Since the beginning of this year, the average monthly repayments on a £100,000 (€127,000) variable rate mortgage have increased by almost £100. It has been a year in which the European Central Bank (ECB) raised interest rates six times, with most of these increases being passed on to Irish consumers.
The increasing cost of mortgages was bad news for borrowers, particularly those who had borrowed to the limit of their ability. But there may be some respite in the coming year, with many commentators predicting that international interest rate trends have reached a ceiling and may be about to fall back. The average market variable rate rose 1.77 percentage points to 5.99 per cent this year, while the one-year fixed rate rose on average by 1.37 percentage points to 5.65 per cent. Since the middle of last year, fixed rates have been edging steadily upwards. They began to level off in the past few months. The differential between cheapest lender and dearest lender in the market also narrowed during the year, according to Mr Tom O'Connor, head of business intelligence at ICS. For example, the variable differential in December 1999 was 0.7 percentage points while this month the difference between the most expensive and the cheapest lender is 0.56 percentage points. Mortgage providers continued to do brisk business, with borrowers prepared to push themselves in terms of loan to house value ratio and multiples of income borrowed.
The latest Central Bank figure for household debt for housing purposes as a percentage of disposable income stands at 48.9 per cent. Three years ago that figure was around 40 per cent and 10 years ago it was 29.1 per cent.
After an estimated 18 per cent increase in house prices across the State this year, more moderate growth in prices is expected next year. Housing inflation this year is still high but the rate will be below 20 per cent for the first time in three years.
It is estimated that house prices will continue to rise but at a slower pace, with forecasts of 12 to 15 per cent for next year. Perhaps a more modest rate of housing inflation, compared with 24 per cent in 1998 and 22 per cent in 1999, will lessen the attraction of housing as a speculative asset.
But there are a number of robust underlying factors that make it highly unlikely that house prices will see a rapid slowdown. With 42,300 immigrants and returned emigrants coming to live in the Republic in the year to April 2000, demand is being propped up in the key house-buying age group. Barring a disaster, the economy is expected to see another year of strong growth and combined with a rise in disposable income it can only fuel demand.
In the short term, Mr O'Connor expects there to be a bias towards private treaty sales until Spring 2001 as auctions have not been achieving such spectacular results lately.
He points to a general auction malaise reflecting the buyer's frustration with a non-consumer-friendly sales process, particularly for would-be buyers who are tied for time. So demand will continue to be strong, well outstripping supply at the lower starter homes end of the market. The backlog of people on middle incomes who have been priced out of the market in recent years will continue to mop up any new and more affordable supply. Despite the rate rises throughout 2000, the vast majority of people taking out mortgages still opted for the variable rates, which are naturally lower than fixed rates. The general advice from Mr Martin Walsh, head of lending at EBS, is that in the long term variable rates tend to work out cheaper. However, Mr Walsh said that if the borrower would be in any difficulty in the event of fluctuations in the monthly repayment, it is well worth going for the fixed option for peace of mind. Mr Walsh predicts very little movement in any direction for interest rates in 2001. According to ICC Bank Group Economist Ms Mary Doyle, the interest rate profile "suggests a flat short-term interest rate scenario in the first half of 2001".
Mr O'Connor of ICS predicts that variable rates should increase by about 25 basis points during 2001, probably in the first quarter.
"Variable is likely to plateau at this level for the remainder of the year and there is a reasonable probability that we could start to see a variable reduction in the final quarter of 2001."
According to Mr O'Connor, fixed rates are likely to remain static throughout the year, with three and five year more likely to fall than to rise.
