Dr. Kieran McQuinn:

On the Central Bank macroprudential measures, as I stated in response to an earlier question, I worked in the Central Bank for ten or 11 years. I always say in commenting on the macroprudential measures that it is essential, as a small, open economy with a highly globalised banking sector, to have such measures in place. That safeguards as much as possible the domestic financial sector from the kind of huge inflows of credit and exposure that we all witnessed. There were almost horrific effects in many different ways.

Macroprudential policy is here to stay as a policy tool and that is a good and positive development. In our initial submission to the Central Bank on the macroprudential measures and in a revised submission recently, we suggested some tweaks in the way in which the measures should be implemented. I was speaking earlier about comparing this, for example, to monetary and fiscal policy. In those very important policy domains, the crucial issue very often in discussing whether to increase taxes or expenditure, or in the monetary policy area to increase or lower interest rates, is how well the market or economy is performing as a whole. Is it performing very well or not so well? Where is it? In terms of implementing macroprudential policy, there is no reason those kinds of principles cannot apply.

There is a growing body of international literature suggesting that this is the way to implement policy, taking into account where one believes is the market. By that I mean embedding what we call a counter-cyclical dimension. This means that if we believe the market is over-performing, we are building too many houses and house prices are rising too fast, then those measures can be implemented and tweaked so as to tighten the credit supply, as that is what often causes bubbles. Equally, if one feels the market is underperforming, we are not building enough houses, prices are very low, etc., we could ease credit. That would not happen widely within big bands but there should be a principle in place. Implementing the measures when the bank did without a counter-cyclical dimension was unfortunate as the market was still very much on its knees, particularly on the supply side. We were only building 8,000 or 9,000 houses two or three years ago and this year we will be lucky to build 14,000 units. That must be put in the context of research done by colleagues at the ESRI demonstrating that we need somewhere in the region of 25,000 units per annum. In light of the recent census, we will probably need 30,000 houses per annum, as it found 100,000 extra people in the country. The key point is that target. This year we will be lucky to build 14,000 units so we are still a long way off that. In that context, if there is a counter-cyclical dimension, it could lead to the easing of the measures somewhat. Equally, if we start to build 45,000, 50,000 or 60,000 houses, we should be able to tighten measures and reduce the exposure of the domestic banking sector to the kind of credit bubble that we witnessed in 2005, 2006 and 2007.

The Deputy is right in that the rental issue is a by-product of many of the macroprudential measures. Research, including some involving us, has demonstrated that if credit is tightened in a market, rents tend to increase vis-a-visprices for the reason outlined; if people cannot afford to buy but still want to live in a particular area, the only option is to rent. That drives up rents. Another related issue is that there will be a spreading of the commuter belt. For people who wish to work in Dublin, the only alternative is to buy further out, which would be another unintended consequence of the macroprudential regime. It is very important that we have this policy framework in place but there are ways in which we can tweak this to ensure we take into account where is the market.