In the ongoing variable rates pricing fracas there are many points being overlooked. The first is why our mortgage rates are higher than other European countries, but we should just ignore that – at least to stay popular.
We’ll say that the government/Central Bank pressure works and banks drop their rates, what next?
We might get around to the greater number of people under price pressure for housing (the renters), but that’s unlikely, instead we’ll inadvertently drive up house prices a little more by making credit more easily available.
Because the lower the variable rate the lower the stress test. Lower rates equals more credit, it’s a fact of life in lending.
You heard it here first. The lower variable rates go the more it frees up a persons lending capability. We have covered the way the Central Bank lending rules won’t work to the point of being annoying (and we weren’t alone, the ESRI and Department of Finance agreed), so we know that the LTV/LTI rules probably won’t save us the same as they haven’t saved Hong Kong.
The regulatory position is that stress testing occurs at 2% above the variable rate, so the lower the variable rate the lower the stress test, the more exposed the loan is in terms of size and ability to absorb rate hikes when they come – and they will.
If the Central Bank move to make banks cut rates they will inadvertently help to blow up the credit balloon a little more, not bad for a days work given they say they want to avoid just that!
The simple answer here is (to start with) consumer assertiveness, something that hasn’t been mentioned by any of the people ‘calling for a rate drop’. Consumers can switch within their own bank and get a rate cut, just take a fixed rate!
They can switch and have costs covered, but instead we are going to take the low competition environment and make it worse by solving it with government intervention instead of asking people to help themselves first.
It reminds me of an old room-mate I had in college, he’d be kicking the front door, screaming how he was locked out of the house (drunk out of his mind of course). When I’d eventually go down I’d ask ‘did you lose your keys?’, ‘no’ he’d tell me. Then I’d ask ‘did you put your key in the door?’… Of course he didn’t, but in his mind he was still ‘locked out’. Perception is everything.