[Article] Mortgage borrowers warned on interest rate rises

Victor

http://home.eircom.net/content/irelandcom/topstories/4062030?view=Eircomnet

Mortgage borrowers warned on interest rate rises
From:ireland.com
Wednesday, 22nd September, 2004

Borrowers do not appear to be taking into account the likely rise in interest rates when calculating how big a mortgage they can afford, the Central Bank has warned. Una McCaffrey reports.

Mortgage rates now at 3.5 per cent could rise as high as 6 per cent in the years ahead, substantially increasing repayments, the Central Bank said

While not making any forecast on the timing of rate increases, it said there is a danger that borrowers "are not paying sufficient heed to this possibilty".

Speaking at the launch of the bank's Financial Stability Report yesterday, the Governor, Mr John Hurley, warned that some home-owners could be associating the adoption of the euro with "permanently low interest rates".

The report, published as a separate analysis by the Central Bank for the first time yesterday, identified the danger of an "unanticipated and sudden fall in residential property prices, accompanied by an increase in the default rate among mortgage holders" as the risk that poses the greatest threat to the financial system.

Borrowers must take a longer-term view, Mr Hurley said, warning that the variable rates that govern the bulk of the Republic's mortgages do not reflect where the economy will be in the medium term. The Central Bank also warns housing investors that rents available on properties may not cover the cost of mortgage repayments.

The Central Bank has long been concerned about the amount of money that consumers borrow to fund property purchases each year. Personal debt has doubled in the past decade and the Central Bank again expressed concern at the rate at which credit is growing. It has found that first-time buyers now shoulder more of a debt burden than their peers in the early to mid-1990s. This means that the relative weight of mortgage repayments has not diminished in line with the declining interest rates that have been recorded since then.

This has seen households choosing to borrow more or to extend the term of their loans. The average mortgage repayment burden on first-time buyers has grown from 23.7 per cent of disposable income in 1995 to 27.1 per cent in 2004.

The Central Bank wants to make sure that lenders are "stress-testing" each mortgage they advance to work out how affordable it would be in a recession. It is considering asking borrowers to sign a document to testify that they agree with a lender's assessment of their ability to repay.

An industry-wide stress test conducted by the Central Bank found that the profits and provisions of the 12 main lenders would be "resilient" to a severe recession.

This would not protect borrowers, however, with much of the resilience displayed by lenders based on their ability to call in the collateral, or property that backs their loans. First-time buyers would be hardest hit here according to the Central Bank's analysis.

"The most significant losses for the banking system would arise from those borrowers who have only recently taken out mortgages and have not yet built up significant equity in their properties," it warns.

"The risk to late borrowers is very obvious," said Central Bank director general, Mr Liam Barron, in reference to a recession.

The Central Bank warned that the risk of a "sharp correction" will rise if house prices continue to grow by double-digit percentages.

Market analysts are divided on when the European Central Bank will push up rates here, but most expect mortgage costs to be on the rise by next year at the latest.

Victor

Piece in bold below - note the huge growth in GDP.

http://home.eircom.net/content/unison/national/4062214?view=Eircomnet

Bank warning as our debts double
From:The Irish Independent
Wednesday, 22nd September, 2004

PERSONAL debt has doubled in the last ten years, the Central Bank revealed yesterday.

The alarming figure was included in the bank's first Financial Stability Report.

The report was designed to measure the ability of the Irish banking system to withstand a recession or other downturn which would put most borrowers under pressure.

While the system passed several tests designed to measure its overall health, Central Bank governor John Hurly warned that the speed at which debt is continuing to accumulate within the private sector is "particularly worrying".

He also warned on the increasing reliance on overseas funding and the negative impact this is having on the "net interest margin", or the amount the banks make on lending to the public.

Total debt levels in the Irish economy have grown from 71pc of GDP in 1995 to 123pc in the first half of this year, well above the EU average of 112pc of GDP.

Personal debt levels have doubled over the same period and now account for 95pc of disposable income.

This means that if we all attempted to clear our personal debts in a single year we would be left with, on average, just 5pc of our disposable incomes.

Most of this debt, the bank said, is from mortgages. Mortgage debt accounts for 80pc of personal sector credit. For the euro area as a whole, mortgage debt accounts for just 68pc of personal sector debt, the bank pointed out.

First-time buyers are the most heavily indebted and the report states that the average household mortgage repayment burden for first-time buyers has increased from 23.7pc of disposable income in 1995 to 27.1pc earlier this year.

However, thanks to lower interest rates, repayments are still well below the 32pc of disposable income first-time buyers paid out on mortgage repayments in the early 1990s, although the bank warned that it would return to these historically high levels if mortgage rates rose to about 6pc.

And while it says that such a substantial increase in the mortgage rate is unlikely in the short term, "it has to be borne in mind that the actual mortgage rate will eventually converge over time to this equilibrium rate."

The report states that Irish banks remain adequately profitable and well capitalised. After a stress test completed last year, the Central Bank concluded that the results were positive. However, the Governor noted, a decline in the level of deposits relative to the amount outstanding in loans, means the banks are now increasingly reliant on overseas funding.

This is having an adverse impact on their interest margins. It is also introducing additional risk on the ongoing availability and cost of those funds, the bank warned.

Pat Boyle and Senan Molony

Victor

http://home.eircom.net/content/irelandcom/topstories/4068513?view=Eircomnet

Irish house prices overvalued by up to 20%, IMF warns
From:ireland.com
Thursday, 23rd September, 2004

The rise in house prices in Ireland cannot be explained by economic trends, leaving the market vulnerable when interest rates start to rise, according to a new analysis from the International Monetary Fund (IMF). Cliff Taylor, Economics Editor, reports.

Ireland is one of a number of countries identified by the IMF as having house price levels between 10 and 20 per cent above values justified by factors such as growth and low interest rates, with the others being Australia, the UK and Spain.

Its analysis, included in a chapter from its forthcoming World Economic Outlook, suggests the overvaluation in the Irish market is towards the top of this range.

The IMF study breaks new ground by examining how house prices move together across international markets. The current upturn in house prices has been a "global phenomenon" across many industrialised countries, it suggests, warning that "any downturn is also likely to be highly synchronised across countries, with corresponding implications for the world economy".

Higher international interest rates is the most likely factor to trigger a downturn, it says. In many cases this will be "manageable".

However it warns that in countries where houses are highly priced - such as Ireland - "there is a risk that an increase in interest rates could trigger a sharp house price drop with more severe consequences for economic activity".

In these countries it says that "early but gradual" increases in interest rates appear the best approach. This is the approach being adopted in the UK, where successive rate rises by the Bank of England are starting to cool the housing market. However interest rates here are controlled by the European Central Bank which has held rates at a low level.

The IMF analysis follows a warning from the Central Bank earlier this week that borrowers were not taking sufficient account of the likelihood of higher interest rates when calculating the size of mortgage they could afford.

The bank has said that unless the rate of borrowing growth slows, the rate of indebtedness in many Irish households could soon approach danger levels.

The latest warning is one of several comments from the IMF about the dangers facing the property market here. The latest study includes comprehensive new economic analysis looking at the factors behind rising house prices between 1997 and 2003.

Prices here have approximately doubled over the period, it says, saying that about 80 per cent of the increase could be explained by factors such as low interest rates and higher disposable incomes.

Ireland is one of the markets where it finds "an important portion of the increase" in prices remains unexplained by these underlying economic factors, leading to its concern about vulnerability in the face of rising interest rates and higher loan repayments.