By Padraic Halpin
DUBLIN (Reuters) - Ireland's central bank proposed restrictions on how much banks can lend to home buyers on Tuesday in a bid to reduce the risk of a new property bubble forming as prices recover rapidly from a crash.
A combination of reckless lending and lax regulation during Ireland's "Celtic Tiger" era helped fuel a property bubble that dragged the country into an international bailout after it burst and left the surviving banks in need of expensive state rescues.
With property prices in Dublin rising by 25 percent year-on-year in August, although they were still 41 percent below their pre-crisis peak, the central bank said it was appropriate to bring in limits on new lending at high loan-to-value (LTV) or loan-to-income (LTI) ratios.
"Ireland has experienced a devastating property bubble that was triggered by excessive lending by banks and excessive borrowing by households. It is essential that we avoid a repetition of this," central bank deputy governor Stefan Gerlach told reporters.
The proposed measures will require banks to restrict lending above 80 percent of the value of a home to no more than 15 percent of the aggregate value of all housing loans. They will also restrict lending above 3.5 times the borrower's gross income to no more than 20 percent of that aggregate value.
The proposals, contained in a consultation paper that banks have until Dec. 8 to respond to, also include a lower threshold for buy-to-let properties. They require banks to limit loans of over 70 percent of the value of investment properties to 10 percent of all buy-to-let loans.
Gerlach said while there was no evidence that the revival in house prices was driven by credit expansion and that the measures were not aimed at limiting or steering prices, they would probably have an impact on the pace of increases.
The rebound in prices is being driven by a lack of supply and the central bank has warned that a protracted delay in addressing housing shortages, particularly in Dublin, has the potential to put prices on an unsustainable path again.
LENDING CONCERNS RETURNING
Ireland's head of financial regulation, Cyril Roux, said there was concern that the market was getting back to a place where some borrowers were taking out loans where their ability to repay was tenuous.
While the volume of new lending last year was low, 1.3 billion euros worth compared to an annual 28 billion euros at the height of the boom, 44 percent of new lending would have crossed the 80 percent LTV limit, the central bank said. The LTI rate was closer to the threshold at 23 percent.
It also highlighted that Irish households and banks were more exposed to the property sector than most euro zone peers, with house purchases composing over 80 percent of the total stock of lending to households and mortgage loans making up almost 60 percent of the total stock of loans by Irish banks.
Roux said is was not the bank's intention to limit the overall volume of mortgage lending but that banks having more room to lend to small business and the corporate sector would "certainly be nothing to hide away from."
Analysts said the measures would likely represent another headwind for the profitability of lending at the countries main banks at a time when the low interest rate environment is hurting their tentative return to profitability.
"The imposition of prudential caps on new mortgage lending is likely to temper the recovery in the Irish property market, reducing the pool of eligible first-time buyers," said Ciaran Callaghan, an analyst at Merrion Stockbrokers.
"However, over the medium to longer term, we expect the market to adjust to the new regulatory caps, with their implementation potentially helping to de-risk the Irish banking sector and enhance valuation multiples."
(Editing by Janet Lawrence)