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The Central Bank will impose new financial rules on real estate funds, warning that a massive sale of assets by these entities could destabilize the sector.
In its latest financial stability review, the regulator said real estate funds now hold 40% of the Republic’s commercial residential real estate assets, worth an estimated 23 billion euros, marking a significant change from the previous year. era of the Celtic Tiger when domestic investors dominated the sector.
Most of the investments have been made since 2014 and have benefited from the use of tax-efficient investment vehicles.
While the influx of overseas investment “represents beneficial diversification”, the Central Bank said there was a cohort of real estate funds that had high debt levels and that “these vulnerabilities” had the potential to grow in the absence of policy interventions.
“In the presence of such vulnerabilities, the real estate fund industry could respond to future adverse shocks by selling real estate assets over a short period of time,” the regulator said.
“This type of selling behavior has the potential to amplify negative shocks in the commercial real estate market and the economy in general,†he said.
The Central Bank said it is currently consulting on new macroprudential policy measures aimed at preserving the resilience of the Irish real estate fund industry, so that it can better absorb – rather than amplify – adverse shocks.
Separately, the regulator has paved the way for retail banks here to participate in the government’s controversial equity investment program despite the warning that the incentive could push up house prices.
He said he had taken into account “the interaction” between its mortgage rules and the government’s proposed program and felt that it would be “disproportionate” to prevent banks from participating.
“This reflects our overall judgment based on financial stability considerations, including the characteristics of this form of financing, other guarantees in place such as bank capital, as well as the initial scale and scope of the program,” said he declared.
The government has set aside € 75 million in the 2021 budget for the equity sharing initiative, which involves the state paying up to 30% of the cost of new homes in exchange for a stake in the property. Banks are also expected to subscribe to part of the program.
The Central Bank warned that the government’s program would work by shifting demand for home purchases “and, therefore – in a limited supply market – has the potential to increase price pressures.”
Mortgage rules
As part of its review, the regulator also decided to leave its mortgage rules unchanged for another year, noting that the benefits of the measures were evident in payment interruption rates during the pandemic.
Borrowers with an originally high LTI (loan / income) and LTV (loan / value) had much higher payment interruption rates in 2020 than those with lower mortgage charges, did. he declares.
However, the regulator needs to change the way the rules work allowing lenders to carry over any unused allowance from one year to the next. Banks are allowed to lend part of the money outside the rules.
He said “structural and cyclical forces” continued to exert upward pressure on house prices.
While noting that the government’s plan for universal housing had ambitious plans to increase the supply of housing, “which, other things being equal, should serve to slow the rate of growth of housing prices, relative to to what it could have been, in the medium term “. However, it would take time to be delivered and for the effects to be felt, he said.
Inflation
Regarding inflation, the governor of the Central Bank, Gabriel Makhlouf, noted that inflation “is now well ahead of the objectives of many central banks in developed economies”.
He explained that “although our baseline scenario is that these inflationary pressures gradually fade away, we must also recognize the uncertainty involved and the prospect of the risks that would ultimately be associated with a more prolonged inflationary period.”
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