Niamh Hallissey's (Macroprudential Policy Manager, Central Bank of Ireland) presentation on FIN-FSA Conference on EU Regulation and Supervision – focusing on household indebtedness and macroprudential stability

1. Conference on Household Indebtedness and
Macroprudential Policies in Helsinki
Central Bank of Ireland - RESTRICTED
The Irish housing cycle: from boom to bust and beyond
Niamh Hallissey, November 2018

2. 2
Disclaimer
These views are my own and not the views of the Central Bank of Ireland or the
European System of Central Banks
Central Bank of Ireland - RESTRICTED

3. 3
Overview
Irish housing cycle in the 2000s
Introduction of macroprudential measures in 2015
Recent experiences
Central Bank of Ireland - RESTRICTED

4. 4
Irish housing cycle in the 2000s
Central Bank of Ireland - RESTRICTED

5. 5
International Housing Cycle
Central Bank of Ireland - RESTRICTED
Source: Federal Reserve Bank of Dallas international house price dataset https://www.dallasfed.org/institute/houseprice
Green line denotes Ireland and blue line denotes Finland.
International house price indices

6. 6
(Some of the) main drivers of the Irish housing bubble in 2000s*
Strong economic growth – initially driven by convergence – but post 2003 driven by a
boom in investment in housing and commercial property.
Expansion in property investment fuelled by rapid credit expansion.
Credit expansion relied increasingly on international wholesale markets for funding.
Increased competition in the market contributed to very low loan spreads and a loosening
of lending standards.
Loosening lending standards a strong driver of house prices.
Feedback mechanisms amplified the boom.
Final trigger for economic collapse: global financial crisis.
Central Bank of Ireland - RESTRICTED
For further reading see Lane, P (2010), The Irish Crisis, CEPR Discussion Paper No. 8287 and
Honohan, P. (2010), The Irish banking crisis – regulatory and financial stability policy 2003 – 2008.

7. From boom to bust and beyond…
Sources: BPFI, DoHPCLG, CSO, ESRI/PTSB and Central Bank of Ireland calculations.
Central Bank of Ireland - RESTRICTED

8. 8
Role of lending standards
Central Bank of Ireland - RESTRICTED
Source: Central Bank of Ireland

9. Household indebtedness
9
Central Bank of Ireland - RESTRICTED
Source: Central Bank of Ireland
0
50
100
150
200
250
0
50
100
150
200
250
Source: ECB and CBI calculations
Note: Data refer to 2018Q2
Irish household debt indicators
Cross-country comparison of European household indebtedness
Per cent of disposable income
15
20
25
30
110
130
150
170
190
210
230
2003Q2
2004Q3
2005Q4
2007Q1
2008Q2
2009Q3
2010Q4
2012Q1
2013Q2
2014Q3
2015Q4
2017Q1
2018Q2
%ofTotalAssets
%ofDisposableIncome
Debt to Disposable Income(LHS) Debt to Total Assets (RHS)

10. 10
Cross-country comparison of European household indebtedness, 2014Q1-2018Q1
Central Bank of Ireland - RESTRICTED
0
50
100
150
200
250
Denmark
Netherlands
Sweden
Ireland
UnitedKingdom
Finland
Belgium*
Spain
Portugal
France
Euroarea19
Greece**
Austria
Germany
Percentofdisposableincome
2014Q2 2015Q2 2016Q2 2017Q2 2018Q2
Source: Central Bank of Ireland
Notes: * latest data Q1 2018 ** latest data Q4 2017

11. Estimated Gross Cost of Crisis
11
Central Bank of Ireland - RESTRICTED
Source: Bova, Elva, Marta Ruiz-Arranz, Frederik Toscani, and H. Elif Ture. 2016. The Fiscal Costs of Contingent
Liabilities: A New Dataset. IMF Working Paper WP/16/14. Washington: International Monetary Fund

12. 12
Introduction of macroprudential measures in 2015
Central Bank of Ireland - RESTRICTED

13. The recovery
The early stages
Economy started to turn around – exited EU IMF
support programme in 2013.
House prices already rebounding quickly (16% in
2014).
Although credit still contracting, new mortgage
lending beginning to pick up.
Banks’ lending standards much improved post crisis.
Supply shortages in the housing market.
Why consider macroprudential measures?
Important to introduce early in the cycle, before
vulnerabilities build up.
Intended as permanent measures in the market –
maintaining prudent lending standards.
Elevated vulnerabilities following crisis (high NPLs,
LTVs/LTIs).
13
Central Bank of Ireland - RESTRICTED

14. Relationship between lending standards at origination and losses
Relationship between LTI ratios and defaults by
originating year
2002
2004
2005
2007
2008
2009
All
0%
5%
10%
15%
20%
25%
Defaultrate
Originating LTI
Relationship between LTV ratios and loss given
default by originating year
2003
2004
2005
2006
2007
2008
2009
All
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
(5,10]
(10,15]
(15,20]
(20,25]
(25,30]
(30,35]
(35,40]
(40,45]
(45,50]
(50,55]
(55,60]
(60,65]
(65,70]
(70,75]
(75,80]
(80,85]
(85,90]
(90,95]
(95,100]
LGD
Originating LTV
14
Central Bank of Ireland - RESTRICTED

15. 15
Mortgage measures
Central Bank of Ireland - RESTRICTED
First Time Buyers (FTBs) InvestorsSecond and Subsequent Buyers (SSBs)

16. Introduction of mortgage measures in 2015
Objectives of the measures:
 Increase the resilience of banks and borrowers to
negative economic shocks.
 Dampen the feedback loop between credit and house
prices.
Combination of LTV and LTI:
 Ratios naturally complement each other in reducing
risks.
 LTVs may not be sufficiently countercyclical.
Proportionate caps
 Allows an appropriate balance between flexibility and
maintaining prudent lending standards.
 Avoids an overly prescriptive approach and leaves
responsibility for individual exemptions with banks.
16
Central Bank of Ireland - RESTRICTED

17. Some country-specific features
Treatment of first time buyers Treatment of investment lending
17
Central Bank of Ireland - RESTRICTED
Source: Central Bank of Ireland
FTB first time buyer; SSB second and subsequent buyer; BTL buy to let; PDH primary dwelling home.
Lending for investment properties riskier at each LTV level

18. 18
Recent experience
Central Bank of Ireland - RESTRICTED

19. 19
Monitoring effectiveness – annual review
Central Bank of Ireland - RESTRICTED
Evaluation of
the measures
Objectives of the
measures:
1. Enhance the resilience of
banks and borrowers to future
shocks
2. Limit pro-cyclical dynamics
between credit and house prices
Potential side effects:
Rental market
Housing supply
Unsecured lending
Borrower impact
Other issues:
Is the original framework still
appropriate?
Is the calibration appropriate?
Evidence
Governance
Communication
Credibility
Effectiveness

20. Allowances are being used
First time buyer new lending H1 2018 Second & subsequent buyer new lending H1 2018
20
Central Bank of Ireland - RESTRICTED
Source: Central Bank of Ireland

21. 21
Allowances are being used
Banks making use of allowances
Market has established a 90 per cent LTV limit on all new mortgage lending.
Very few borrowers get both LTV and LTI allowances.
Characteristics of borrowers getting allowances
LTV allowances are more prevalent among SSBs, high-income borrowers and couples.
LTI allowances are more prevalent among FTBs, low-income borrowers and single
persons.
Central Bank of Ireland - RESTRICTED

22. Rule are becoming more binding
22
Central Bank of Ireland - RESTRICTED
Allowances are concentrated Dublin
Mean characteristics with or without an LTI allowance 2017
Use of allowances over time
Source: Kinghan et al (2018),
Macroprudential measures and
Irish mortgage lending: an
overview of 2017, Central Bank
of Ireland Financial Stability
Notes No. 1, 2018
FTB LTI allowances Without With
Income (€) 71,605 69,641
Borrower age 34 33
Single (%) 53 68
Dublin (%) 28 63
SSB LTI allowances Without With
Income (€) 107,874 95,879
Borrower age 41 38
Single (%) 19 30
Dublin (%) 38 69

23. House prices continue to grow strongly
House price growth still growing strongly but is
moderating (close to or above fundamentals).
Price increases driven by more robust developments
at the lower end of the price distribution where
mortgage financing is less prevalent.
Limits of influence of macroprudential policy on
house prices.*
23
Central Bank of Ireland - RESTRICTED
CSO RPPI and annual change: National and Dublin
Source: CSO
Last observation: August 2018
index (Jan 2005 = 100) per cent
-40
-30
-20
-10
0
10
20
30
40
40
60
80
100
120
140
160
05 06 07 08 09 10 11 12 13 14 15 16 17 18
National Y-on-Y growth Dublin Y-on-Y growth
National (lhs) Dublin (lhs)
* See Gaffney, E., Residential property price segments and mortgage finance, Central
Bank of Ireland Financial Stability Note Vol. 2018, No. 11

24. Pace of mortgage lending remains strong
Pace of mortgage lending remains strong.
Scope for further sustainable increases in overall
new lending.
No indication of a general easing of credit
standards.
Overall there is little evidence of a credit-price
spiral emerging.
24
Central Bank of Ireland - RESTRICTED
Source: Central Bank of Ireland calculations
Last observation: 2018Q2
Note: The black dotted line denotes an NMDI ratio threshold derived based on long-run structural
determinants
See Keenan, E. and M. O’Brien, New mortgage lending activity in a comparative context, Central
Bank of Ireland Economic Letter Vol. 2018, No. 5.
New mortgage lending to disposable income (NMDI) ratio
per cent per cent

25. Supply shortages continue to be an issue
25
Central Bank of Ireland - RESTRICTED
Stock listed for sale or rent on Daft.ie
Source: Daft.ie
Last observation: June 2018
units units
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
07 08 09 10 11 12 13 14 15 16 17 18
Nat'l stock for sale (lhs) Nat'l stock for rent (lhs)
Dublin stock for sale (rhs) Dublin stock for rent (rhs)
New dwellings
Source: CSO
Note: UFHD refers to unfinished housing developments
Units units
0
5,000
10,000
15,000
20,000
25,000
0
5,000
10,000
15,000
20,000
25,000
11Q4 12Q4 13Q4 14Q4 15Q4 16Q4 17Q4
New Dwelling Completions UFHD
Reconnections Non-Dwellings

26. 26
Other macroprudential tools have been activated
The resilience of the Irish financial system to mortgage lending and housing market
developments has been complemented by the activation of the countercyclical capital
buffer (CCyB) at 1%, from July 2019.
Objective of the CCyB is to increase the resilience of the banking sector to cyclical
systemic risk.
Building resilience an important objective for the Central Bank given the risks evident
internationally and domestically and given the nature of the Irish economy.
Mortgage measures and CCyB reinforce each other in fostering resilience.
CCyB can also help mitigate against risk-taking in non-mortgage lending.
Central Bank of Ireland - RESTRICTED

27. 27
Some lessons learned (1)
The importance of:
Communication with all stakeholders
Empirical evidence and transparency
Regular evaluation
Introducing early in the cycle
Learning from other country experiences
Central Bank of Ireland - RESTRICTED

28. 28
Some lessons learned (2)
Design of borrower-based measures should reflect:
Objectives of measures
Analytical underpinnings
Country specific factors
Allowances – a useful communication tool
Trade-off when calibrating allowances / level of limits
Central Bank of Ireland - RESTRICTED

29. 29
In conclusion
Ireland’s experience highlights importance of maintaining prudent lending standards
through the cycle.
Loosening lending standards one of the driver’s of the house price bubble.
Experience to date corresponds with international evidence on the effectiveness
of LTV / LTI measures.
Combinations of macroprudential measures is particularly important for a small
open economy.
Clear objectives, rigorous evidence, transparent governance and communication all
contribute to credibility and ultimate effectiveness of these policies.
Central Bank of Ireland - RESTRICTED

30. 30
Thank you
Central Bank of Ireland - RESTRICTED