The Central Bank’s new ceilings on loan-to-value ratios for residential mortgages need to be seen in the context of the great Irish banking bust. This was one of the largest banking crashes, relative to the size of the economy, ever to have occurred anywhere.

Lending money to home buyers is a large part of the business of modern banking systems. It is inherently risky for banks to lend at 20 and 30 years when their deposit base and access to wholesale funds can dry up very quickly. The exposure is exacerbated where they are also the financiers of the house builders.

If they are careless about loan quality and do not maintain adequate reserves of risk capital to absorb losses, they risk going bust. In Ireland, much of the analysis of the bank bust has focused on commercial property loans but more was lost financing the demand and supply sides of the residential property market.

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Home ownership and housing finance are political issues. Governments throughout the western world encourage home ownership through tax breaks and the rules governing bank structure and supervision.

The full story of the Irish banking crash is a tale of inept housing policies covered up by the temporary provision of plentiful housing finance routed through shaky banks. Membership in the eurozone facilitated this expedient since it permitted the Irish banks to borrow prodigious amounts in short-term international money markets.

There would likely have been a housing bubble had Ireland had the good sense to decline eurozone membership, but there are good reasons to believe that it would have been smaller.

The reason why there would probably have been a bubble anyway is because of the weaknesses in housing policy, and in the system of housing finance, which had been allowed to persist through the 1990s boom.

Up to about the mid-1970s, planning permission for new house construction in Ireland was available fairly freely in the environs of the major towns and cities. Until that time, there was only a small differential between prices of similar homes in Dublin and in provincial areas.

By the time the 1990s boom came along, Dublin had been surrounded by numerous unlegislated green belts and serviced land for building was bought up in a frenzy of speculation and significant corruption in the local government planning process.

One result was urban sprawl and the encouragement of long-distance commuting to Dublin with similar patterns on a smaller scale emerging around the main provincial cities. Builders followed planning permission rather than common sense into the countryside.

Eventually, large parts of the midlands came to be regarded as commuter belt territory – quite unnecessary given the small size of the city of Dublin. It is now one of the lowest-density cities of its size in Europe.

Inevitably, the tax-favoured status of home ownership joined forces with rising demand to confront the artificial restrictions on supply. This resulted in a house price boom, but could not have done so unless mortgage finance had been made available.

A mortgage famine in the years after 2000 would have been the preferable policy response, but would have left a generation unable to mount the creaking property ladder.

The indulgence of irresponsible lending by banks in the years after 2000 should thus be seen as the solution to a political problem, namely how to paper over the self-inflicted shortage of housing in high-demand areas.

The choice was to leave the policies which incentivised home ownership in place, alongside the restrictive planning regime constraining supply. Prices went through the roof, but this did not matter since 100% mortgages at low interest were readily available.

Builders were busy and those fortunate enough to secure planning permission for farmland cashed in. Some unfortunately invested the proceeds in bank shares.

Aside entirely from the bank bust, the escalation in national debt, heavy unemployment and borrower distress, the Irish bubble has yielded a highly distorted residential property market, with severe shortages in Dublin and some other urban areas, combined with giveaway prices in parts of the provinces where too many units were built.

The side effects include the neglect of perfectly sound older properties in many towns and villages, where empty new homes are available below the cost of construction.

Avoiding a repetition of this fiasco as the economy finally begins to recover requires the abandonment of the policy errors which gave rise to it. The Central Bank is quite right to put a stop to irresponsible mortgage lending. The threshold at which the higher loan-to-value ratio has been pitched is very revealing.

€220,000 would purchase a very lavish house indeed in most parts of provincial Ireland. But in the Dublin suburbs, there is hardly anything available in this price bracket. The reason is that there are not enough Dublin suburbs.