European Commission Report on Ireland: December 2011

The latest European Commission report on Ireland is available here. Lots of interesting stuff in it. One bit that caught my eye is a discussion of an internal report prepared by the Central Bank

A second report covering the use of certain types of credit limits, from a prudential point of view, is at an early stage of development. This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits, as well as potentially fixing all interest rates for certain products such as mortgages.

It’s not obvious to me that banning variable rate mortgages is a good idea, either from the point of view of consumers or from the point of view of international financial institions considering coming into Ireland to offer mortgages. While fixed-rate mortgages do offer increased stability, the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).

There are various reasons why fixed-rate mortgages are not common in Ireland or the UK (this 2004 report on the UK mortgage market by David Miles discusses this issue in detail). But banning variable rate mortgages seems to be an extreme proposal.

18 replies on “European Commission Report on Ireland: December 2011”

“The International Monetary Fund last night cleared the way for the next tranche of funds under Ireland’s €85 billion bailout programme. This €3.9 billion round of funding is being released after the IMF executive board’s fourth review of Ireland’s economic performance”

There should be enough in there for the March ELA
What pantomime is on at the Olympia this year? The Troika are hilarious.

I wonder if the breaking in the link refers to the broken economy.

Banning variable rate mortgages, and increasing the level of deposit required to, say, 20%, is the one single step that would bring home to the Irish people that membership of a single currency requires an end to the free-wheeling boom and bust pattern of Anglo-Saxon housing finance.


“free-wheeling boom and bust pattern of Anglo-Saxon housing finance”

Eh? What is Anglo-Saxon about housing bubbles? Check out the following link on The Economist. If you switch to ‘Prices against average incomes’ you can see that every EU country bar Germany and Italy looks like it is going through the bust part of your free-wheeling boom and bust pattern.

I don’t think variable-rate mortgages should be banned.

But I do agree with restricting mortgage LTV and mortgage durations.

Max LTV should be 80, maybe 85%. Max duration should be 20, maybe 25 years.

It may smack of the nanny state interfering with individual decision-making, but the last 15 years show that people weren’t sensible, and borrowed too much.

Giving 33-34-35yr mortgages to people aged 30+ is crazy.

People will have to be convinced that saving a 15% deposit and borrowing less is actually good for them in the long run.


Also, there is a pretty strong case to be made that it was Ireland’s membership of a single currency was one of the larger contributing factors to the housing boom here. Please see the following article by Ronan Lyons that illustrates how real interest rates were negative during the boom – which was driven by a one-size-fits-Germany interest rate policy by the ECB.

I’m not saying that the ECB was entirely responsible for the Irish housing bubble, but humans respond to incentives and when you pay them to borrow money, they will borrow money. There is nothing Anglo-Saxon about that and I find your characterization to be culturally offensive.

Thanks for the trackback to that post. I would also say that if Ireland had pursued a sensible policy – akin to a US state within its larger currency union – of switching the default product in the market from variable to fixed, much of the “bad stuff” associated with giving up control of your interest rate would have disappeared.

We can still do this – the idea in Europe is known as the covered bond. Danish banks have been using it for centuries, I’m told.

Also @Karl
“the premium required is quite large so that financing costs would be higher on average (and house prices probably that bit lower as a result).”
Abstracting from negative equity, is a one-off downward shift to lower but more stable house prices a bad thing?

@ Ronan

“Abstracting from negative equity, is a one-off downward shift to lower but more stable house prices a bad thing?”

Perhaps you have in mind that the lower house prices boosts affordability but in this case, that’s not true. The house prices are lower because the higher rates reduce affordability without a corresponding downward adjustment in house prices.

Greater stability is possible if we had more fixed rates but remember that the US market is dominated by fixed rates and has had its fair share of stability. Once fixed rates fall below a certain level, you get refinancing booms.

And abstracting from negative equity has a touch of the “apart from that Mrs. Lincoln” about it.

Anyway, I’m just arguing against a complete ban, which I think would be quite extreme.

I think the Irish should think about how monetary policy impacts the various economies in a monetary union when some countries almost solely use variable rate mortgages, and other almost solely fixed rate mortgages. When every country has broadly the same proportion of variable rate vs. fixed rate mortgages, monetary policy should have more or less the same impact everywhere. But if not, then monetary policy will always more strongly impact those countries with a high share of variable rate mortgages.

Banning variable rate mortgages is a disastrous idea.

No time to read the full doc but re

This would take under consideration policy tools including Mortgage Insurance Guarantees and Loan-to-Value (LTV) limits,

There’s plenty good practice in Europe re Mortgage Insurance Guarantees that should be required in Ireland as well.

Loan-to-Value (LTV) is a dangerous concept exploited by Berni Madoff among others Don’t know how many would have cashed in on similar deals during our own bubble and maybe still paying for these mistakes today. The practice would have greased the wheels of the property boom.

In Germany. District areas have a set of professionals who log every property transaction within a district and set the value of property based on an accurate log of all property transactions in that district over time.

Builders and developers must register with this group and provide professional qualifications and pass agreed standards before being allowed to develop property. As far as i recall, the group also regulate and monitor building standards at each stage of a build.

Mortgage insurance guarantees in conjunction with a system based on above form of tight regulation would achieve value for money for all concerned.

Per Colm, the Canadians appear to have avoided a bubble (so far! Quite expensive place!) thru the use of mandatory mortgage insurance, but does anyone know of they allow variable rates or what sort of ltv’s etc?

@ Colm

Provided the mortgage insure doesnt go bust, obviously. Mono line insurers in the US caused a lot of problems, remember.

Personally I think that, setting aside current negative equity issues, for equal up front affordability a regime with higher interest rates and lower house prices is better than the converse, provided early redemptions are not penalised. The reason is that if you have a extra few quid at any point to put into put into paying down the mortgage it will make a bigger dent in the outstanding amount, making it much easier to clear the damn thing.

Speaking of credit limits, should there have been prudential scrutiny of benchmarking?


General Secretary of the Irish Nurses and Midwives Organisation Liam Doran defended the Croke Park Agreement.
Speaking on Today with Pat Kenny, Mr Doran said many public servants were given mortgages by banks on the basis that they would move up the pay scale and, if they did not get their increments, they would not make their repayments.

We are coming through a period of low mortgage rates. It appears that confidence in the Euro is less tan rock solid as evidenced by the fact that there is a flight of capital to the USA whose economy and banks are in a parlous state. Interest rates in the EZ could increase rapidly if the weekly occurrence of the hope and despair roller coaster continues. The gambit of a plan to make a plan is wearing thin. In economies whose property market has held up as the consumers become more indebted the Presidents of banks are once again asking gov’t to tighten up by making the maximum term 25 years thus eliminating 30 and 35 year term mortgages. The Presidents are asking because as one of the Presidents of a US failed bank said as long as the music played we had to dance. Previous moves were to test affordability using a 5 year rate and a 35 then 30 year term. One of the Presidents is Ed Clark of TD Bank who went public with his concern. I cannot envisage a scenario that would keep mortgage rates as low as they are now due to the perceived risk factor and not a return of inflation or stagflation (blame Germany).

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