Irish central bank flags possible limits on mortgage lending

DUBLIN (Reuters) - Limiting how much banks can lend to home buyers should be examined as sharp price rises fuel fears that another property bubble is building up in Ireland, research from the country's central bank said on Wednesday.

Property prices in Dublin rose by 25.1 percent year-on-year in August, data showed last week, as a lack of supply, particularly in the capital, drove price rises nationally to their highest level since the 2006 peak of a property boom.

While prices are 41 percent below the peak reached before a spectacular property crash forced Ireland into an international bailout, the central bank has already warned that the shortage of houses could put prices on an unsustainable path again.

Introducing limits on new lending at high loan-to-value (LTV) or loan-to-income (LTI) ratios - measurements of how affordable a mortgage is - could reduce the probability of default, the research paper by the bank found.

"There is no evidence the current price increases are credit driven, but the number of mortgage approvals, a potential measure of new mortgage credit demand, rose sharply in the first seven months of 2014," the research said.

"This is therefore a key time to investigate the tools available," it said, adding that it was clear that limiting high LTV and LTI lending would improve bank resilience and help protect borrowers from movements in property prices.

Examining the boom and bust that has left around one in five home loans, worth 23 billion euros (17.90 billion pounds), in arrears, the paper said there was a sharp increase in the losses of defaulted loans approved for more than 85 percent of the property value.

In a separate note, the central bank said national legislation provided the basis for the introduction of tools such as restrictions on lending based on LTV or LTI ratios. Guidance could also be issued, it added.

Davy Stockbrokers said this week that some banks are already lending at up to 4.5 times the combined income of higher-rated borrowers – above the limit of 3 to 4 times that it said would typically be considered a more acceptable level.

Irish Central Bank Governor Patrick Honohan said in July that the bank had a toolbox of measures which could be used to cool down credit-fuelled demand and would not hesitate to use them to prevent bank credit overheating the market.

(Reporting by Padraic Halpin; editing by Susan Thomas)