The Economic and Social Research Institute’s latest commentary takes a fairly sanguine view of our economic prospects, with growth expected to remain strong despite the impact of Brexit. Indeed the ESRI believes the economy is approaching full capacity and that no tax cuts are thus justified in the Budget.
However, the ESRI commentary on the Central Bank’s mortgage rules is likely to lead to most discussion. The ESRI has run the numbers and calculates that the rules will have a significant impact in the longer term.
If left in place as they are, the institute calculates that mortgage lending will be 15 per cent lower in three years time than would otherwise have been the case – and that this lower level of demand would knock on to a 3.5 per cent lower house price level.
In turn this would mean that the level of new house building would be five per cent lower in each quarter than what would have been the case, as the amount of profit on offer to builders would be that much lower.
These calculations show a significant enough impact. But, of course, the point of the rules is that they should have an effect: by stopping people from borrowing unreasonably large amounts of money which they might struggle to repay.
We know from the days before the economic crash that 100 per cent mortgages, given out with little relation to the income of the borrower, store up significant risk. It is perhaps a commentary on the short-sighted nature of bankers that the Central Bank believes restrictions are needed to stop this happening again.
The Central Bank has faced calls from the industry and from politicians to soften its approach. Some tweaking may, indeed, be appropriate. But the ESRI research does not mean the rules should be torn up.
There are a host of factors which are limiting the supply of new houses – the key problem in the market – and addressing these can still lead to a steady flow of new properties. The last thing we need is another generation of young borrowers getting into mortgage arrears trying to buy houses they cannot afford.