Davy: five reasons why mortgage Bill will not work

Legislating for mortgage interest rate caps, as proposed in Fianna Fail’s new mortgage Bill , will “eliminate the prospect of new market entrants, stymie competition and ill-serve consumers over the longer term” Davy Stockbrokers has said.

The Bill, which was published on Tuesday, seeks to give the Central Bank the power to regulate mortgage interest rates, against a background of increasing frustration with Irish variable rates, which are considerably higher than European averages.

“The Bill is essentially an effort to force variable mortgage rates closer to the European average,” Fianna Fail spokesman Michael McGrath said.

But, Davy Stockbrokers argues that far from helping consumers, such a Bill would hinder the ability of the Government to divest its banking stakes and preclude new players from coming into the Irish mortgage market. The answer they say, is more competition.

"Competitive dynamics will result in the continued decline in mortgage rates," analysts Diarmaid Sheridan and Conall Mac Coille write, in a report which outlines five reasons why the Bill is bad for consumers and banks alike.

It’s not constitutional

Pointing out that parts of the Bill may be unconstitutional - "presumably relating to whether a law can be enacted to unilaterally override a clause in a pre-existing contract" - analysts Diarmaid Sheridan and Conall Mac Coille also note that competition issues are not a function for the CBI but rather the Competition and Consumer Protection Commission, and that Europe's Single Supervisory Mechanism would need to be consulted on the measure.

Competition is already working

Noting that the average mortgage rate in Ireland fell by 49 percentage points from the first quarter of 2015 to 3.64 per cent in 2016, Davy argues that mortgage rates in Ireland are on a declining trend.

" This dynamic remains evident with both AIB and KBC cutting their rates by 25bps in the past week with speculation that AIB will cut rates further this year."

However, Irish rates remain considerably above the European average rate for new variable rate mortgages of about 2 per cent.

Rates of 2% would not be sustainable for the banks

According to Davy, a mortgage portfolio yielding 2 per cent would not cover a bank’s cost of capital, while further regulatory initiatives are likely to increase the cost of funding . Another factor is the extremely low level of repossessions but exceptionally high numbers of households in long-term arrears, “making lending in Ireland inherently more risky”.

Cuts in mortgage rates could fuel “Ireland’s frothy housing market”

Further “significant cuts” in variable rates could provide further impetus to house prices, Davy notes, suggesting that should Irish house prices continue to rise faster than wages and incomes, “it might even force the CBI to consider tightening the mortgage lending rules further”.

It could make it more difficult for Government to sell bank stakes

If lower mortgage rates hit profitability, then this would “be destructive of value in the state’s investments and further impact investor sentiment toward the banking sector”.

“Enabling mortgage rates to come down over time in a sustainable manner would be far more supportive of banking sector valuations and ultimately the value realised by the state through stake sales,” Davy says.