Concerns bank lending rules will hit housing loans

Funding gap could restrict residential development over the next five years, writes Michael Cogley

THE Irish banking system could be unable to meet the needs of the mortgage and construction lending markets in five years’ time, a new government study has warned.

In an as-yet unpublished report titled ‘The Funding Gap’, the Department of Finance stated that Irish banks needed to double their loan-to-deposit ratio from 0.8 to 1.6 by 2024 in the event that 50,000 new homes were needed each year. Estimates for the number of new homes needed in the coming years vary dramatically, with some estimates as low as 18,000 a year while others forecast 50,000.

The ratio means that for every €100 the bank is lending currently it is holding €80 on deposit. Finance suggests that banks need to grow that to a level where for every €100 lent they would have €160 on deposit.

“Although the loan-to-deposit ratio is not a sufficient measure of the overall stability of the banking system, a rise of this magnitude may be problematic,” the department stated.

“Institutional investment in the residential sector has the potential to reduce reliance on bank funding for development, which is important in building broader capital markets.”

The report stated that investors would also help “de-couple the financial health of the banking system from the vagaries of the residential investment cycle”. Finance also described housing as a “historically volatile asset class”.

A number of socio-economic issues were raised by the Department as cause for concern of a growing influence of institutional investors in Ireland’s property market.

These included a reduction in the ability of a first-time buyer to purchase a home in their own locality. It also warned that investors had typically serviced the “premium” end of the market and that it was “unlikely to have a direct impact on increased affordability”.

Finance also suggested that an over-reliance on these investors would force average income earners out of purchasing or renting from the private rental market.

Financial expert Karl Deeter said that banks would not be able to lend at the levels needed in the department’s hypothetical scenario.

“Our system cannot cope with the demands that will be necessary in the years to come to fund housing, to fund the supply of construction and mortgages,” he told the Sunday Independent.

“Where are these deposits going to come from to get the ratio up to 1.6? The money needs to come from somewhere, and in this case it looks as though the shortfall will be met by institutional investors.”

Deeter said that Ireland was facing a “catch-22” situation as he said that banks would not be able to amass the deposits needed to meet demand.

“The problem from an indigenous perspective is that it will do massive damage if institutional investment crowds out individual investment,” he said. “It isn’t a good idea to outsource home ownership.”