A gap in current policies for Irish financial stability

In a recent speech, the Deputy Governor of the Central Bank of Ireland, Sharon Donnery, floated the prospect that the CBI might impose Counter Cyclical Capital Buffers (CCyB) on Irish banks, in order to guard against an unstable credit build-up in the currently strong economic environment. She also used the speech to discuss current conditions in the Irish financial system and review the macroprudential regulation policies of the CBI.

In many ways, Irish macroprudential regulation has been exemplary, but there is a glaring defect. Stanga et alia (2017 and 2018) compare 26 countries regarding mortgage arrears, financial stability and macroprudential policies, and Ireland’s profile is remarkably poor. As Stanga et al. note, controlling mortgage arrears is a key objective of macroprudential policies, and Ireland has very poor performance by this metric.

Ireland’s intractable mortgage arrears problem stems in large part from its defective legal system regarding loan security, with extremely limited lenders’ rights to collateral repossession. This defect in turn limits the reliability of Ireland’s quite restrictive macroprudential policies. As Stanga et al. state in their international overview:

“Better institutions – which improve judicial efficiency and make it easier for banks to enforce their rights – reduce the level of mortgage defaults. We consider several proxies for institutional arrangements and compile an index of institutional quality (IQ). We find a significant and negative relationship between IQ and mortgage arrears, both before and after the onset of the financial crisis – the higher the average quality of institutions, the lower the average mortgage default ratio (Figure 3). Moreover, the effects of macroprudential policies and institutional quality on mortgage defaults are mutually reinforcing. As illustrated in Figure 4, the effect of the MPI [Macro Prudential Index] on defaults becomes stronger in countries with better institutions. This result suggests that the effect of tougher macroprudential policies (that reduce household leverage and ultimately deter defaults) is amplified in an institutional environment conducive to an efficient judicial system with better protection for lenders’ rights and better enforcement capabilities.”

In addition to making banks more cautious, the limited-repossession system in Ireland makes the CBI more stringent in its macroprudential squeeze on credit flows. The prospect of a future spike in mortgage defaults is a key concern for the CBI, along with the high average loss-give-default in such a scenario. Because of this, the CBI is correct to stamp down hard on any signs of substantial credit flow into the domestic housing market.

When it comes to tackling the underlying defect in the Irish system (the too-limited repossession rights of lenders) the CBI has taken the line that this is somebody else’s problem. The CBI harangues the government endlessly on tax and spend policies (which are also not strictly the CBI’s problems) but when it comes to addressing the big defect in the Irish system regarding repossession, the CBI is as quiet as a mouse.

Who is paying for this unusual Irish system of extremely-limited repossession rights? Nondelinquent mortgage borrowers pay for the limited-repossession system since their mortgage interest rate includes the expected cost of default, capturing both a high probability of default and a high loss given default. Households looking for mortgages suffer in two ways: one, the Irish limited-repossession system makes mortgages more difficult to obtain; two, the system has a knock-on effect on housing construction: property development is a high-risk business and with no guarantee of mortgage-ready buyers, developers are extra-cautious.

The net effect of the Irish limited-repossession system on housing prices is indeterminate since there are opposite effects on the demand and supply sides. Cash buyers might benefit or lose on a net basis: they lose from the decrease in house construction (hence higher prices) but benefit from reduced bidding competition against mortgage-based buyers. Existing mortgage holders (other than defaulters) lose, and prospective mortgage holders lose twice over.

At the conclusion of her speech Donnery states:

“While there are uncertainties placing a precise value on the short-term benefits and costs, in the longer-term, increasing the margins of safety in an uncertain world is of benefit to all.”

Consider a young Irish household wishing to buy a family home using mortgage finance. In exchange for a mortgage loan, they might be willing to take a chance that they lose the house in some future scenarios if things turned out badly and they could not pay the loan back. They want a house now and are willing to take a chance on the future. Such a mortgage contract is not legally available to them in Ireland nowadays, since repossession can only be enforced in ridiculously limited circumstances and, due to this legal reality, banks are not allowed to issue mortgage loans unless they are virtually default-risk-free. The young household will have to rent or live with parents, for many years into their future.

The Irish financial system, where there is virtually no chance of receiving a default-risky mortgage and even less chance that such a loan could end with repossession, is not of benefit to all. For many people in many circumstances, risk is good.

Conniffe and Norvartis Prizes

The annual conference of the Irish Economic Association was held on the 10th and 11th of May at the Central Bank. More than 160 people attended the conference.

Alejandra Ramos (TCD) was awarded the Conniffe Prize for best paper by a young economist at the conference. Alejandra received the prize for her paper titled “Household Decision Making with Violence: Implications for Transfer Programs”.

Benjamin Elsner (UCD) and Florin Wozny (IZA) won the Novartis prize for the best paper in Health Economics at the conference. The winning paper was titled ” The human capital cost of radiation: Long run evidence from exposure outside the womb”

Prof Wendy Carlin (UCL) and CORE gave the ESR lecture “The Econ 101 paradigm is broken – what is the alternative?” Her slides from the talk

IEA Dublin ESR Guest Lecture 2018

Prof Olivier Blanchard (Peterson Institute) gave the Edgeworth lecture “Should we reject the natural rate hypothesis” His slides from the talk

Edgeworth Lecture IEA 2018

On the IEA website there are plenty of pictures from the conference

http://www.iea.ie/category/latest-news/

Gerard O’Reilly

Central Bank of Ireland: Financial Stability Notes

The Central Bank of Ireland has today published its first Financial Stability Note. This new series will cover financial stability related topics including those relating to risks and vulnerabilities facing the Irish and European financial system.

 

The Note, ‘Macroprudential Measures and Irish Mortgage Lending: An Overview of 2017’, by Christina Kinghan, Paul Lyons and Elena Mazza, provides an overview of new residential mortgage lending in Ireland in 2017. It describes key loan and borrower characteristics of loans subject to the Central Bank’s Mortgage Measures along with a comparison to lending in 2016. The Note also provides details on loans with an allowance to exceed the loan-to-value (LTV) and loan-to-income (LTI) limits, as permitted under the Measures. 35, 472 new loans are examined, with a value of €7.4 billion.

 

The key findings of today’s Financial Stability Note are:

 

  • First-time-buyers (FTBs) in 2017 had an average LTV of 79.8% and an average LTI of 3 times gross income. This represents a marginal increase on the average LTV and LTI ratios reported in 2016. FTBs also had a larger loan size, property value and income compared to FTBs one year earlier (see Table 4).
  • The average loan size and property value of second and subsequent buyers (SSBs) also increased compared to 2016. The average LTV for SSBs in 2017 was 67.6% and the average LTI was 2.6 times gross income (see Table 5).
  • A higher proportion of loans for both FTBs and SSBs were originated on a fixed interest rate compared with one year earlier.
  • 17% of the aggregate value of SSB lending exceeded the SSB LTV limit.
  • 18% of new primary dwelling home (PDH) lending exceeded the 3.5 LTI cap. This corresponds to 25% of the value of FTB lending and 10% of the value of SSB lending. A larger share of LTI allowances was accounted for by FTBs (74%) relative to SSBs (26%).
  • Allowances to exceed the LTI and LTV caps were allocated to borrowers in all four quarters of 2017 (see Table 7).

Irish Postgraduate and Early Career Economics Workshop

See below for the programme for the return of the Irish postgraduate and early career economics workshop (previously “ISNE conference”). All are welcome to attend. Thanks to School of Economics in UCD for providing financial support.

Irish Postgraduate Early Career Economics Conference

UCD Geary Institute

Friday May 4th

9am to 915am: Opening Remarks: Professor Liam Delaney (UCD), Dr. Lisa Ryan (UCD), Dr. Ben Elsner (UCD), Dr. Michelle Queally

Session 1a: 915am to 1045am Session 1b: 915am to 1045am
Sanghamatira Mukrhrejee (UCD) “Factors influencing early electric vehicle adoption in Ireland”. Aine Doran (QUB) “Population Dynamics in 19th century Ireland”.
Bryan Coyne (TCD) “The impact of a subsidised weatherisation scheme on Irish domestic energy consumption”. Gayana Vardanyan (TCD) “The long-run impact of historical shocks on the decision to migrate: evidence from the Irish Famine”.
Martin Murphy (ESRI) “Predicting farm’s non-compliance with regulations on emissions of nitrates”. Man Wing (Lorraine) Wong (UCD) “The effect of language proximity on the labour market outcomes of the asylum population in Switzerland”.
10.45am  to 11am Coffee
Session 2a: 11am to 1230pm Session 2b: 11am to 1230pm
Florian Gerth (CBOI) “Entry and Exit Dynamics of UK firms in the wake of the Global Financial Crisis”.

Patrick McHale, BA  (NUIG) & Thomas Plunkett, B.Pharm (NUIG) “Healthy Eating Meal Plan Preferences Amongst a University Population: A DCE Approach”

Tammana Adhikari (UCD) “Deals versus Rules?”. Kenneth Devine (UCD) “Mortgage Choice and Expectations”.
David Jordan (QUB) “Doomed to decline?: Interwar industrial performance and policy in Northern Ireland”. Ivan Petrov (UCD) “Information Asymmetry, Split Incentives, and Energy Efficiency in the Residential Rental Market”.
1245pm to 130pm Lunch
Session 3a: 130pm to 3pm Session 3b: 130pm to 3pm
Dora Tuda (TCD) “Does higher unemployment increase income inequality: evidence from European labour markets using a discrete choice experiment”. Iordanis Parikoglou (UCD/Teagasc). “The impact of innovation on farm level productivity: evidence from the Irish dairy sector”.
TBC Stefano Ceolotto (TCD). “The impact of moral licensing on pro-environmental behaviours”.
Philip Carthy (ESRI) “Is employment growth affected by the introduction of broadband services?: Evidence from Ireland”. Linda Mastrandrea (UCD) “Linking retail pricing policy with the decarbonisation of the electricity sector”.
Coffee 3pm to 315pm
Session 4a: 315pm to 445pm Session 4b: 3pm to 445pm
Deirdre Coy (UCD) “Health formation in an RCT Early Childhood Visiting Programme”. Eoin Corrigan (UCD) “Capricious Redistribution: The Scale and Impacts of the Local Authority Rent Subsidy”.
Anne Devlin (QUB) “Why is work-limiting disability in Northern Ireland so high?”. Stephen Byrne (CBOI) “Solving the wage puzzle: Does the ‘nonemployment rate’ explain wage dynamics?”.

 

 

 

41st Annual DEW Economic Policy Conference

The Dublin Economics Workshop (DEW) is holding its 41st annual Economic Policy Conference in the Clayton White’s Hotel in Wexford on 14/15 September 2018.

At this stage, the DEW is inviting submissions on the following six topics:

  1. All-island economy
  2. Transport & infrastructure
  3. Higher education
  4. Diversity
  5. Behavioural economics – application to policy
  6. Housing supply

All speakers will be asked to present for 15 minutes each. While a paper is not mandatory, it is preferred. If you would like to submit, please send a short abstract (c.300 words) to sarah@dublineconomics.com by 5pm on Friday 11th May.

 

Bringing the Household Back in: Comparative Capitalism and the Politics of Housing Markets

Some readers might be interested in this new working paper at UCD’s Geary Institute. http://www.ucd.ie/geary/static/publications/workingpapers/gearywp201807.pdf

The core argument is that to understand heterogeneity in house price inflation, it is vital to understand the interactive dynamics in two markets that determine homeownership: First, the labor market, which shapes households’ incomes and; second, the market for mortgages, which shape households’ access to credit financial resources.

Screen Shot 2018-04-24 at 12.29.04

SSISI Annual Symposium – Ireland 2040

The Statistical and Social Inquiry Society of Ireland will host its annual symposium this Thursday, 26th April 2018 at 5:30pm, in Chartered Accountants House, 47/49 Pearse Street, Dublin 2.

The topic of the symposium is: ‘Where’ will the Economy be in 2040? Delivering on the National Planning Framework

Speakers include:

  • Professor Henry Overman, London School of Economics and Director of the What Works Centre for Local Economic Growth
  • Paul Hogan, Senior Adviser at Department of Housing, Planning & Local Government and project manager for the National Planning Framework
  • Dr. Ronan Lyons, Assistant Professor of Economics at Trinity College Dublin

As ever, non-members are welcome to attend and participate in the discussion.