Vol. 478 No. 6
1 Mr. McCreevy asked the Minister for Finance his views on the recent ESRI report which called for the consideration of adding a temporary tax on new mortgages and the tightening of lending regulations to curb rising house prices; and if he will make a statement on the matter. [11850/97]
The rate of house price inflation largely reflects very strong demand for housing, which is related to the strong economic growth in recent years. Lower interest rates and the expectation that they will remain low, increased real disposable incomes and unprecedented employment growth have all contributed to the upward pressure on house prices. The changing demographic situation, with more young people looking for housing, has also had a role to play. These factors have fuelled the demand for houses, resulting in a rate of house price inflation which is currently considerably higher than the general inflation rate. Despite the fact that house prices are not included directly in the consumer price index, there are clear grounds for concern that persistent high house price inflation may generate inflationary pressures indirectly in other areas of the economy. The trend over the near future will require close attention.
The Central Bank is responsible for regulating and supervising credit institutions so that their financial stability and well-being are maintained and that shareholders' and depositors' funds are protected. I understand from the Central Bank that it has recently completed a survey of mortgage lending practices which has found that the standard of mortgage lending practices is generally being maintained. I also understand that the bank will continue to keep mortgage lending practices under careful review in its ongoing supervision of credit institutions.
In relation to the suggestion that a temporary tax or surcharge might be put on new mortgage borrowers, I would point out that the value of mortgage interest relief has been considerably restricted in recent years through the phased introduction of standard rating. Furthermore an increase in stamp duty for houses over a certain value was introduced this year. The introduction of a temporary tax or surcharge is not proposed. It would of its nature, discriminate against young people entering the house market for the first time and might not have a pronounced effect on reducing demand. The better and more sustainable approach is to look at increasing the supply of developed land and houses and the Minister for the Environment has been examining what measures might be considered in that regard.
I am sure that the Minister, like the rest of us, is concerned about the considerable inflation in the housing market which will inevitably spill over into other forms of inflation. As he will be aware, the CPI measurement of inflation gives no indication of rising house price inflation because it is not designed to do so. If house price inflation is allowed to continue at its present rate, it will inevitably lead to higher wage demands and higher costs in the housing market.
If the Minister is ruling out the tax on mortgages as proposed by the ESRI, will he expand on his statement yesterday regarding the increase on the supply side, which both he and the Taoiseach indicated was the way to dampen down house price inflation?
This is a somewhat complex area with which the Deputy is more than familiar as he lives in County Kildare. There are a number of factors. The supply of housing, of its nature and gestation, is a medium to long-term rather than an instant and short-term factor.
The demand has been growing for some time because of the substantial increase in employment. The price inflation is marked with regard to secondhand houses where, in effect, the supply is fixed. Wherever there is a situation in which there are increased salaries, employment and prosperity as a function of the economic growth about which we have spoken — one must bear in mind the ESRI forecast for the next ten years — it is inevitable that secondhand house prices will rise in the short-term, particularly for certain sectors of the market. There seems to be some evidence to suggest the rise at that end of the housing market is factoring its way through the entire housing market.
I am also informed by the construction industry and lending institutions with whom I have meetings on this topic that there is a shortage in the supply of suitably serviced land. The local authorities in the greater Dublin region — although this problem is not confined to that region — would say there is an adequate supply of suitably serviced land, but the response which has been given to me by some of the housing players in the construction industry and credit institutions associated with house mortgages is that the location of that land is not necessarily in the areas where the demand might be highest.
What we need to do, and what the Minister for the Environment is doing, is to have meetings and discussions with officials in his Department and officials of the relevant local authorities to see how the fairly substantial public capital programme for sanitary services and road development can be used in such a way as to ensure that an orderly supply of suitably serviced land can be brought to the market as quickly as possible.
Now that the Minister has given his views about the supply side of the housing market, is he ruling out forever a tax on mortgages as proposed in the recent study? Is he also ruling out any intervention in setting the lending criteria? Is the Minister firmly set against either intervention?
I am not ruling out or ruling in anything entirely. All my instincts would be against penalising first-time house purchasers, and I would suspect these are the Deputy's instincts also. The first-time purchase is the most difficult house purchasing decision for anybody. I know some people desire to buy a house now because they have a more secure job than they did three or four years ago or they actually have a job. They are in a position to buy a house. All parties in this House have always encouraged home ownership and I do not think policy will change in that respect.
The concern I expressed some months ago was that, because of intense competition, the various lending institutions would engage in imprudent lending practices either by discounts to first-time purchasers or discounts over the first three or four years and lock people into a commitment in real mortgage terms, after the discounts have been washed out, to a level of payment which might be imprudent. I welcomed the action which the Director of Consumer Affairs has taken with regard to ensuring that the real costs of mortgages are conveyed properly to would be borrowers.
I am satisfied that the Central Bank, in fulfilling its statutory function of regular supervision of the credit institutions in the housing market, will bring to the attention of those institutions its concerns that the disastrous experience which occurred in the UK should not occur here. There is no evidence whatever that the irresponsible lending policies in which institutions engaged during Mr. Lawson's tenure as Chancellor for the Exchequer in the UK will be replicated here. It is not in the interests of either the depositors or the lending institutions that it should.
We are looking at one of the bottlenecks to which the Taoiseach referred in welcoming the ESRI report which, because we have effectively nearly 200,000 extra people in work, some of whom are earning substantial salaries relative to those which they earned previously, is factoring itself into the housing market demand. The only way to address that is to improve the supply. Putting surcharges or taxes on particular categories of people would not address the problem because it would not increase the supply. It would simply make it more difficult for those who do not own a house to buy their first house and that would be inequitable.
Except in the general way in which the Minister is a member of Cabinet and, therefore, collectively responsible, he does not have a direct input into the housing supply side.
Would he agree that a more interventionist role could be taken by the Central Bank in looking at the lending criteria applied by a number of the institutions? He is correct that it is the intense competition among the institutions which is inspiring much of the housing price demand. I do not think that former Chancellor of the Exchequer, Mr. Lawson, set out to destabilise the housing market in the UK but what occurred resulted in a desperate situation. Nor do I think that the Minister or anybody else is trying to upset the situation here. However, we do not want to see it end in tears. The Minister must agree there are similarities between the situation in Ireland at present and that which existed in the UK a decade ago. Unfortunately, those similarities are great and perhaps lightning might strike twice in the same place.
I deny the Deputy's assertion that there are similarities between the current situation in this country and that which existed in the United Kingdom in the 1980s because the lending policies are different. Under the criteria applied by lending institutions in the UK, multiples of four times the annual salaries of two people, without any kind of relationship, sharing——
Strange multiples are being applied in this country.
If they are, the lending institutions involved are imprudent. The Central Bank has written to each of the credit institutions seeking clarification and confirmation that they are adhering to the sound principles that have informed the policies of such institutions. The Central Bank is the regulatory authority and it can take a range of actions against any lending institution it believes to be behaving improperly. A number of the chief executives of the various lending institutions clearly stated that they do not intend to replicate the disastrous lending policies utilised by their UK counterparts in the 1980s. We would be crazy not to learn from the experience of a neighbouring state with which Ireland has many friendly connections.
