Competitive market in national interest

Comment: Recent media reports of remarks by Housing Minister Noel Ahern on the role of financial institutions in the housing market are confusing to say the least.

The Minister is reported as saying that lenders are pushing first-time buyers out of the market by fuelling property prices. At the same time, he is critical of lenders for introducing innovative products such as longer-term and 100 per cent mortgages - the only means by which some first-time buyers can secure a home of their own in the market today.

The Minister's attempt to account for rising house prices stands in sharp contrast to the most recent analysis in the Irish Property Review from Bank of Ireland economist Dan McLaughlin. He concludes that, such is the impact of additional pressures on the demand side, that "all the available indicators suggest that 2006 will again set new records in terms of house prices, numbers of transactions, house completions and mortgage lending".

It seems therefore that the Minister, like the rest of us, has grounds for concern about rising house prices. However, in seeking an explanation for this trend, he should substitute the word "demand" for the word "lender". The following are among the key factors driving the demand for housing:

• employment growth - with 90,000 new jobs alone created in the 12 months to the first quarter of 2006;

• growth in wages and household income - with wage income rising by 10.9 per cent in 2005;

• population growth of 2 per cent a year;

• growth in the numbers in the household formation age group;

• strong immigration - with recent research indicating that as many as 20 per cent of new homes are being purchased by foreign nationals.

As for house completions, the figure stands at 81,000 for 2005, according to figures produced by the Minister's own department. Tellingly, some 93 per cent of these are private houses and local authority houses account for just 5.2 per cent.

The same departmental source uses Economic and Social Research Institute (ESRI) figures to confirm the Republic's high level of house ownership at 82 per cent. Since the EU average stands at 63.5 per cent, it is clear that homeowners, including first-time buyers, are well served in this market.

Mortgage lenders have been instrumental in helping to maintain this internationally-high level of ownership. The choice of mortgage products for borrowers has never been wider, including variable rate, fixed-rate and tracker offerings, to mention just a few. The number of mortgage lenders and brokers serving the market has never been greater - and the price of these various offerings has never been more competitive. The most recent comparative figures from Eurostat show that the average total cost of a mortgage here stands at 3.96 per cent, compared to the euro zone average of 4.43 per cent.

The introduction of longer-term and 100 per cent mortgages is a further competitive market response to developing consumer demand. As confirmed by the Irish Financial Services Regulatory Authority, stringent lending criteria and stress testing are applied. Furthermore, such products are deemed suitable for only a small cohort of borrowers - estimated at less than 10 per cent in the case of 100 per cent mortgages, for example.

Nevertheless, the reality is that, were it not for innovations such as these, many thousands of first-time buyers would not be able to purchase their own homes. A new and comprehensive set of mortgage market statistics, due to be published shortly by the Irish Bankers' Federation (IBF), will further illustrate the support provided by lenders across the residential mortgage market to all segments of that market.

Of course, competition is by no means the hallmark of the mortgage market alone. A whole series of consumer cost surveys by the regulator confirms the extent to which consumer choice has increased and price and product competition has intensified across the range of banking services - including current accounts, personal loans, credit cards and car finance. Independent international comparisons illustrate the overall competitiveness of the banking market here relative to other countries, and not just for mortgages as stated earlier.

For example, Capgemini's World Retail Banking Report 2005 shows that, at €59 per year, the average cost of current account banking here is the second lowest of 20 countries worldwide. Eurostat data shows the average cost of non-mortgage consumer credit here to be 6.97 per cent compared to a euro zone average of 7.73 per cent. And the London-based Retail Banking Research shows the total cost of having a credit card is competitive by European standards.

The development by the IBF of the personal account switching code as well as the recently-launched business account switching code greatly facilitates ease of switching and supports the development of further competition in the marketplace. A competitive market that facilitates consumer choice is to the benefit of banks and customers alike.

It is also in the national interest, although the Minister's comments might have us believe otherwise.

• Pat Farrell is chief executive of the Irish Bankers' Federation, the leading representative body for the banking and financial services sector in Ireland