View from Dublin: prop­erty bub­ble warn­ing

Belfast Telegraph - Business Telegraph - - News - BY RICHARD CUR­RAN

THE re­cent good weather wasn’t the only thing rais­ing the tem­per­a­ture around Ire­land last week. The OECD has warned of a pos­si­ble prop­erty bub­ble and sug­gested there may be signs of over­heat­ing in the econ­omy.

As if that wasn’t enough, the Cen­tral Bank deputy gover­nor Sharon Don­nery sug­gested that it may be time to im­pose on banks a Coun­ter­cycli­cal Cap­i­tal Buf­fer (CCB).

Cur­rently set at 0%, this can go up to 2.5% of bank’s credit ex­po­sures. It would mean the banks would have to set aside size­able chunks of money to help strengthen their bal­ance sheets in the event of a rainy day.

It isn’t ex­pected to be enough to se­ri­ously cur­tail their lend­ing, but it could re­duce the amount they have avail­able to pay out in div­i­dends to share­hold­ers. In the case of 71% of AIB and 14% of Bank of Ire­land, that would see the ex­che­quer los­ing out.

There are a few things worth not­ing about all of this over­heat­ing. The OECD is look­ing at the rate of house price growth.

Where there is a short­age of sup­ply, house price in­fla­tion is enor­mous, run­ning at around 13% per year.

It has warned that if it were to con­tinue at that rate it could lead to a bub­ble — i.e. bub­bles burst and prices could fall back. This is kind of stat­ing the ob­vi­ous and sim­ply get­ting its warn­ing in early.

There is no real ev­i­dence of reck­less or tur­bocharged lend­ing from the banks. New mort­gage lend­ing is grow­ing steadily but from a very low base. Our price in­fla­tion doesn’t ap­pear to be credit-fu­elled.

This doesn’t mean prices couldn’t fall back. It just means that if they lev­elled and then dropped in value it wouldn’t be as calami­tous as the last time.

As for the coun­ter­cycli­cal CCB, it is a draw­back for the State as a ma­jor bank share­holder. It re­ally does ap­pear that reg­u­la­tors will not let an­other bank­ing cri­sis hap­pen — un­less it is in Italy of course, where all of the foun­da­tion work has al­ready been laid.

The Cen­tral Bank is watching two key cri­te­ria in de­cid­ing whether there needs to be a CCB put in place. Its main in­di­ca­tor is the “credit gap” — the de­vi­a­tion of the credit-to- GDP ra­tio from its long run trend.

If avail­able in the past, the max­i­mum CCB would have been ap­plied on the Ir­ish banks in the late 1990s and the peak boom years of the noughties. The fact that our banks qual­ify again doesn’t mean we are in for a re­peat of a bank­ing col­lapse.

In fact, we may only be meet­ing the cri­te­ria now be­cause lend­ing is com­ing off such a re­ces­sion pe­riod low that it is skew­ing the num­bers.

I could live with a heavy CCB be­ing ap­plied es­pe­cially given that I am not a di­rect share­holder in any of the banks.

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