Monday 18 December 2017

Behind the headlines: Mortgage rate rise to have a damaging effect on consumer spending power

THE Government continues to maintain a diplomatic silence as the main mortgage lenders remorselessly raise rates on standard variable mortgages.

Narrow banking logic explains the recent moves -- Irish mortgages haven't been reflecting borrower risk or the real cost of funding for years. Time to make the painful adjustment.

But the broader economic logic of the variable mortgage increase is more dubious. Virtually every industrialised nation in the world is running a loose monetary policy at present.

Banks themselves are simply pricing up mortgages, mainly because Ireland has a non-functioning mortgage market where switching is all but impossible for existing customers.

The dampening effect on consumer spending of the variable mortgage increases is likely to be very significant and damaging.

This dampening effect gets multiplied because the banks will not (or cannot) give any indication of how many more increases are in the pipeline.

This makes household budgeting almost impossible, making consumers hugely risk averse. The December budget was going to have this impact anyway, but the variable increases make matters worst, except for those on trackers.

The government will resolutely defend the logic of banks repricing their loan books, but the timing and wider economic impact of such moves is becoming harder to justify.

Irish Independent

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