Irish central bank urged to ease mortgage restrictions

The Irish central bank is under pressure to ease restrictions it plans to place on mortgage lending amid a chorus of criticism that the new rules risk pushing first-time buyers out of the housing market.

The Economic and Social Research Institute, a think-tank, became on Wednesday the latest and most influential critic of the central bank's move to curb a mini house-price bubble. It argued that Irish house prices were not fundamentally overvalued and that the new rules may restrict the supply of new homes even as the government and the public are clamouring for the construction of more houses.

The mortgage lending restrictions "may distort the supply of new homes when supply is the critical issue", said Kieran McQuinn, an associate research professor at the ESRI.

The central bank said in October that it would introduce "macroprudential measures" to cap the size of a mortgage to 3.5 times a borrower's income, and to 80 per cent of the value of the property, with exceptions possible in only 15 per cent of mortgage lending. That would represent a sharp change from the years of Ireland's property bubble between 2002 and 2007, when there were virtually no restrictions on mortgage lending.

The rules were due to take effect from January 1. However, the central bank has indicated it may delay implementation as it studies nearly 160 submissions it has received, including the ESRI paper. The finance ministry, construction sector, banks and political parties have all asked the bank to ease the restrictions, especially for first-time buyers.

It is rare for the Central Bank of Ireland to come under such public and sustained pressure to row back on a key policy initiative. The debate on its mortgage restriction proposals comes in the context of a growing housing market crisis in Ireland six years after the bursting of one of the world's most dramatic house price bubbles.

Almost no new houses or apartments have been built in the country since 2008, and demand for new homes is soaring as the economy recovers. As a result of the rise in demand and the lack of supply, Irish house prices have started to soar again. Prices in Dublin are up nearly 25 per cent this year, though the rise nationally is more modest.

Still, the ESRI maintained that house prices remained undervalued given the sharp fall in prices between 2007 and 2013 - which analysts say is around 50 per cent. It said that given where the Irish housing market stands now, "it is not clear that the envisaged measures are fully warranted". The central bank is due to finalise its mortgage lending measures early next year.

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