Central Bank was doing no more than following the example of a host of other countries including Hong Kong, Singapore, Norway, Sweden, Italy and, most recently the UK.

But no. The response to the Central Bank's modest proposals could hardly have been more hostile if Governor Patrick Honohan (left) had followed the example of the Biblical King Herod and recommended the slaughter of the first-born.

"The measures though, could have unintended consequences around home ownership which go to the heart of Irish society," said Ulster Bank boss Jim Browne.

"The proposals as they stand will impact the ability of many first time buyers to acquire their home. In addition to this other hopeful first time buyers will struggle to save a higher deposit while paying increasing rents," he went on.

Government backbenchers, already spooked by the Irish Water débâcle, are also running scared.

This has led to unconfirmed reports that the 20pc deposit requirement could be partially waived in favour of State-funded mortgage insurance.

This would have the effect of transferring the risk of any future fall in house prices from buyers and the banks to the taxpayer.

With the State having already had to pump €64bn into the banks this would amount to throwing good money after bad. Thanks, but no thanks.

depressing

While one should hardly be surprised that the banks are lobbying hard against the proposed new mortgage lending restrictions, the fact that many of our politicians are backing them is profoundly depressing.

Have these guys learnt nothing from what has happened in this country over the past seven years?

And yesterday it transpired that the Central Bank won't be able to bring the new 20pc deposit rules into force on January 1, as it had originally planned.

Honestly, you couldn't make this stuff up.

However, the good news is that Patrick Honohan doesn't seem to be for turning.

Taxpayers, and potential homebuyers, must hope that he keeps his nerve and doesn't bow to pressure to water down the new mortgage lending restrictions.

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