The Central Bank of Ireland has today published a financial stability note which examines real-estate exposures of the Irish banking system in a historic and European context. A review of the international evidence on the risks associated with real-estate lending is also provided.
The report shows that since the financial crisis, the overall level of concentration of the Irish banking system to real-estate lending has remained relatively stable at around 70% of total balances. Irish banks are more concentrated in real-estate lending than their European peers. This concentration is primarily to residential real estate.
According to the report, real-estate exposures have been central to many financial crises, including Ireland’s own financial crisis experience (2008-2013). In Ireland’s case, commercial and residential real-estate prices declined by 67 and 51% respectively between December 2007 and September 2013.
While prices have since recovered, in line with the improved Irish economy, the level of concentration of the Irish banking system in real-estate lending means that it remains vulnerable to potential price corrections. The Central Bank says this is despite the banking system having increased its ability to absorb such shocks.
The Financial Stability Note concludes that the high degree of exposure to real estate in the Irish banking system underlines the importance of prudent underwriting by the banking system. It also concludes that the Central Bank’s mortgage market measures help in this regard, by protecting banks and borrowers against a marked loosening of such underwriting.