This Irish Mortgage Corporation market comment was prepared by Economist Geoff Tucker

The average price paid for a house in Dublin and outside Dublin in July 2006 was €408,959 and €262,142 respectively, ESRI/PermanentTSB House Price Index. The equivalent prices at the start of 2006 were €368,576 and €240,201.

The Irish mortgage market is on course to record total gross lending of €43 billion in 2006, up from €33.4 billion in 2005 and an increase of 29% over the year.  This phenomenal growth in lending is spurred on by the exceptional strong demand for property, especially from first-time buyers, despite the recent increases in interest rates.

In fact, figures published by the Irish Central Bank show that the value of residential mortgages outstanding increased by €2.4 billion in the month of July, the biggest monthly increase so far this year.  The strong performance of the mortgage market in July mirrors a busy summer period for Irish Mortgage Corporation, with new enquiries and closed business up on previous year’s figures. 

The strong demand for new mortgages is predominantly from first-time buyers, which in turn is due to the ongoing expansion of the population and the supporting economic environment.  Recent figures from Irish Mortgage Corporation show that non-Irish nationals represent a growing sector of the mortgage market, accounting for almost one-in-five first-time buyer mortgages in the first six months of this year.

Of the €43 billion in gross lending expected this year, €27 billion will be directly loaned out for the purchase of residential property and the remaining €16 billion will be via new equity release mortgages, which will be used for a variety of purposes including part-funding the purchase of investment property at home and abroad, home improvements and extensions, parents helping children purchase their first home, debt consolidation and the purchase of goods and services.

Meanwhile, the Governing Council of the European Central Bank (ECB) decided at its meeting on 31st August to leave Euro-zone interest rates unchanged, with the ECB's repo rate currently at 3 per cent.  However, at today's press conference Jean-Claude Trichet, the President of the ECB, gave a strong indication that the bank will increase interest rates at it's next meeting on Thursday 5th October.

In his introductory statement, Mr Trichet said that “…  strong vigilance remains of the essence so as to ensure that upside risks to price stability are contained.”  The use of the word vigilance has in the past been used by the bank as a signal to the financial markets that there is a good chance that interest rates will increase at the next meeting of the Governing Council.

Mr. Trichet did note that recent data on money growth showed some moderation in the pace of expansion, which is possibly due to the earlier sequence of rate increases since last December.  But the ECB is still concerned about the rate of monetary expansion and feels it still presents upside risks to price stability over the medium-term.  Mr Trichet also reiterated his statement from last month that “if our assumptions and baseline scenario continue to be confirmed, a progressive withdrawal of monetary accommodation will remain warranted” i.e. if the Euro-zone economy continues to grow over the coming months then more interest rate increases are on the horizon. 

In view of all current available information, Irish Mortgage Corporation expects Euro-zone interest rates to reach 3.75% by March of next year.  The peak of the current interest rate cycle is now somewhere between 3.75% and 4.25% and will ultimately depend on a number of variables, including the Euro-zone inflation rate, the performance of the Euro-zone economy, the evolution of oil prices, exchange rate movements and the global economic environment.  With US interest rates seemingly reaching a peak and with recent data pointing to a slowdown in growth in the US economy and some easing of the rate of expansion in the Euro-zone economy, the scope for further interest rate hikes in 2007 is likely to be very limited.  This will be further reinforced by any appreciation in the euro vis-à-vis the dollar in the coming months.

As stated in previous bulletins, an increase in rates of this amount does not present any imminent danger to either the mortgage or property market.  Rising interest rates introduced at a very gradual pace and signalled well in advance, as has been the case to date, do not represent a threat to the Irish residential property market.  If anything, rising interest rates should temporarily ease some of the pressure on residential prices, which is to be welcomed at a time when prices are increasing at a rate in excess of 15% per annum.

For first-time buyers, rising interest rates leads to a reduction in the amount that can be borrowed.  As a general rule, a lender will advance funds up to the point where the monthly repayments do not exceed 35% of the applicant’s net disposable income.  The Irish Mortgage Corporation affordability model for the Irish property market, which looks at the ability of a typical dual income household to meet the monthly mortgage repayments on a new home, shows that even if rates were to rise to 3.75%, the repayment burden for the typical first-time buyer couple would rise to 29.8% of net disposable income by the end of 2007, still comfortably below the 35% limit.

Homeownership remains a realistic goal for the large majority of young people given the favourable affordability environment.  Product innovation in the mortgage market in recent years means that many first-time buyers can now avail of a wide range of products that provide even greater accessibility to the property market, including 40-year loan terms, 100 per cent loan-to-values, ‘low-start’ repayment mortgages and very competitive variable and fixed interest rates.