Walking the mortgage tightrope

The only way to establish the exact impact of an interest rate increase on a given person's lifestyle is to work out how much of their income currently disappears on mortgage repayments each month.

While this will obviously vary from homeowner to homeowner, it is possible to get a sense of the general picture by drawing on two pieces of economic research published over the past week.

The first, from the Central Bank, finds that housing finance accounts for slightly more than 80 per cent of all the Republic's personal credit, or borrowings.

This compares to about 76 per cent in 1993 and, according to the bank, it suggests "that, for many households, their mortgage may be their only or dominant debt". No shocker there, you might say.

The next step taken by the bank's study is a touch more illuminating, however, with a measure of how our collective mortgages relate to our collective disposable (or after-tax) income.

The bank finds that the collective total of all our mortgages represented about one-third of our collective disposable income in 1993. This had risen markedly by 2003, standing at 77 per cent last year.

This "striking change" will automatically heighten the sensitivity of household spending to interest-rate increases, the bank warns.

It acknowledges, however, that, while the value of personal debt has climbed over the past decade, the actual cost of paying that debt back has not risen to the same extent.

This is because interest rates have been dropping while the amount we borrow to pay for our houses has soared, thus reducing the financial impact of taking out a bigger mortgage than our predecessors.

It is at this point that new research from Davy Stockbrokers takes up the baton by calculating what the broker's economists call the "servicing cost" of the average Irish mortgage.

The servicing ratio looks at the average capital and interest repayments (i.e. the monthly mortgage repayment) faced by Irish homeowners and then calculates how much of a given person's disposable income is needed to cover this. The results are again rather striking.

In 1998, just less than 10 per cent of our after-tax income went on servicing our mortgages. By 2002, this had risen to 12.2 per cent, climbing further to about 15 per cent last year. In 2004, according to Davy's estimates, it will reach 17.3 per cent.

The key point to bear in mind at this stage of the calculation chain, according to Davy, is that, while mortgage lending has exploded over the past few years, it has not climbed so substantially as a measure of the value of our houses.

Therefore, the ratio of mortgage debt to the value of the Irish housing stock actually dropped from 16.4 per cent in 2002 to 16.1 per cent last year. This came after several years of double-digit percentage growth in house prices.

While offering some comfort to those already in the market, the above observation will be less of a consolation to the Republic's would-be first-time buyers, many of whom will continue to find themselves priced out of the mortgage and housing markets.

An affordability index compiled by Davy's sister company, DKM, finds that the average first-time buyer couple needed to allocate 25.5 per cent of their after- tax income to paying back their mortgage at the start of this year. This was a slight increase on last year's average.

And for first-timers in Dublin, the picture was a little more harsh, with net mortgage repayments requiring about 32 per cent of disposable income in the first quarter of 2004.

The positive spin on this figure, however, is that it is substantially lower than the 42 per cent recorded at the start of 2001.

Davy's conclusion, which comes at the end of a study into all kinds of personal credit, is that debt levels remain "manageable" for the majority of consumers - at least for now. But the economists acknowledge that "a sharp rise in unemployment, a collapse in house prices or a significant hike in interest rates", however unlikely, could change everything.