As this blog has repeatedly pointed out, it is very difficult for banks to lend money when they see the value of the collateral that would secure their loan declining.
In addition, the effect of banks tightening loan terms exacerbates the impact on credit availability caused by the frozen structured finance market.
With the structured finance market unavailable, banks have to hold onto the mortgages they originate. With the financial regulators pushing for higher capital ratios, banks have an incentive to limit their loan portfolios. Combining long term credit risk with limited capacity naturally leads to a focus on only highly qualified borrowers.
BANKS are making it harder for people to get mortgages because they believe house prices will keep falling and fear the economy will continue to slow down.
The lenders are imposing tougher conditions before they will grant mortgages, a Central Bank survey on lending has found.
Regulators said banks would continue to turn down applications for mortgages despite the Government boosting the tax reliefs it will pay new buyers this year, and banks claiming to be willing to lend.
Although banks have cut the interest rates they charge on mortgages, at the same time they are demanding larger deposits, the Central Bank said.
But it is not just a reluctance to lend that is keeping the property market in a price-fall spiral. Demand for home loans weakened in the last three months of last year due to economic uncertainty.
House prices have fallen by half since the peak of the property bubble in 2007, with an international study last month concluding that prices in Ireland were now among the most affordable in the world.
But the Central Bank survey found that lenders were being put off by the likelihood that prices would keep falling and have responded to this by making it harder to get approved for a mortgage.
"The tightening of credit standards in respect of mortgage lending was attributed to less favourable expectations regarding economic activity, along with diminished prospects for the housing market," the survey stated.
Hopes of an uplift in the property market have been dashed by a comment in the survey that "credit standards are expected to tighten on loans to households with loan demand anticipated to remain unchanged".
The availability of finance was the biggest stumbling block for the property market, the Royal Society of Chartered Surveyors Ireland (RSCSI), whose members include estate agents, said in a report this week.
A lack of banking funding means up to a quarter of house purchases are now made by cash buyers.
The RSCSI said: "On the residential side, only those in secure roles either in the public service or from high-profile, international firms are being offered mortgages, despite claims to the contrary from the banks themselves."...
A spokesman for the Irish Banking Federation said banks were engaged in prudent lending to prudent borrowers.