Slowdown in House Price Growth Could Delay ECB Interest Rate Hike

House price growth in Eurozone countries has been steadily decreasing for a number of months. The current slowdown in Eurozone housing markets could jeopardize the region’s economies. Many Eurozone countries have experienced exceptionally high growth levels over the past number of years and may find it difficult to adjust their economies accordingly.

Countries such as Ireland witnessed unprecedented growth in the housing and construction sectors in the years leading up to 2006 when they peaked, and have steadily slowed since then. Much of this growth has been attributed to low Eurozone interest rates, which bottomed out at around 2%. The end of 2005 saw the beginning of interest rate increases, a trend which continued throughout 2006 and 2007 to date, and saw interest rates doubling. This put increased pressure on borrowers and contributed to the marked slowdown in the housing market. Ireland is particularly susceptible to interest rate hikes, given the large proportion of variable rate mortgages that exist here.

It is thought that the expected average rate of increase for house prices in the Eurozone will stand at …

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Financial Regulator Introduces New Stress-Testing Regulations

The Financial Regulator is set to introduce new regulations governing the stress-testing of mortgages in the near future. The changes, which are expected to be introduced next month will amend the current practice of stress testing mortgages to determine repayment capacity at a rate 2% above the ECB rate. The proposed changes will mean that future mortgage applications will be tested at a rate of 2.75% above that of the ECB.

Up to this point, lenders have stress-tested mortgages to establish whether borrowers could afford payments on loans at an increased rate of 2% above the ECB rate. Many lenders in the Irish market don’t stress-test applications that seek 5 year fixed rates. The new regulations will require that lenders stress-test all applications to make certain that borrowers can make repayments at the new higher rate of ECB +2.75%. The policy of some banks not to stress-test 5 year fixed rate mortgage borrowers, meant that many qualified to borrow larger sums than a standard variable rate mortgage would allow. These new directives will put an end to this practice.

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A Return of Section 23? ..Tax Incentives on Property Due for Re-Introduction

It has been reported this week that the government may be considering re-introducing tax incentive schemes in order to foster development in regions outside Dublin. Previous tax incentive schemes that have been introduced are due to finish some time in 2008. Earlier incentives include section 23 and section 50 initiatives. These initiatives were hugely successful in attracting investment to developing regional towns although they did attract some criticism as many felt that these tax incentives allowed wealthier landlords to avail of further tax breaks at the expense of locals.

The proposed incentives will be strongly linked to the National Spatial Strategy, 2002. This decentralization strategy was launched with the intention of drawing individuals away from the capital city and building a thriving nationwide business network instead. These proposed schemes are being designed with the midland towns of Athlone and Mullingar in mind. Other towns that will reportedly be designated these new tax incentives include Dundalk and Letterkenny.

It is also alleged that the ‘living over the shop’ scheme is due for re-introduction. This refers to tax incentives for …

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Surprise Move by US Federal Reserve Revives Global Markets – U.S. interest rate cut

Traders are relaxing slightly this evening as stock markets perked up, following a surprise move by the US Federal Reserve in which it cut its primary rate of interest. The move was implemented with the intention of calming nervous global markets, shaken by the US subprime crisis. Markets have been weighed down by huge doubts which saw global share prices plummeting in the preceding weeks. Credit restrictions have jeopardized global market stability in the aftermath of the US subprime crisis. The US Fed cited fears of ‘restrained economic growth’ as reasons behind its dramatic intervention.

The 50 basis point rate cut affects Fed loans to banks, and resulted in the interest rate falling from 6.25% to 5.75%. Already the effects of the rate cut have rippled through financial markets. European markets have seen some positive effects already, with Europe’s FTSE Eurofirst up 1.7% and Britain’s FTSE 100 up 2%.

The US Fed also said that it was ‘monitoring’ market conditions and that it may intervene further if required. Meanwhile long-term investors remain unfazed, maintaining their position that signs …

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Credit Squeeze – Could it Help to Cool Overheating Markets?

Although it may be of little consolation to investors, the recent credit squeeze could be just what is needed to help overheating markets cool down. Despite not being early enough to rescue the US housing market from crashing, it could still prove a blessing in disguise in helping to dampen the takeover boom from escalating to an uncontrollable level.

Debt markets will have to try to cope with huge impacts on a global scale. Hopefully lenders and borrowers alike will have learnt their lessons from the events of the past six months. Lending standards will be tightened, resulting in less risky lending deals such as PIK notes or ‘payment in kind’ notes, which are agreements where IOUs can be issued in place of cash payment on interest.

With great nervousness surrounding the debt markets at this moment in time, investors will be avoiding takeovers in this area. The stockmarket, which had been experiencing highs on the back of debt market takeovers, will find share prices continuing to fall. The majority of businesses shouldn’t have any major difficulties in accessing …

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Reasons Behind Increasing Interest Rates

Increasing interest rates are a constant source of concern for borrowers. The fact that another ECB interest hike is almost imminent some time this autumn is news that will not be received well by borrowers and will undoubtedly leave countless people in financial trouble. Yet despite this, there is still reasonable cause for central banks to consider raising interest rates.

Output is still continuing to grow at surprising levels. Although this does not necessarily herald the arrival of huge inflationary pressures anytime in the near future, the ECB will certainly wish to curb any potentially adverse inflationary effects and it is well known that prevention is better than cure. Monetary expansion is continuing at healthy levels but a closer look hints that much of this could be resulting from inflows of money that attempt to take advantage of promising interest rates. Mortgage lending is also leveling off agreeably, while wage pressures have not yet surfaced. However, if output levels remain constant, it is likely that this situation could change soon.

Economists are suggesting that the optimal rate of interest …

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How the US Subprime Mortgage Crisis Affects Irish Markets

Rumours have been circulating about the brewing subprime mortgage crisis for the past 18 months or so. More recently we have seen these rumours explode into major headlines as the global effects of the fallout from the US subprime mortgage predicament are felt. Although we should all by now be familiar with the term ‘subprime mortgage lender’, not all of us know what these lenders are. Even more so, many of us fail to see how problems with relating to US subprime mortgage lenders affect global markets.

Subprime lenders traditionally operate outside general ‘prime’ lending conventions. They provide credit to individuals with bad credit ratings, few assets and low incomes. In the US, there have been instances of lending institutions selling ‘Ninja’ mortgages – meaning to people with no income, no job and no assets. Many also allow mortgage applicants to self-certify, in that they personally certify their own level of earnings. In return for this, they charge interest at a much higher level than prime lenders. These lenders then put the loans into bundles and sell off the …

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Fixed Rate Mortgages Offer Greater Borrowing Possibilities

Many borrowers are unaware that it is often possible to borrow larger amounts if you agree to a 5 year fixed rate with your lender. This is because lending institutions are not required to stress test borrowers’ repayment capacity is they decide to take out a mortgage on a 5 year fixed rate.

Under guidelines as set out by the Financial Regulator, when processing applications for variable rate mortgages, lending institutions are required to test the borrower’s repayment ability in face of an increase in interest rates of 200 basis points. This means that if a borrower wishes to take out a variable rate mortgage at a rate of 4.75%, then their application will be stress tested to ascertain whether the borrower could cope with repayments at a level of 6.75%.

Many borrowers choose to buy properties that already require them to stretch their income. This process of ‘stress testing’ applications often means that many borrowers are refused the amounts they wish to borrow on the basis that they would not be capable of making repayments at a …

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Bond Issues, Monoline Insurers and the Fallout from the US Subprime Mortgage Crisis

With the current crisis in the US subprime-mortgage market, observers are keen to speculate on who will be most affected by the fallout. Many onlookers are claiming that one of the industries that will suffer most adversely will be the so-called monoline insurers. These insurers guarantee efficiency in repayment of bond principal and interest when defaults occur. Monolines are highly geared in comparison with conventional insurers therefore leaving them more exposed in an unstable environment. Despite this, Monolines stress test each and every potential transaction under hugely stressful situations and accept only those transactions displaying no losses. This is one of their more conservative protection measures and they do this to cover themselves in the case of things turning bad.

It has been claimed already this year that MBIA, one of the largest monoline insurers in the US, has suffered losses and that it has made large payments in order to quell allegations of instability. One of the major factors considered by observers is that MBIA’s huge leverage. Outstanding guarantees currently stand at 150 times capital.

In the …

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Credit Market Anxieties May Weaken the Global Economy

For a number of years borrowers have been allowed unrestrained movement in the debt markets. This was largely due to huge demand from investors for high-yield products. The healthy profits and favourable market conditions helped companies to make their repayments and as a result, failure to pay was hardly an issue. This resulted in borrowers amounting huge pressure on banks to drop certain precautionary measures that they had adopted to protect themselves in the event of payment defaults.

At present however, investors are being very selective with their choice of investments. Lending institutions that had previously lent substantial amounts to finance huge deals, had done so on the premise of selling these loans on. A decrease in market demand has this week resulted in companies backtracking on two major deals due to close. Deals totaling $17 billion have been withdrawn in the past six weeks alone.

Many are citing the difficulties in the US subprime mortgage market as the principal cause of this change in behaviour. Here, defaults have increased vastly and have resulted in the downfall of …

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