It’s a long road back to mortgage market normality

Irish variable mortgage rates are falling, but it is a slow process and looks unlikely to ever deliver the sub-2-per-cent rates charged on average in the euro area. The average rate on new mortgages in August – excluding renegotiated loans – was 3.47 per cent, down from 3.77 per cent a year earlier.

The banks may have taken a bashing in the media and from the Government, and they were even “called in” by Minister for Finance Michael Noonan last year. Meanwhile, Fianna Fáil tabled a bill which, if brought into law, would give the Central Bank power to force lenders to cut rates, a power it does not want.

All this, and some competitive pressures in the market, have led to rates edging downwards. But despite the promise of new niche entrants in the mortgage market, there is no sign yet of the kind of competitive pressures that would see Irish variable rates fall significantly closer to the euro zone average.

In a note on the issue, Owen Callan of Investec says that while there is scope for continued downward pressure on lending rates, “Irish mortgage rates are likely to price at a significant structural premium to euro area peers in the medium to long term.”

One reason, as Callan points out, is the costs and difficulty of foreclosure in the Irish market. It is just one of the factors that makes it more difficult to earn profits on Irish mortgage books than on those in many other European markets.

But relatively high rates are not the only issue. Mortgage volumes may be crawling upwards, but total lending in the past year is just €4.6 billion. You could argue about what would signify a return to some kind of normality, but it would certainly be an annual lending total of €7.5 billion plus.

The Government’s help-to-buy scheme may spark some additional lending demand, but the risk is that it will also push up prices. In the dysfunctional push-me-pull-you that is the Irish property and mortgage lending market, this may solve a problem for some people but create new barriers for others. After the market and banking crash, it is indeed a long road back.