Squeezed mortgaged households face more pain
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This week marked one year of the most aggressive period of monetary tightening policy in the history of the European Central Bank (ECB) which has seen interest rates soar while mortgage repayments increase, squeezing hard-pressed households even more.
The nine straight rate increases since July last year — the most recent of which was announced on Thursday — means eurozone official interest rates now stand close to 20 year highs.
The potential for more rate hikes — which could come at the next ECB meeting in September — will not be welcome news for mortgage-holders as their repayments have already shot up by thousands of euro.
With this latest increase, the 171,000 households with tracker mortgages face another immediate hit, while fixed-rate households will face paying €3,500 more annually in servicing their home loans than they would have a year ago, when their loans come up for refinancing.
There has been speculation the ECB might forgo another rate increase in September but the bank is keeping its options open, with ECB president Christine Lagarde saying future decisions would ensure the key ECB interest rates will be set at sufficiently restrictive levels.
Regardless of whether or not there will be further increases, the ECB has made it clear the rates will remain high for an extended period of time, which means homeowners will be stuck making higher payments for years.
Martina Hennessy, chief executive of mortgage broker Doddl, said she had seen steady numbers of people choosing to drop their tracker mortgage and fix their rates because there is no certainty these high ECB rates will come down in the short to medium term.
“Realistically, it could be into 2025 before we see a decrease,” she said, adding even if there is a decrease it would take “extraordinary negative economic circumstances” for rates to go back down to 0% where they had been for a long time.
There are 171,000 households holding tracker mortgages in the Republic who will be immediately affected by the latest rate increase, as has been the case with every rate hike decision since last July.
A further 71,600 households who come off fixed loans this year will also face significantly increased monthly repayments. First-time buyers will also pay mortgage interest payments that may have appeared challenging just over a year ago.
Figures from the Banking and Payments Federation Ireland (BPFI) seem to suggest rate increases are having an impact on mortgage approvals, which dropped 20% in June compared to the same period last year to 4,766.
While first-time buyers approvals increased 12.6% to 3,013 in June, compared to last year, mover-purchaser approvals dropped by 7.7% to 1,094 while remortgaging/switching activity dropped 83.2% to 300.
Central Bank figures show that of the 716,560 residential mortgage accounts in Ireland, 48,760 accounts were in arrears, an increase of 1,430 accounts during the first three months of the year. Given there has been an additional 0.75% since then, it is likely more arrears and defaults will take place.
Other areas where the interest rate increases are having an impact is in the commercial property market, as well as the demand for loans from companies.
In the commercial property market, increased borrowing costs have curtailed the level of transactions between April and June. According to estate agent Sherry FitzGerald, during those three months there were only 26 commercial property transactions valued at €333m — one of the lowest quarters on record.
Sherry FitzGerald managing director Marian Finnegan said if the high interest rates were to hold into next year, investors may be able to make more informed decisions on their potential projects.
“The volume of transactions we are likely to see in both the overall commercial property sector and the development are dependent on more than just the cost of borrowing,” she said.
Across the eurozone, demand for loans among companies has plunged by the most on record between April and July — a clear signal the ECB’s year-long campaign of interest-rate hikes is feeding through.
The drop, which was “substantially stronger” than lenders expected, came alongside a further decline in demand for mortgages and other consumer borrowing, according to the ECB’s Bank Lending Survey.
In announcing its most recent rate hike of 0.25% on Thursday, Ms Lagarde said inflation had remained too high for too long. When questioned about a pause for interest rate hikes, Ms Lagarde said even if they were to go ahead with it, it “would not necessarily be for an extended period”.
The annual rate of inflation in the eurozone during June was running at 5.5% while in Ireland it stood at 6.1%. When rates started going up in July last year, eurozone inflation was running at 8.9% and gradually increased, before peaking in October at 10.6%.
Core inflation — which strips out volatile food and energy prices — has remained strong. It stood at 5.5% in June, down only slightly from March’s record high of 5.7%. The ECB’s medium term target for inflation is 2%.
Ms Lagarde said interest rates were starting to do their job in reining in demand, citing manufacturing and signs of weakness in housing markets. The eurozone economy was expected to remain weak over the short term, but employment remains "robust", although manufacturing employment may weaken, she suggested.
She said food price inflation was slowing, but remained at an elevated level, adding the drivers of inflation were changing, with domestic factors including wage increases and profit margins increasingly in the spotlight.
Among analysts and economists, there was hope this latest increase would be the last, but a further one in September is now seen as likely.
Economists at Capital Economics are forecasting one more rate hike before there is a pause, as core inflation is high in the eurozone.
Economist Jim Power said he expected there to be further rate hikes as he foresees pressure to be put on the energy markets as well as food prices in the coming months.
A potential economic stimulus in China could put pressure on oil and gas prices and Russia’s refusal to allow Ukraine to export grain could increase food prices. In addition, one of the largest rice exporters in the world, India, announced a ban on the exporting of non-basmati white rice.
“The ECB is clearly of the view that it is going to continue tightening until it is certain that the tightening seen since this time last year will actually start to impact on inflation. So it certainly doesn’t believe that the job is done yet,” Mr Power said.
“From the perspective of the mortgage-holder, it is a double whammy in the sense that rates are rising but also food price inflation, which is very elevated but the prospect of it coming down soon is being blown out of the water.”
Irish people are already dealing with very high grocery price inflation which was running at 14.7% in early July.
Mr Power said ahead of the September meeting, the ECB is going to be closely watching the data and if it suggests underlying inflation pressures are strong, we can expect another 0.25% increase.
“It’s not definite, it will depend on the data but I would be a bit fearful that energy and food price inflation will start to accelerate again,” Mr Power said.
Economist Austin Hughes said this latest rate increase could and should be the end of the rate increases but “ I don’t think you can definitively say at this stage that it is the end”.
“The reality to me is, the things that are pushing inflation back to target have nothing to do with the ECB. The energy price reversal, the fact that we don’t have a wage price spiral,” he said.
Mr Hughes said most of the heavy lifting on reducing inflation has been done by factors outside of the ECB’s control and should rates continue to rise, it runs the risk of leaving “after-scarring" in the form of weaker economic activity.
“The reality is that you need more investment in the eurozone economy for climate change, for ageing reasons and also for short-term issues around getting the supply capacity better suited to a world where we can’t rely on Russia anymore.
“You need investment to be stronger which means you need borrowing to be strong, which means in a sense what the ECB is doing by dampening borrowing could be counterproductive to the inflation side,” Mr Hughes said.
Economists at Capital Economics are expecting at least one more rate hike and for rates to be left that high until at least late next year. They also noticed the slight change in language from the ECB.
It had previously said interest rates “will be brought” to sufficiently restrictive levels at future meetings and are now saying they “will be set at sufficiently restrictive levels” for as long as necessary. Capital Economics said this suggests there may not be any further interest rate hikes.