House prices would be nearly 9% higher without the strict mortgage rules of the Central Bank of Ireland, a study by the Institute for Economic and Social Research (ESRI) has found.

Macroprudential rules, introduced in 2015 to stop another credit-fueled real estate bubble, limit the amount that banks can lend to mortgage borrowers.

The ESRI study found that there was “a mutually reinforcing relationship” between mortgage credit and house prices. In other words, a movement in one causes an equivalent movement in the other.

The study estimated that the Central Bank’s rules had reduced the average mortgage amount here by 8%, mostly since 2018, and therefore average house prices were 8.8% lower.

“The results of the analysis highlight the strong and continuing relationship between mortgage credit and house prices in the Irish market, and the effectiveness of macroprudential regulations in limiting the increase in the average loan size,” said Kieran McQuinn of ESRI.

He said they also show that the relationship between credit and house prices that preceded the 2008 housing crash still applies today.

“So there is always the potential for another house price spiral, mortgage credit in the absence of rules. It is clear that if you were to loosen the rules significantly, the danger is that the average loan amount starts to rise again and this would then have an impact on house prices, ”McQuinn said.

Central Bank rules restrict a mortgage’s loan-to-value limits to between 70 and 90 percent of a property’s value, while a separate loan-to-income rule limits consumers to borrowing 3½ times their salary. Banks can, however, violate these limits for a certain portion of their loans, although these exemptions have been largely frozen since the lockdown restrictions on Covid-19 were first introduced last March.

Mortgage measures

In Monday’s separate event, Deputy Central Bank Governor Sharon Donnery said counterfactual analyzes showed that “house price levels could have been around 25% higher in the year before the pandemic if the mortgage measures had not been in place “.

The estimate was for the four-year period from the introduction of the rules in 2015 to March 2019 and was calculated using a different model than ESRI. Ms Donnery said macro-prudential rules had helped the financial sector “absorb rather than amplify the shock of the pandemic”.

House prices rose an average of 2.2% last year despite forecasts that the pandemic would trigger a drop in property values.

The latest data from the Central Statistics Office (CSO) shows that despite the rise in recent years, residential property prices in Dublin are still 21.8% below their February 2007 peak, while house prices in the rest of the state are 18.1% below their peak in May 2007.