The Central Bank of Ireland Conference on Distressed Property Markets

20-2-2013 — /europawire.eu/ — The Central Bank of Ireland today (13 February 2013) hosts a conference at the Institute of Bankers in Dublin focusing on distressed property markets.

Two papers ‘On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?’ and ‘Understanding Irish house price movements – a user cost of capital approach’ will be presented by Central Bank economists.

Along with this research, representatives from the Federal Reserve Bank of Dallas, the Federal Reserve Bank of Atlanta, the Mortgage Bankers Association and the International Monetary Fund will also present papers at the conference.

Deputy Head of Financial Stability at the Central Bank Kieran McQuinn said;
‘The aim of the conference is to compare and contrast the policy treatment of the mortgage arrears issue in the Irish and United States markets and there will be contributions and insights from both Central Bank staff and international experts in this area.’

All papers will be published here.

Central Bank research

On the hook for impaired bank lending: Do sovereign-bank inter-linkages affect the fiscal multiplier?

Given the difficulties in the Irish mortgage market, this paper assesses the implications for the Irish fiscal accounts given the unique relationship between the sovereign and its main financial institutions. Macroeconomic policies, which reduce the loan impairments on the balance sheets of the guaranteed banks are likely to generate savings for the sovereign due to its capitalisation obligations.  Using a broad empirical framework, the paper examines the relationship between house prices, unemployment and mortgage arrears in an Irish context. Loan loss forecasts over the period 2012-2014 are then generated for the Irish mortgage book under two different scenarios. It is shown that macroeconomic policies, which alleviate levels of mortgage distress, relieve the solvency position of the guaranteed institutions thereby reducing the Irish State’s future capital obligations.  This impact on the sovereign’s fiscal accounts, while of particular interest in the case of Ireland, is also worthy of consideration in other countries where financial institutions are also experiencing significant loan impairment issues.

Irish house price movements – a user cost of capital approach.

This paper employs the user cost of capital[i] to examine Irish house price movements. Between 2002 and 2007, a combination of factors including rapid house price increases and the prevailing fiscal and monetary environment created a strong bias towards home ownership. This was reflected in a negative user cost of housing as capital gains exceeded the costs of home ownership, incentivising this practice and fuelling further increases in prices. However, the collapse in house prices since 2007 has contributed to a reversal of this process. The paper also discusses fiscal and financial policy measures, which could enable a more efficient functioning of the housing market.

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