Joan Burton (Dublin West, Labour)
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Question 57: To ask the Minister for Finance his views on the recent financial stability report from the Central Bank and its warning that Ireland is more indebted than in 2005, more exposed to interest rates and that house prices have reached unreal levels with a high risk of investors destabilising the market as they exit the market at short notice; the measures he is taking to address these risks; and if he will make a statement on the matter. [39327/06]

Brian Cowen (Laois-Offaly, Fianna Fail)
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I welcome the publication by the Central Bank of its Financial Stability Report 2006 which reflects the bank's mandate to contribute to the stability of the financial system in Ireland. I note the report's main conclusion that Ireland's financial system continues to be in a good state of health. This is based on a detailed assessment of the risks facing borrowers, the financial position of the banking sector as well as recent stress testing of the system.

The bank's central expectation, based on an assessment of the risks facing borrowers, the financial position of the banking sector as well as the results of recent stress testing of the system, is that the current shock absorption capacity of the banking system leaves it well placed to withstand possible pressures. The report also highlights that the strength of the economy continues to support the stability of the financial sector.

The bank's report identifies vulnerabilities facing the financial system, including those arising from credit growth and house price inflation. Within the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, a matter for the Central Bank and Financial Services Authority of Ireland. While the strong increase in borrowing is a sign of a healthy economy and a positive economic outlook on the part of borrowers, I fully support the vigilance of the Central Bank and the financial regulator on the issue of personal credit and mortgage debt and in reminding both borrowers and lenders of the need for responsible behaviour. The Government, for its part, will continue to contribute to economic and financial stability by pursuing a prudent fiscal policy.

Recent indicators point to continued moderation in house price inflation in line with increased housing supply and higher ECB interest rates. The consensus among commentators is for this trend to continue, resulting in a gradual cooling and soft landing for property prices in Ireland. The Central Bank's report shares the view that this is the most likely outcome.

In terms of the general economic implications of the rise in house prices and the associated increase in indebtedness in recent years, both borrowers and lenders need to be aware that interest rates are currently still low by historical standards. The Central Bank has highlighted the need for borrowers and lenders to factor into their financial decision making the prospective impact of potential changes in the future economic and financial environment. This also confirms the need for responsible budgetary policy to provide room for manoeuvre in the event of any unexpected sharp slowdown in economic growth.

The major element of household outstanding indebtedness is accounted for by residential mortgages. Demand for residential mortgages is underpinned by a number of factors, including strong new housing output, the growth in the economy, the accompanying pickup in employment creation and wages, the increases in household formation, significant net immigration and lower public sector indebtedness which facilitates the maintenance of low levels of taxation.

With regard to the Deputy's point regarding investors, the financial stability report states clearly that property remains a popular asset for investors as it continues to outperform other asset classes in the short to medium term. My overall view is that the report, with its main conclusion and its assessment of risks, makes a valuable contribution to the assessment and maintenance of financial stability in our economy.

Joan Burton (Dublin West, Labour)
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Has the Minister seen a report in the October 2006 issue of the Irish Property Buyer which includes an analysis of the impact of interest rate increases on average mortgage repayments? Between July 2005 and December 2006 the average monthly mortgage repayment, due to interest rate increases, will have risen by over 50%. The figures show average repayments increasing from €1,057 to €1,573 for all buyers nationally, from €926 to €1,390 for all first-time buyers and from €1,453 to €2,167 for all Dublin buyers, who comprise approximately 49% of the total mortgage market. In view of the outlook from the European Central Bank and given that people also have financial commitments regarding child care and high commuting costs, does the Minister believe such figures are sustainable? Is the Minister concerned about the type of monthly bills sustained by people trying to provide a home for their families?

The Central Bank referred to investors in its report. It said that investors, unlike owner occupiers, pose a risk to the stability of the market in so far as they might attempt to exit the market at short notice. The CSO and property economists have suggested that between 8% and 15% of Irish houses are unoccupied. Is that not a worrying trend?

Our total indebtedness has reached €300 billion. That is equivalent to 205% of GNP. It is extremely high in comparison to other countries and it is growing all the time. Do any of these issues concern the Minister as he frames the budget?

Brian Cowen (Laois-Offaly, Fianna Fail)
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Of course one keeps a close eye on these matters, as one must and should. Interest rate policy, as a result of our euro membership, is a matter for the ECB in the first instance. Ireland is represented on the ECB by the Governor of the Central Bank. Mr. Trichet, President of the European Central Bank, when addressing the European Parliament's economic and monetary affairs committee — his comments were not confined to Ireland but related to a number of European countries — said that the housing market in a number of European countries has been considerably buoyant but monetary policy decisions are taken with regard to the euro area as a whole and cannot be taken with regard to individual conditions in specific countries.

The Central Bank has been consistently pointing to the requirement for prudence on the part of both borrowers and lenders in the housing market here. The prime emphasis in its comments is that people should focus on affordability both in the present and in situations that might not be as benign as in the recent past. This has been done through its economic bulletins and its financial stability reports. In addition, it continues to have ongoing dialogue with the banks and conducts stress testing exercises. The financial regulator also recently increased the risk weighting on all new mortgages with a loan to value ratio of more than 80% and its consumer division has been active in informing consumers of the various options and factors they must consider when borrowing.

Prudent and responsible fiscal policy clearly also has an important role in contributing to financial stability and balanced economic performance overall. One of the issues when preparing the Estimates was ensuring that an increase in spending would not add to inflationary pressures already in the system, due to the fact that we are reaching our potential growth in tight labour market conditions.

With the implementation of the overall legislative framework, private sector credit growth and debt levels are, in the first instance, matters for the Central Bank and the Financial Services Authority of Ireland. That follows from the Central Bank's role as part of the European system of central banks and its functions as a financial regulator with regard to the prudential supervision of financial institutions and the protection of consumers of those firms.

The recent growth in credit requires us to recognise that while we have reduced public sector credit, there has been a growth in credit in the private sector. People need to be mindful of that issue. The financial stability report to which Question No. 57 refers indicates that while estimated mortgage repayments as a percentage of disposable income have varied over the past 16 years, the current mortgage repayment level on a national basis is less than the 35% level which obtained during the early 1990s. Irish house buyers benefit from a range of supporting factors, including healthy income growth, low income tax rates and relatively low interest rates by historic standards.

Affordability is also supported by the strength of the economy, record employment levels and relatively high savings rates. Recent indications of an increase in the private sector debt to income ratio require us to recognise that borrowing has to be taken into account on the basis of all the relevant criteria and we are now entering a slightly higher interest rate regime than was the case 18 months ago.

Joan Burton (Dublin West, Labour)
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The Minister spoke about his desire for a soft landing but, with a 50% increase in the average mortgage repayment over the past 18 months, how soft will that landing be? The softest arrangements for people in the property market are geared towards investors rather than owner occupiers. The Minister did not address the issue of empty houses, which in a number of economies are taken as a signal of stress in the market when their numbers rise above a certain threshold. What is being done to ensure a soft landing?

Brian Cowen (Laois-Offaly, Fianna Fail)
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A soft landing is being encouraged by the continuing supply of houses to a market which continues to have strong fundamentals. Anecdotal evidence suggests the market is softening but we will not be able to ascertain until spring of next year whether interest rate increases are contributing to that situation. The important point is that we should not be predicting a hard landing when the Central Bank and all the evidence of continuing high income growth and low unemployment rates indicate otherwise. When people saw problems in the housing market across the water, it was against a background of rising unemployment and much higher interest rates. Taking nominal inflation into account, real interest rates are significantly lower at present.

Joan Burton (Dublin West, Labour)
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However, 5.5% is a significant increase compared to the rate that obtained when people took out their mortgages.

Brian Cowen (Laois-Offaly, Fianna Fail)
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We are no longer facing the difficulties of the early and mid-1990s, when the real interest rate was as high as 7% above nominal inflation.

Joan Burton (Dublin West, Labour)
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People have borrowed based on low interest rates.

Brian Cowen (Laois-Offaly, Fianna Fail)
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I recognise that affordability is now an issue for people. Clearly, the repayment of the mortgage is the first charge on disposable income and the resulting impact in terms of less spending power for other activities can ultimately affect economic growth and revenues. However, we should remind ourselves that interest rates remain at historically low levels. The Central Bank has made it clear that price stability will be the determining factor in how it applies interest rate policies not only at next month's meeting, but throughout 2007. That needs to be taken into account, as the Financial Regulator insists, by borrowers and lenders alike.