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New research by the ESRI has found evidence that mortgage lending rules put in place by the Central Bank six years ago have helped keep house prices 9% lower than they might otherwise have been.

The study by Kieran McQuinn found that there remains a strong mutually reinforcing relationship between the availability of mortgage credit and house prices here. 

He also found that movements in one of those variables is likely to lead to movements in the other. 

When Mr McQuinn ran simulations, he found that after 2018 the average actual amounts loaned out for mortgages more than 8% less than what they should have been based on his models. 

This, he suggests, are the resulting impacts of the imposition of the mortgage lending rules by the Central Bank in 2015. 

"The results of the analysis highlight the continued strong relationship between mortgage credit and house prices in the Irish market and the effectiveness of the macroprudential regulations in limiting the increase in average loan sizes," he said. 

He estimated the knock-on effect of this is that house prices could have risen by as much as 9% in the period, based on a 1% increase in average loan amount leading to a 1.1% rise in price 

The research builds on earlier research by Mr McQuinn and Trevor Fitzpatrick in 2007 that found a long-term mutually reinforcing relationship between the availability of credit and house prices in the Irish market.

That paper looked at the period between 1981 and 1999, but the current research extends the analysis up to 2020, taking in the credit-fuelled property boom. 

Mr McQuinn said the findings that the model remains reliable over the longer period are somewhat surprising, 

This is because the period between 2000 to 2020 saw significant changes in the Irish housing and credit markets, with one of the largest house price and mortgage credit spirals observed amongst OECD countries, which was followed by a property crash. 

The Central Bank rules were introduced in 2015 to try to increase the resilience of the banking and household sectors to the property market and to try and reduce the risk of bank credit and housing price spirals from emerging in future. 

They put a limit on how much a borrower can receive from a bank to fund a residential property purchase based on loan to value and loan to income limits. 

Kieran McQuinn, research professor with the ESRI, said today's study looked at the relationship between mortgage credit and house prices which showed that "if one went up, the other tended to increase as well'. 

He told Morning Ireland that the study concluded that the average loan size would be 8% higher without the mortgage rules. 

Inadequate supply of new houses is part of the difficulty, he added. 

Mr McQuinn explained that while increasing mortgage credit increases affordability for young people, increasing it where supply is relatively fixed - as has been the case for the last decade - inevitably leads to higher house price inflation. 

He said the main worry about the impact of the Covid-19 pandemic is that it exacerbates the imbalance between supply and demand of houses. 

While demand tends to recover relatively quickly, history shows that supply is slower to recover, he added.