Governor Honohan says that mortgage rates may be too high!

Brendan Burgess

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The media focused on Honohan's comments about mortgage limits, but these comments in the [broken link removed] to the UCD Economics Society are very important.

Meanwhile it is noteworthy that spreads on non-tracker mortgage interest rates have moved higher and higher, not responding positively to the lowering of the ECB policy rate from 1.5 per cent in mid-2011 to 0.05 per cent today (Figure 2). (This is not quite visible from the usual statistical data series on aggregate mortgage lending rates since some tracker rates – mostly on restructured mortgages – are included in the standard definition for that series). Admittedly, despite this widening of spreads on non-tracker mortgages, the banks have not been profitable. Still, it is reasonable to ask whether, having under-priced lending so badly in the early years of the millennium, they could end up over-pricing it now. Ireland is not the only country to have been experiencing widening spreads. In the UK too they have moved up since the crisis and, for mortgages, are about as high as here. Spain and Italy are other large countries where spreads on small loans, including business loans widened appreciably following the crisis, though with some reversal more recently (Figure 3).



So, should there be a ceiling on interest spreads? Control of retail interest rates by the Central Bank is not provided for in legislation, and I believe it should remain so. This will not come as a surprise to students of economics, accustomed to understanding the problems that can be caused by preventing the emergence of a market-clearing price. But I think that there is an important political economy dimension here. If the local banks are charging unnecessarily high interest rates, that will be an inducement for new entry into lending here, and that (reversing the trend of the past few years) would be very welcome and would have the effect of bringing both pricing and the quality of banking services to a much better place. In contrast, aggressive official interest rate spread control would be the clearest warning signal to would-be entrants that they might not be permitted to earn sufficient profits to justify the costs of entering.
 
Aren't Ulster now reducing some of their fixed rate products, which will maybe encourage others to reduce.
 
I had heard that as well.

I don't think that people should fix.

I believe that the lenders will come under pressure to reduce the SVR rates over the coming months.

Brendan
 
Paddy needs to check his facts a bit better. The end of 2008 saw the decoupling of base rates and SVRs.
 
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