A new study by Bank of England researchers has revealed that stricter mortgage lending rules can have a significant impact on both house prices and rents. The research, published in a staff working paper, used Ireland as a case study to examine the effects of credit tightening measures introduced in 2015. These measures included a minimum 20% downpayment on houses and a maximum 3.5 ratio of mortgage debt to income.
The study found that such contractionary credit shocks reduce house prices on impact but lead to higher rents over both the short and long term. Specifically, the Irish reform lowered house prices by 0.9% immediately, while rents peaked at a 4.5% increase seven years later and settled 2.6% higher in the long run. The homeownership rate also dropped by 3 percentage points over time, as more people remained in the rental market.
The authors of the paper, Juan Castellanos of the Bank of England, Andrew Hannon of the National Bank of Belgium, and Gonzalo Paz-Pardo of the European Central Bank, explained that the mechanism behind these changes involves prospective buyers staying in the rental market longer. This increased demand for rentals requires more landlords to enter the market, driving up rents. The study highlighted that small landlords, who hold more than 50% of all tenancies in Ireland, play a crucial role in this dynamic.
The research also examined the impact of real interest rate shocks, finding that they too raise rents, consistent with the results for lending limits. However, the authors noted that their work does not provide a fully integrated assessment of the costs and benefits of such policies, as it does not model the cyclical build-up of financial-sector risks. The paper is part of ongoing research and does not represent official Bank of England policy.