Regulation: 'Do something' is not a good motivation

For those of us of a certain vintage the announcement by the Central Bank of its proposed restrictions on mortgage lending will have generated distinct feelings of deja vu. We have been here before and the omens are not good.

In the late 1990s houses prices were skyrocketing with prices jumping by 16pc in 1997. Pressure on the government of the day to "do something" about rising house prices became intense and the then Minister for the Environment Noel Dempsey commissioned a series of reports from economist Peter Bacon.

The first of these, published in April 1998, recommended that interest relief be withdrawn from buy-to-let landlords. This would it was hoped push would-be landlords out of the market and free up more homes for owner-occupiers.

Bacon I also called for the abolition of Section 23 tax breaks for residential property developments, changes in stamp duty and an increase in the supply of serviced building land.

Interest relief for buy-to-let landlords was scrapped immediately after Bacon I was published in April 1998.

Unfortunately the hoped- for reduction in the rate of house price inflation was slow in coming with prices jumping by a further 30pc in 1998, by 18pc in 1999 and by 21pc in 2000.

Meanwhile with new investors virtually excluded from the market, rents were skyrocketing.

No-one was surprised when interest relief was restored by Charlie McCreevy in his December 2001 budget. However, restoring interest relief to investors may have been premature as there were clear signs that the measure was belatedly having an impact with house prices rising by only 4pc in 2001.

The restoration of interest relief for investors quickly changed all that. With our membership of the euro having already unleashed a tsunami of cheap credit, restoration of interest relief for investors sent house prices soaring once again. In the five years to the end of 2006 house prices rose by 71pc.

When contacted by the Sunday Independent Dr Bacon replied with a polite "no comment".