Regulators around the world have responded to the failures of commercial banks by requiring them to raise more risk capital, some of it provided involuntarily by taxpayers, and by something called macro-prudential policy. This takes the form of lending rules.

In Ireland, much of the damage was caused by excessive growth in lending for mortgages and the resulting price bubble. Not surprisingly, the Central Bank introduced new rules for mortgage approvals last year, as the housing market began to recover. There is now a double test: the amount advanced should not exceed a certain multiple of the borrower’s gross income, and the loan should not exceed a maximum percentage of the value of the property. The rules are designed to protect borrowers from taking on debt they might struggle to repay, to protect banks from piling up bad loans and to protect bystanders from liability for any more disasters.

One of the most damaging innovations during the Irish bubble was the 100% mortgage. From 2004 onwards, tens of thousands of mortgage loans were granted with no requirement for the borrower to put up a deposit.

So it was hardly a surprise when former Central Bank governor Patrick Honohan decided that the recovery in house prices through 2014 was a good signal for the introduction of a loan-to-value cap on residential mortgages. The headline figure in the new policy was a cap of 80%. In reality, the policy was more lenient, as we shall explain, but the very idea of a cap produced widespread criticism, rather as if any cap at all was undesirable. Where are young people to find the deposit?

Honohan stuck to his guns, believing that the alternative to a cap was acceptance that 100% mortgages could be allowed to re-emerge. If there had been an 80% cap from 2004 onwards, there would still have been a mortgage arrears crisis, so severe was the over-valuation of residential property in Ireland, but much heartache would have been avoided.

In any event, the cap is not really 80% – it is higher. And the Central Bank’s critics have failed to make a case for any relaxation. Honohan’s successor, Philip Lane, plans to review the policy in the summer and will be under the same pressures.

The loan-to-value cap works like this: the maximum loan can be 90% of the property’s value up to €220,000 and the bank can lend 80% of the excess over €220,000. The deposit needed to meet the Central Bank’s requirement works out as shown in Table 1 for various levels of house price.

The deposit requirement is modest up to house values of, say, €250,000 – enough to buy a very fine home in most parts. As the property websites will confirm, there are decent properties available for half that sum, and less in many rural counties. In these price ranges, the deposit required is comparable to the price of a car. Nobody with a steady job should be complaining, and nobody without one should be buying.

The problem created by the Central Bank rules is largely a Dublin problem, where starter homes cost double, or more than double, the figure demanded in the provinces. There is no good reason for housing in the capital’s outer suburbs to be so expensive. The pressure to relax the cap is coming mainly from Dublin and it should be ignored. The solution is to address the supply, not to finance another price bubble to conceal a dysfunctional housing policy.

Two of the surviving mortgage lenders, Bank of Ireland and Permanent tsb, are offering a 2% cashback to new mortgage borrowers. One of the blurbs states: “Our 2% cashback offer will give you the flexibility to buy the things you need for your new home. Or maybe a nice holiday instead. This is just one of the ways we want to make sure you can keep on living the way you want after you get your mortgage.”

Bubble talk. The effect of the 2% cashback offers, borrowed from car salesmen, is to knock a further 2% off the required deposit. If banks are free to lend people part of the deposit, the Central Bank’s sensible and undemanding requirement is being circumvented.