Exploring the implications of monetary policy normalisation for Irish mortgage arrears

Abstract

The current level of the monetary policy rate in the Eurozone is low both by international and historical standards and will likely rise over the coming years. In this Article we consider what the impact of a rise in ECB policy rates would mean for the Irish mortgage market. First, we examine the structure of the Irish mortgage market in terms of interest rate contract types and explore the link between the mortgage rate and the policy rate. Second, we draw out the results of policy modelling linking arrears and interest rates using a model put forward in Slaymaker et al. (2019). We then use this model to provide some further scenarios exploring the impact of interest rate rises on the arrears rate for particular groups of Irish households. Our findings suggest a 25 basis point increase in the policy rate would lead to a 0.1 percentage point increase in new missed mortgage payments. While households are in a better economic position to withstand policy rate increases given the recovery in the labour market and in house prices, rate rises would lead to payments rising faster than long-term income growth. Younger, lower income households who are at an earlier stage in their mortgage contract are more at risk, as are households on tracker interest rates who have a contractual pass-through from the policy rate to the lending rate. 1 This research is funded under the Macroeconomy, Taxation and Banking Joint Research Programme between the Department of Finance and the ESRI. The views presented in this paper are those of the authors alone and do not represent the official views of either the Department of Finance or the Economic and Social Research Institute. Results presented in this paper are based on analysis of strictly controlled research microdata files provided by the Central Statistics Office (CSO). The CSO does not take any responsibility for the views expressed or the outputs generated from this research. Any remaining errors are our own. * 2

Repayment capacity, debt service ratios and mortgage default: An exploration in crisis and non-crisis periods

“…In addition, they express sample selection concerns, arguing that certain households may be less willing to answer survey questions and that this is likely correlated with them having repayment diculties, leading to underrepresentation of mortgage default in surveys. In previous work using SILC Slaymaker et al (2019) have shown that for the period 2009-2016 1 , there is a 0.88 correlation between McCann (2017) shows that the actual six monthly ow was approximately 1.5%, indicating that the model based on these SILC data is a very close t with the actual observed loanlevel data. We therefore contend that SILC is a suitable dataset with which to undertake analysis of the determinants of mortgage default.…”

“…Previous descriptive work by Fahy et al (2018) using Irish SILC data provides suggestive evidence that the relative importance of the various channels of default may vary over time. They show that during pre-crisis years households that suered health, employment and marital shocks saw higher mortgage default rates 3 , but that during the systemic crisis typically lower risk groups such as the employed and healthy saw the largest increases in incidence of default.…”

“…As discussed in Slaymaker et al (2019), one of the main motivations for using SILC data to examine the determinants of mortgage default is that it enables us to combine information on mortgage payment default with timely data on the household's economic status. This ensures that two biases common in existing studies are avoided; the omitted variable bias relating to the lack of current household income and the measurement error from using aggregate employment information.…”

“…The lack of adequate measures of current repayment capacity or aordability shocks in most datasets means that to date relatively few studies have used data on current income to test aordability channels, with Gerardi et al (2017), Mocetti and Viviano (2017) and Slaymaker et al (2019) notable exceptions. This lack of current income information with which to measure directly the repayment capacity of the household, in particular for a sample that spans a broad period of tranquil and turbulent economic times, has left a number of questions unanswered in the literature: does the relationship between repayment capacity and default dier depending on the magnitude of any shock or the level of indebtedness of the household?…”

“…The contribution of this paper is threefold. First, we build on the work by Slaymaker et al (2019) to explore the link between mortgage repayment capacity and default by testing the direct relationship between changes in the debt-service ratio and ows into default. Using the change in the current debt service ratio provides us with a direct measure of aordability shocks that come from both the labour market as well as interest rate changes and provides a direct measure of repayment capacity.…”