Macroprudential Policy in a Recovering Market: Too Much too Soon

The aftermath of the 2007/08 financial crisis has resulted in many Central Banks and regulatory authorities examining the appropriateness of macroprudential policy as an effective and efficient policy option in preventing the emergence of future credit bubbles. Specific limits on loan-to-value (LTV) and loan-to-income (LTI) ratios have been assessed and applied in a large number of markets both in developing and developed economies as a means of ensuring greater financial stability. The Irish property and credit market were particularly affected in the crisis as the domestic housing market had, since 1995, experienced sustained price and housing supply increases. Much of the activity in the Irish market was fuelled by a sizeable credit bubble which was greatly facilitated by the growth of international wholesale funding post 2003. After a period of pronounced declines, Irish house prices in late 2013 started to increase significantly. In early 2015, the Irish Central Bank responded by imposing new LTV and LTI limits to curb house price inflation. However, the introduction of these measures comes at a time when housing supply and mortgage lending are at historically low levels. In this paper we use a newly developed structural model of the Irish property and credit market to examine the implications of these measures for house prices and key activity variables in the mortgage market.