Opening remarks by Deputy Governor Sharon Donnery at the Central
Bank Conference to inform the 2021-2022 mortgage measures
framework review
26 April 2022 Speech
Ladies and gentlemen,
It is a pleasure to welcome you to our virtual event. I would like to extend a particularly warm welcome to all of our
external participants. Tá fáilte romhaibh go léir go dtí Banc Ceannais na hEireann. Thank you all for sharing your
valuable time with us over the course of this afternoon and tomorrow.1 Our capacity to make policy is greatly
enhanced by your willingness to share your experience and your expertise. Our recent strategy emphasised our aim
to be open and engaged, by listening to our stakeholders, building dialogue and learning, we can strengthen our
policy frameworks.2
We are hosting this conference at a key juncture in our mortgage measures framework review. Last summer, we
engaged with and listened to the views of the public, as well as key stakeholder and representative groups from
across industry and civil society. We gathered their perspectives on our policies through a series of roundtable style
events and an online survey. This elicited the largest response ever to a Central Bank survey. Throughout the autumn
we analysed the feedback gathered through this engagement, and complemented it with extensive in-house analysis,
culminating in a public consultation which launched in December 2021.3 That consultation closed in late March
2022, with submissions from a wide cross-section of organisations with an interest in our measures, and the
functioning of the housing market more widely. The feedback we have received from these engagements has been
useful in ensuring we understand the different perspectives others may have. As we make decisions, which will be
evidence-based and grounded in data and research, we will ensure the mortgage measures continue to meet their
goals.
This conference acts to complement the "bottom up" analysis and information gathering exercise we have been
conducting up to now. I believe we can benet greatly from engaging with academia, and policymakers and
researchers from other institutions. Today, we will hear from three of the world's leading macro-nancial
researchers, Professor David Aikman, Professor Atif Mian, and Professor Moritz Schularick. Between them and their
set of co-authors, they have been at the forefront of building the post-2008 knowledge base on the damaging role
that debt build-ups, and those relating to household debt in particular, can have on the economy at large. This
includes not only the direct build-up of risk on borrower and bank balance sheets, but the role that indebtedness
plays in creating a wide range of harmful macroeconomic imbalances that damage medium-term prosperity. The
work of David, Atif and Moritz provides a powerful underpinning for the macroprudential policy frameworks that
have been developed rapidly over the past decade.
In my remarks today, I am going to outline how we have implemented our mortgage measures, why we think the
measures have met their objectives, and the issues we are considering as part of our framework review. I will also
highlight some of the topics to be covered by the eminent policymakers who have kindly agreed to join us
throughout the rest of the conference.
The objectives of the mortgage measures in Ireland
One of our key goals in the Central Bank of Ireland is to safeguard nancial stability - ensuring that the nancial
system can absorb, rather than amplify, adverse shocks, and that banks can continue to serve households and
businesses through times of stress. The active use of macroprudential policies, including our mortgage measures, is
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key to meeting this goal.
In Ireland, we have had two main pillars of our macroprudential policies, the bank capital measures and the
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mortgage measures. For bank capital, we have a number of instruments, including the countercyclical capital buffer
(CCyB); the other systemically important institutions buffer (O-SII); and, the systemic risk buffer (SyRB). We are
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currently conducting a review of our bank capital framework, which will conclude later this year.
The mortgage measures were introduced at a time when the banking system was only beginning to emerge from the
catastrophic damage caused by the 2008 nancial crisis. This crisis had an unsustainable real estate lending boom at
its heart. House prices had been recovering from their trough in 2013, but the affordability challenges that have
caused such difculties for so many households were only beginning to emerge.
Since their inception, the mortgage measures have had two clearly stated aims: increasing the resilience of banks
and borrowers to negative economic and nancial shocks, and dampening the pro-cyclicality of credit and house
prices so a damaging credit-house price spiral does not re-emerge. Our policy approach, both in introducing those
measures during 2015 and in evaluating them ever since, has been evidence-based, grounded in data and research.
We must remain clear that there is a distinction between our aim to mitigate the damaging role that credit can play
in housing markets, and an explicit targeting of house prices. Housing markets are complex, with many different
stakeholders and prices are inuenced by a variety of factors, both domestic and global, which are outside the
control and mandates of central banks. Targeting house prices is not the aim of macroprudential mortgage measures.
Our assessment up to now is that the measures have been successful against both of these stated aims. Our data tell
us that lending over recent years has been happening at much lower loan-to-income ratios than at a broadly similar
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point in the pre-2008 cycle. Measuring the precise role that the measures have played in promoting borrower and
lender resilience to shocks is difcult in the absence of a widespread shock to repayment capacity. The policy
response to the pandemic in March 2020 ensured that such an event was thankfully avoided. Nonetheless, the usage
of moratoria, or "payment breaks" during that period helps to provide evidence of these benets. Our research tells
us that borrowers with lower loan-to-income and loan-to-value ratios at mortgage origination were less likely to
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require payment breaks in response to the pandemic shock. This conrms prior research from the nancial crisis
period that, the higher the loan-to-income or loan-to-value ratio, the greater the default risk, ndings that provide
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rationale for restricting credit with loan-to-income and loan-to-value instruments.
Similarly, the precise role that the measures have had in limiting mortgage-housing feedback loops can be difcult to
pin down. Of course, we simply cannot observe how the Irish economy would have evolved in the absence of the
measures, a well-known challenge facing macroeconomic policymakers. Nonetheless, across a number of research
methods, our assessment again is that the measures have been effective. Our survey of property price professionals
showed that the measures had a substantial dampening effect on house price growth expectations after
introduction. This is an important channel given the role played by beliefs in price formation in housing. In addition,
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credit growth has remained relatively subdued in recent years. Another technique compares counties, some of
which had higher loan-to-income ratios in 2014. These counties were more likely to be affected by the measures.
The research shows that house prices moderated substantially more in these counties during 2015 and 2016, a likely
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consequence of the disproportionate dampening effect of the measures. Based on different modelling approaches
carried out by the Bank and the Economic and Social Research Institute, estimates show that house prices, and the
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house price to income ratio, would have been higher in the absence of the measures.
The potential role that the measures have played in mitigating further damaging credit-house price feedback loops
may seem academic to a potential rst time buyer household struggling to purchase their rst home. Context is
crucial here, and we must always remain clear with the public on what we believe the measures can and cannot
achieve. The measures were introduced in an era where housing supply has been slow to respond to price growth,
both globally and in Ireland. There are several factors that are likely contributing to the slower response of housing
supply to house prices, exacerbated by long-running cost pressures in the construction sector. These have been
compounded more recently by pandemic-related supply chain issues and the Russian invasion of Ukraine. There are
societal risks with simply allowing households to borrow more, only so that they can purchase housing at even
higher prices due to elevated construction costs. A policy framework that can deliver lower construction costs,
greater supply, lower house price to income ratios and less indebtedness is far superior to one in which a higher cost
base and great indebtedness are hard-coded into the system.
While acknowledging the benets that the mortgage measures provide, we are of course aware that, like any policy,
the measures also impose economic costs. An important development in our framework review so far relates to the
principle that the mortgage measures framework will take into account the costs that the measures impose on the
Irish economy. The Central Bank will continue to develop tools that aid the assessment of trade-offs between
benets and costs. This will bring a more formalized and structured approach to cost-benet assessment of the
measures.
Our review of the mortgage measures framework
This brings me to the reasons that we are conducting our framework review, and what we hope to achieve. Each year
since 2016, we have reviewed the mortgage measures against their stated objectives. In the past, changes
implemented during these reviews have included an increase in the loan-to-value limit for some rst-time buyers,
and changes to the size and composition of allowances above the limits. We had our review as usual in 2021, but we
also started the process of doing something signicantly different in parallel: an overarching review of the entire
framework around the mortgage measures. In this framework review, we are assessing deeper, longer-term issues to
ensure our policy framework remains t for purpose, not just now, but into the future.
Our opening session tomorrow morning will allow us to gather lessons from a deep well of policy-making expertise,
featuring three eminent global policymakers, Deputy Governor Christian Hawkesby, Head of Financial Stability Ana
Cristina Leal and Executive Director Torbjorn Haegeland from the macroprudential authorities of New Zealand,
Portugal and Norway, respectively. Given the increased usage of these measures since the global nancial crisis, this
is an ideal opportunity to take a step back and hear a variety of international perspectives.
It is now seven years since the introduction of the measures, and much has changed in the global economy since
then. Up until this past year, a lot of focus had been placed on the role that deep, long-running forces like
demographics, productivity, globalisation and inequality had played in lowering the "natural rate" of interest in the
global economy. Borrowing costs have fallen substantially, both globally and in the Irish mortgage market, since
2015. Despite all that, the pandemic and the invasion of Ukraine have now moved the possibility of interest rate
increases to the forefront of all of our minds. Although as President Lagarde recently outlined in the context of the
euro area, the Governing Council of the ECB "will maintain optionality, gradualism and exibility in the conduct of
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monetary policy".
At the same time, the Irish housing market has changed markedly, with the supply response being weaker than one
might have expected given the uplift in prices since 2013, and a range of other changes including the emergence of
institutional investment, predominantly in the private rented sector. All of these forces play a role in shaping the
operating environment in which we must set macroprudential policy for the Irish mortgage market. Our panel
discussion tomorrow with our former Governor Patrick Honohan, the Bank of Finland's Deputy Governor Marja
Nykänen, and the Bank of England's Executive Director Sarah Breeden, will help us greatly in thinking through the
implications of these deep, long-run changes on our policy frameworks.
Conclusion
So in summary, this conference provides an excellent opportunity to continue strengthening our policy frameworks
by listening to our stakeholders and building dialogue. We believe our macroprudential mortgage measures have
been effective in meeting their goals since we introduced them in 2015. Our review is crucial for us to ensure the
measures continue to meet their goal in the years to come.
After this event, we will move towards nalising our mortgage measures framework. This feedback from this
conference, in addition to the feedback garnered from our public engagement together with further research and
analysis by the Central Bank, will inform the nal conclusions on the design of the framework and the implications
for the calibration and implementation of the mortgage measures. The framework review is due to conclude in the
second half of 2022.
I wish you all a lovely afternoon and I hope that you all have a productive conference.
1
I would like to thank Fergal McCann for his contribution to my remarks.
2
See here for more information on our Strategic Plan.
3
See here for further details.
4
Donnery, Sharon. Macroprudential Policy in the Irish Mortgage Market: Taking Stock. Remarks delivered at Bank of
Lithuania Macroprudential policy conference 2021 (5 October 2021).
5
See here for further information on our macroprudential policies.
6
Makhlouf, Gabriel. Remarks on the publication of the Financial Stability Review 2021:2. (25 November 2021).
7
As measured by when aggregate price to income ratios were similar.
8
Gaffney, E., and Greaney, D., 2020. COVID-19 payment breaks on residential mortgages. Central Bank of Ireland,
Financial Stability Note, Vol. 2020, No.5.
Hallissey, N., Kelly, R., and O'Malley, T., 2014. Macro-prudential Tools and Credit Risk of Property Lending at Irish
banks. Central Bank of Ireland, Economic Letter, Vol. 2014, No.10. Kelly, R. and McCann, F., 2016. Some defaults are
deeper than others: Understanding long-term mortgage arrears. Journal of Banking & Finance, 72, pp.15-27.
Kelly, R., O'Malley, T., and O'Toole, C., 2015. Designing Macro-prudential Policy in Mortgage Lending: Do First Time
Buyers Default Less? Central Bank of Ireland, Research Technical Paper, Vol. 2015, No.2.
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Financial Stability Review 2021:II, Central Bank of Ireland.
11
Acharya, V.V., Bergant, K., Crosignani, M., Eisert, T. and McCann, F.J., 2020. The anatomy of the transmission of
macroprudential policies (No. w27292). National Bureau of Economic Research.
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Hallissey, N., O'Brien, M., and Velasco, S., 2019. Estimating the impact of mortgage measures on the housing
market. Central Bank of Ireland, Financial Stability Review 2019:II, Box 6. McQuinn, K., 2021. House prices and
mortgage credit: Empirical evidence for Ireland - An update. Economic and Social Research Institute, QEC Research
Note.
13ECB Monetary Policy Statement , 14 April 2022.