Will banks use SVR reductions to prop up housing market?

Just asking an open question to see what the practicalities of the following would be:

Is it likely, or even economically feasible, for banks to dampen the effect of the LTI/LTV restrictions by offering lower variable rates, or indeed lower fixed rates?

I know this would sound like heresy in most Irish banks as they’ve managed to habituate the Irish customers to SVRs almost double the cost of those widely available in Europe.
But, if it meant protecting the asset values they’ve assigned to their loan book, would they not reduce SVRs to stoke the market?

Acknowledging the hit they are still taking on Tracker Rates currently, and that this may restrict their ability (but more likely just their willingness) to offer lower SVR or fixed - is this an option for the banks?

I don’t think it’s likely, but I could imagine a Dublin where the LTI/LTV restrictions would be dampened a little by:

  • an SVR of 3%
  • a government favorably moving the tax brackets/USC to increase net pay
  • 2 years of sustained low fuel costs driving economic activity
  • European QE creating a feelgood (for investors) asset bubble
  • wage inflation in Dublin due to FDI increase
  • wage inflation in Dublin due to public sector wage “restoration”

If this cumulatively started to put, for example, an extra 200euros/month in to household budgets - it’s hard to see the Irish not wagering all this down on property once again!
Any comments?

Would only affect those who qualify under the restrictions but currently don’t want to borrow because rates are too high.

Maybe trader uppers on non portable trackers with lots of equity or savings.

Is that a large number?

True. Lower SVRs alone don’t move more people into qualifying for the criteria - it’ll just increase their ability to pay down the loan. So it probably broadens the number of people who, are already qualified under criteria, to feel that they can afford higher monthly payments.

I was think more that lower SVRs in conjunction with the other increases to net pay, and increases to gross pay, will drive up the Income in LTI calculations - and make people feel that the “max loan value” they are permitted to get is affordable each month.

Think the OP meant that the cost of monthly payments would drop if the SVR did and that affordability would improve , esp vis a vis rent!!!

The answer is no. The high SVR is a book balancing exercise against.

  1. Large numbers of trackers that the banks lose money on. Well into the billions every year I should think.
  2. The large numbers of deadbeat underwater mortgages where no workout is agreed and where no payments come in either.

The latter two show no signs of going away soon either. Have a read of the most recent analysis from late 2014

centralbank.ie/publications/ … rities.pdf

Table 1: Stylised Facts between Total Market and RMBS Population

No. of Mortgages 907,140
Current Balance € billion 135.89
No. of Mortgages in Arrears 171,578
% of Mortgages in Arrears 0.19
Arrears Balance € billion 3.97
Current Balance for Mortgages in Arrears € billion 34.29
% of Mortgages ‘Tracker or SVR’ 92 94 -
% of Mortgages ‘Fixed or Other’ 8 6 -

and note “However, the aggregate
Central Bank data shows that of the 92 per
cent of total mortgages within the ‘Tracker or
SVR’ category, 50 per cent represent tracker
mortgages, with the remaining 42 per cent
of mortgages on SVRs”

So until some of the 50% of mortgages that are trackers are cleared off then no.

Thanks 2Pack. That’s pretty much what I meant, allied to factors that will increase Gross Pay also. Affordability of monthly payments due to the above factors, and some increases in gross pay pulling a few more into the LTI criteria were the central point I was getting at, but I was a bit heavy-handed when writing the Thread title - can I change the title or is it locked now?
Admin anyone?

The figures that you illustrated are still frightening each time I see them. Massive percentage of total mortgages in arrears. And about 25% of value of total mortgages wrapped up in loans in arrears. Surely there’s no other Westernised country that’s managed to do this to itself?

I guess the point I was making is that there are a few factors coming in to play all simultaneously that would ordinarily* inflate house prices. An SVR reduction being one of the most powerful affordability factors. So in Dublin these factors might offset some of the impact of the restrictions.

TBH it’s hard to see exactly how this will play out in terms of market impact - but it will be fascinating to watch. If things take a dive (15-20% drops) before the next election don’t be surprised to see the parties clambering all over each other to offer FTBs “help to buy homes”.
With the CIF standing at their shoulder.
God knows what scheme they’ll all come up with to inject debt into the citizen buyer.
That’ll give prices a shot in the arm, which keeps the grey vote happy - and will allow FTBers to gather around the craps table again!

*By ordinarily I meant anytime at all that Irish people feel their personal economic circumstances are improving.

Does anyone have good info on what the cost of funding actually is now for Irish banks? Are they really losing much on performing trackers ?

I asked this before - as I was curious how banks were doing - generally about 7-10yrs into 25-30yr tracker mortgages. No-one seemed to have a detailed break-down.
I was curious what the total amount of tracker mortgage debt was - separate from SVR, and also if customers are 1/3 to 1/2 through tracker durations- where the interest/principal profile starts to change substantially - how this was affecting the banks.

I suppose it’s all bad debt, regardless of the split profile, if customers aren’t paying the monthly payments!

There are small but definite signs of banks starting to compete on SVR rates. Question is will they all follow suit and what effect, if any, will it have on house prices.

From Finfacts

https://www.finfacts.ie/images/Euribor_2015_Ireland_Jan052015.png

Also
tradingeconomics.com/ireland/interbank-rate

Banks at present are charging c. 4.6% SVR which is a markup of a 4% spead over euribor. Then again they make no money under a 2% spread and the average tracker rate is well under 2% now and then there are arrears to be covered.

OTOH I’d think the number of SVR mortgages will exceeed trackers by end 2016 or thereabouts. Still it’ll be a while before the spreads tighten to 3% all the same and Euribor can go up as we know!