Housing Finance Developments in Ireland

Abstract

The Irish mortgage market experienced significant change in recent years. Developments in housing finance are closely monitored by central banks, as they can have important implications for many areas of concern to central banks. This paper outlines developments in Irish housing finance over the past decade and their implication for the monetary policy transmission mechanism. It compares, where possible, developments in Ireland with those in other euro area countries and, to a lesser degree, the United States and the United Kingdom. A number of studies indicate that the more flexible/developed a mortgage market is, the more responsive the economy is to changes in official interest rates. Flexibility is often measured according to the level of mortgage debt, the characteristics of the outstanding mortgage debt and the manner in which banks fund their mortgage lending. This paper finds that the Irish mortgage market became more flexible in recent years, thereby increasing the economy’s sensitivity to monetary policy changes. Among the key features of recent developments are a significant increase in the level of mortgage debt; a higher prevalence of variable rate mortgage debt; higher loan-to-value (LTV) ratios and increased contract lengths for new mortgages; the introduction the tracker mortgage; changes in the funding sources of mortgage lenders. The outbreak of the financial turmoil in August 2007 and its deterioration in September 2008 led to a slight reversion in some recent trends, indicating that mortgage market flexibility may have peaked in 2007.