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We should cap how much people can borrow or risk another property bubble

New loans could be capped at 80% of property prices and about four times buyers’ incomes, Central Bank told.

Image: Foreclosure via Shutterstock

A CAP SHOULD be put on how much money people can borrow to buy a house to stop another property price bubble, Central Bank advisers have said.

New home loans could be capped at 80% of a property’s value and around four times buyers’ annual income to “improve bank resilience” and protect borrowers from volatile house prices.

The bank has released research which said more than a quarter of all buyers with the most risky loans - those who were in the top 20% of loan-to-value (LTV) ratios and loan-to-income (LTI) ratios – had defaulted on their borrowings.

“Considering the losses from defaults, LTV limits reduce the loss given default, with a sharp increase in the losses of defaulted loans with originating LTV greater than 85%,” the researchers said.

Losses from risky loans were “amplified” when they were issued at the peak of a housing price bubble, but even loans granted several years before the boom were easily affected.

To achieve the full risk reduction benefits, limits on both (LTV and LTI) ratios would need to be considered,” the researchers said.

The Central Bank economists noted several European countries including Norway, Sweden and Finland have caps on LTV ratios, while the UK plans to bring in an LTI cap this year.

LTV and LTI, what’s all that?

The LTV ratio is simply how much of a property’s purchase price a buyer has to borrow.

The higher the rate the smaller a deposit purchasers need to pay up front, but the more unsafe the loan is considered as a big drop in property prices would mean buyers owe their banks more than their home is worth.

Similarly, the LTI ratio is a measure of how much a person earns compared to their loan size.

Higher rates increase the risk of default because borrowers are more in danger of not being able to make their repayments if their income drops or they lose their jobs.

Lending at LTV ratios above 90% peaked about 2006 as property prices ballooned across the country, although there has been a recent spike in loans at rates of 80-90% as people return to the housing market after the bubble burst.

LTV Source: Central Bank economic letter series

High LTI loans also boomed at the peak of the housing price bubble, when nearly 20% of borrowers were being given over five times their incomes to buy homes.

While the researchers said there was no evidence recent house price increases stemmed from a return to cowboy lending tactics, they added the upward trend “warrants attention” and policy makers should look at ways to make the system more secure.

LTI Source: Central Bank economic letter series

The latest government figures show Irish housing prices have rebounded strongly – up 14.9% across the country and 24.9% in Dublin for the year to August – although analysts have warned the shortage of homes in Dublin and a few other regions was again pushing up prices and rents to unsustainable levels.

READ: If you’re being asked to pay more rent you’re certainly not the only one

READ: 10 things you should know about Ireland’s mortgage debt and arrears

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About the author:

Peter Bodkin  / Editor, Fora

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