Variable rate mortgage holders will be paying €1.25bn more in interest than people living elsewhere.
Is it is grossly unfair and inequitable for one class of mortgage holder to effectively subsidise another as banks struggle to keep their doors open? Is there a case to be made for capping interest rate margins on variable rate annuity mortgages?
The distortions within the housing mortgage market continue to be acutely felt by those who are on variable interest rates. Of the €138bn or so of household mortgage debt about 36% or €50bn is either on a variable rate or a short term fixed rate that will shortly reset at higher margins.
Once the mainstay product, the plain vanilla variable rate annuity mortgage has become a trap few, if any, are able to break free from. Someone with a €200,000 variable rate annuity may by the end of this year pay almost 2.5% more than they would pay if living elsewhere.
Amounting to an additional €5,000 a year it represents an additional citizen’s burden. It’s a hidden, exploitative, discriminatory tax on after-tax income amounting to close to €1.25bn a year.
The gap between what should be paid and what is being demanded by zombified banks is growing. Yet there is no sign of any move to control the upward only movement of variable mortgage rate margins by lenders. And we could be seeing a shift to a permanent high margin non-competitive marketplace where most consumers are so marginalised they cannot shop around.
Mortgage rates and other consumer lending rates will be significantly higher than other Eurozone states for some considerable time to come.
Not only is this state ploughing €70bn into the domestic banking system to keep it alive but tax-payers disposable income will also subsidise banks through higher interest rates, fees and charges. In the absence of a working banking system, banks hold their customers captive. Captivity is amplified by the lack of market participants as mortgage lenders shut down or withdraw from making mortgages. The number of lenders has shrunk from nine principal firms and a clutch of sub-prime operations to three highly conservative lenders.
These remaining banks can abuse their oligopolistic power to increase rates without fear of competition. Given the scale of economic depression it’s highly unlikely that any oversees banks will be interested in entering the mortgage market. If they do they will do so by selectively cherry picking better quality loans. The implications for consumer protection are obvious.
Right now one class of mortgage holder is subsidising another class who opted for tracker mortgages. There are two sub-classes within the tracker brigade - those who bought homes and amateur landlords. Both are effectively being subsidised by variable rate mortgage holders.
To make matters even more unpalatable, many amateur landlords are in receipt of two additional tax payer subsidies. They are receiving social welfare rent subsidies amounting to about €500m a year and are also able to offset loan interest costs against rental income.
One category of borrower is directly through higher interest payments and indirectly as a tax-payer, subsidising others.
The wider problem is one of a severely depressed property market coupled with its continuing decline, now estimated to have fallen 50% from the peak. There is no sight of a bottom being reached as recent fire sale auctions demonstrate that clearance prices are far lower than real long term value. Economists use differing methodologies to assess fair value.
While none of these can predict where prices will level off, they do indicate that the have some way to go before the bottom will finally be reached. The problem with desk top macro analysis is it fails to account for buyer confidence. If people are unwilling to buy at any price then how can you attribute any value at all? The consensus if it can be called that is prices may fall by over 60%. With limited credit availability and only cash sales possible in many cases, the negative shock of recent fire-sale auctions hints that the bottom is still some way off.
Without an active property market and absence of any mortgage competition, it looks as if variable rate annuity mortgage holders have become the most discriminated against group. And as long as banks struggle with as yet unaccounted for loan losses, it seems that the hidden tax implicit in higher margins will continue unless some effort is made to protect consumers through price controls.
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