Irish Housing: A Role for Loan-to-Value Limits?

The introduction of loan-to-value (LTV) limits on mortgages might help to prevent a repeat of Ireland’s housing bubble, according to new ESRI research. An examination of the international evidence suggests that requiring house buyers to accumulate higher deposits dampens house price growth and also protects the financial system from sharp declines in house prices. The evidence suggests that countries with higher LTV ratios have experienced higher house prices and higher house price volatility. Although LTV ratios in Ireland have reduced in recent years, this represents a market response to the crisis. The introduction of LTV limits by regulators now would effectively prevent the re-introduction of 100% mortgages when the market picks up. Referring to the findings, ESRI report author, Dr. David Duffy, said: “We wouldn’t expect such measures to have an impact on the housing market at the moment, because it is very weak. However, this may be the time to put in place the policy framework to help to prevent the reoccurrence of a housing market boom in the future. The experience of Hong Kong shows that LTV limits can be actively adjusted to take account of the property market cycle.” Limits to LTV ratios are just one of the policy measures that have been considered internationally following the housing market crash. The evidence shows that the introduction of such limits can play a role in preventing unsustainable house price growth.

Note to Editors: 1. "Irish Housing: A Role for Loan-to-Value Limits?", by David Duffy (ESRI), is the 7th paper in a special series of ESRI studies that survey available evidence to address issues related to Ireland’s ongoing economic crisis. It will be published online on the ESRI website at 00:01 a.m. Wednesday 29th February.  A copy of this paper is available under embargo on request. 2. A total of 12 studies are being undertaken as part of this “Renewal” project, which is supported by FBD Trust. 3. This paper will be presented at "Financial Stability After the Crisis", a Conference to be held at the ESRI on Wednesday 29th February, which will also feature papers on macro-prudential policy and on consumers' financial decision making.