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Central Bank governor Patrick Honohan Laura Hutton/Photocall Ireland

The Central Bank's chief seems to have gone cold on relaxing its new mortgage rules

Governor Patrick Honohan says the “seeds of trouble” for a new bubble could already be growing.

Updated at 3.35pm

CENTRAL BANK CHIEF Patrick Honohan doesn’t think Ireland is on the brink of another property bubble yet – but the “seeds of trouble” could be sown without its planned new mortgage rules.

And the bank’s governor appears to have gone cold on the idea of relaxing its proposed lending laws – requiring home buyers to come up with a 20% minimum deposit – by letting borrowers to take out mortgage insurance instead.

“What we’re concerned about is a systemic risk – a risk that property prices would, in the future, topple down again,” Honohan told an Oireachtas Finance Committee today.

There’s a danger that if we mis-design this and lure in a whole business of mortgage insurance which was costly and not precisely targeted at the risks we’re talking about, it might not be the way to go.

“I’m not yet, quite sure that this is the solution and the best way to go.”

The Central Bank has flagged new lending rules from next year which would stop banks giving out loans worth more than 80% of a property’s value to the vast majority of its customers.

Critics of the scheme have complained the plan would lock many first homebuyers out of the market if they didn’t have the backing of family money for a deposit.

Those looking to buy in Dublin would be the worst affected with Central Statistics Office figures out today showing house prices had gone up nearly 25% over the last year in the capital.

In a speech earlier this month, Honohan suggested it could be possible for borrowers to produce only a 10% deposit if another 10% was covered with mortgage insurance.

Easy credit is not the answer

But today he said giving borrowers access to easy money wasn’t the way to solve social problems like the gap between the rich and poor. About 2,800 mortgages issued last year would have been affected by the rules, Honohan added.

Central Banks Annual Reports Central Bank governor Patrick Honohan Sam Boal / Photocall Ireland Sam Boal / Photocall Ireland / Photocall Ireland

“I would be very cautious about seeing credit and mortgage credit as a way of resolving inequality in society – the opposite is the fact,” he said.

It actually can create situations where too many people borrow too much and get into ferocious financial difficulties.”

Honohan said the bank was trying to put in place a system to stop a second, credit-driven property bubble developing and another generation being saddled with too much debt.

“Absent such a regime, sharp price rises in Dublin – and they jumped by 42 per cent in just 18 months – in a thin market, not yet eliciting a sufficient supply response, could sow the seeds of trouble for the future,” he said.

Easy credit is not the answer

Leaders from several of Ireland’s major banks have criticised the Central Bank’s proposed new lending rules, which also include a cap on how much people can borrow relative to their income.

However Honohan said banks had clearly shown they were unable to regulate themselves and lend money sensibly.

“I am not going to take seriously views of banks when they’re being told you can’t do this and that - if they say, ‘oh we don’t agree with that’,” he said.

I’m not surprised they don’t agree with it – we are regulating the banks. They say ‘leave it to us, we know how to do this stuff’, well they haven’t shown the ability to do things safely.”

READ: Bubble buster: Homebuyers face 20% deposit as banks hit with tighter controls >

READ: ‘I would never buy a property again,’ says Government’s top housing adviser. ‘I rent’ >

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27 Comments
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    Mute Rachel O' Meara
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    Nov 26th 2014, 3:18 PM

    The “seeds of trouble” are already being sown, especially when the media are shoving comparisons to 2007 down our throats!……Join the hysteria lads, buy now prices could still go up……..complete madness!

    181
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    Mute Ciaran Ó Fallúin
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    Nov 26th 2014, 4:03 PM

    I’m not saying Irish Medias headlines aren’t worsening a situation, but we can’t pretend that house prices and rent aren’t soaring either.

    Personally, I’d sooner see the minimum deposit set at 15% but with greater stress testing performed on applicants salaries to ensure they can comfortably cover monthly repayments.

    70
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    Mute pingu paws
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    Nov 26th 2014, 4:54 PM

    And the media will continue to vomit out property porn like YOU ARE WORTH NOTHING UNLESS YOU HAVE A HOUSE OR WANT A HOUSE ….

    46
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    Mute Patlyndo
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    Nov 26th 2014, 6:20 PM

    Sorry Pingu, Media playing to property obsessed/Negative Equity/ It’s for me pension and rent is dead money brigade. Who can blame them eh?

    11
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    Mute Lamb
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    Nov 26th 2014, 7:03 PM

    You can hardly be surprised with house pricing with NAMA having a huge distorting effect on supply. I think every Irish person in need of a home thought it would be great. NAMA wpuld buy properties closer to the true market value and sell them on to Irish people who couldn’t previously afford to get on the property market. The way things are going, part of your benefits when you get a job will that your employer pays your rent or mortgage or a portion of it, similar to the situation in the US where they pay for healthcare. I really don’t see how it will be feasible to rent/buy in places like Dublin in the future on a ‘normal’ income. I’m shocked that you can have people working in the capital earning Joe Soap wages in shops and the like. These people will be pushed out of the capital by low wages and high rents in future and our expensive public transport won’t be able bring them from their remote dwellings on their wages.

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    Mute Damian Moylan
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    Nov 26th 2014, 7:50 PM

    20% is bonkers esp. Since wages are being held down. Like it or not we have to compete with other Eastern EU Countries with free borders and vvv low wages. 20% Alright if ur on honohan’s money I think he’s deluded.

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    Mute Damian Moylan
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    Nov 26th 2014, 7:53 PM

    Btw what clown decided it was a good idea for forcing us to compete on wages with Eastern Europe where ur lucky if u get €500/month and many on a lot less. Typical EU Bureaucrats who care nothing about jobs in Ireland that’s who and and Irish Govt. Who dont stand up. Cost limerick huge…DELL

    6
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    Mute Kustin J Crush
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    Nov 26th 2014, 8:02 PM

    @ Ciaran. .. and as we know house prices only go UP UP UP!

    5
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    Mute Emachine
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    Nov 26th 2014, 3:19 PM

    Good on ya Patrick, hold firm, somebody has to remove the punch bowl.

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    Mute Plantation Watch
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    Nov 26th 2014, 3:33 PM

    Good on him for resisting pressure from the indo and the other property pushers.

    105
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    Mute Em Ní Mhurchú
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    Nov 26th 2014, 3:20 PM

    The seeds of trouble have already been sown. Enda Kenny & his government have deliberately forced up house prices by severely limiting supply. Anyone remember Mr Noonan saying house prices had lots of room to increase? Now the banks have passed the stress tests our ability to control this monster is limited. And people just keep on becoming homeless while the developers and btl landlords rub their hands in glee as rents spiral out of control and homes become out of reach for regular Joe Soaps. This is EXACTLY what Enda & Michael wanted. The rich get richer and the poor are left without even a roof over their heads. Such wonderful leaders…..not!

    80
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    Mute Ryan Carroll
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    Nov 26th 2014, 3:29 PM

    Everyones worrying about housing but that was just one of many scams last time, they’re taking worse risks now, the too big to fail banks have actually gotten bigger through several mergers, another giant crash is very likely within 6-7 years.

    Why would they not take worse risks when they had NO CONSEQUENCES last time? When they have Obama in the states and the EU actually deregulating further even though 90s and early 00s deregulation led DIRECTLY to the 2008 crash? We told them the Casinos open, you keep your gains and the Serfs will absorb your losses, and were SURPRISED that it’s all starting again? ffsake…

    57
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    Mute rpmc
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    Nov 26th 2014, 4:01 PM

    The Mortgage Indemnity Bond as proposed, is merely a costly Insurance Policy paid for by the Borrowers, but for the benefit & additional security of the Lending Bank

    51
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    Mute Randle P McMurphy
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    Nov 26th 2014, 5:56 PM

    @rpmc. Absolutely right. A hoax. A further cost to be borne by the borrower. Another fop to the fkn banks and the their lapdog politicians…it is disgusting. Absolutely no regard for the future generations, all about bigger margins, return to profit at ANY cost. If I was starting out again in Ireland or had a mortgage again today with an Irish bank, I’d be saving my 20%, getting an affordable mortgage, and giving as little to the banks as possible. Not even a current account! Not a penny of savings at 0.5% interest with 41 fkn % DIRT!!!! No thank you. Nothing.

    21
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    Mute Donald Dump
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    Nov 26th 2014, 4:08 PM

    It’s actually a disgrace, as rightly stated in the comments above this only favors the well off. Now I’m on a ok salary, do not have any major debt, and putting out a relatively small amount on rent, yet I am struggling to get 10% deposit together, never mind 20%.
    I think the speculators and investors need to frozen out of the market with 1st time buyers given priority/concessions to get on the ladder. Every family deserves their own home.

    47
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    Mute Adrian Corcoran
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    Nov 26th 2014, 4:32 PM

    Donald, your problem is not the 20% deposit but the fact that house prices are still too high.

    51
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    Mute Fozz
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    Nov 26th 2014, 4:33 PM

    What you are not factoring in is a reduction in demand with these new rules…meaning a reduction in prices people are going to end up paying (as opposed to asking prices).
    So the new rules are for your benefit even though in the short term it may not appear so.

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    Mute Gillian McCarthy
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    Nov 26th 2014, 9:26 PM

    Exactly, everyone is shouting about how hard it will be to save 20% and they’re right, at the moment with bog standard semi d’s in most middle class suburbs of dublin costing upwards of a half million 20% is an enormous wack of cash. The point being consistently missed is that without buyers the house prices will have to come back down and very soon your now 10% will get a lot closer to 20%.

    25% increase in house prices over 12 months is ludacris, and it’s entirely down to supply, if you search the property price register in Dublin for the last 3 months you’ll see huge blocks of apartments sold off by NAMA, not on the open market for the stream of Irish citizens trying to buy but to investors who no doubt want to cash in on the free for all that is the rental market in Ireland. The current housing crisis is completely fabricated by our dear government.

    18
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    Mute John Judd
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    Nov 26th 2014, 3:59 PM

    If you want to buy a house save up your 20% tax payers should not have to bail out the banks again . If you have strictly enforced lending rules prices wont spiral out of control. Recent Price increases are supply/demand related

    41
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    Mute Mark O'Hagan
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    Nov 26th 2014, 7:23 PM

    GOOD, This time if we have a governor of the Central Bank who does his job properly, we might avoid the same mistakes of the last boom.

    23
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    Mute Adrian Corcoran
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    Nov 26th 2014, 4:30 PM

    Not sure where you get that the CB is “gone cold on the idea”. No where was it said that they are gone cold on the idea – changes to mortgage lending will be applied. Its just not fully clear what the exact rules will be.

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    Mute hjGfIgAq
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    Nov 26th 2014, 4:44 PM

    Adrian, I’m not sure if you’re misreading the story – I’m saying Honohan has gone cold on the idea of relaxing the Central Bank’s earlier proposals by allowing a 10% deposit with mortgage insurance. That’s based on his comments today that he wasn’t sure if it was a good idea or the way to go. I’m not suggesting he’s gone cold on new lending rules altogether

    14
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    Mute Adrian Corcoran
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    Nov 26th 2014, 5:20 PM

    Peter, I listened to the briefing of the Finance committee. I did not hear the words relaxed. I am not sure how you can relax something that has not yet been set?

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    Mute hjGfIgAq
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    Nov 26th 2014, 5:25 PM

    It’s a reference to his earlier comments (http://businessetc.thejournal.ie/20-mortgage-deposit-1769492-Nov2014, although the link’s in the article as well) that the Central Bank could look at easing the 20% deposit requirement if borrowers had mortgage insurance. You’re right that nothing’s been set yet, but the bank’s been pretty clear about what it wants to do

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    Mute Frank Conway
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    Nov 26th 2014, 4:24 PM

    Again, Central Bank doesn’t get it! Prudent lending yes! Social policy based on populism will not work. Dublin price rises as a result of CGT incentive, not lending. 20 percent is populist policy and poor policy. Even in conservative Germany they have ltv lending up to 90% and higher but charge for risk. Stop this cb madness!

    6
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    Mute Richard Mccarthy
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    Nov 26th 2014, 7:15 PM

    Get over it,we had to save 20% for a home mortgage deposit back in the mid eighties when conditions were even worse,and repaid it in 16 years,the 20% deposit reduced the amount that needed to be repaid with interest with allowed early repayment of the loan,in the long run its a win win.

    28
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    Mute Uplift
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    Dec 4th 2014, 1:30 PM

    We’re running a campaign to stop the 20% suggested rule – if you feel that the 20% is too much too soon, we’ve only a few days left before the deadline on the public consultation ends on Monday. If you agree with us – please sign: http://www.uplift.ie/centralbank

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