Mortgages go up.. and there is nothing we – or Minister

THE phrase ‘It’s the economy, stupid,” is attributed to one of Bill Clinton’s campaign team ahead of his election to the White House in 1992.

It was used as a constant reminder that people will tend to vote with their pockets at election time – and politicians who forget that will live to regret it.

Our President, Michael D. Higgins, turned that phrase on its head the other day, when he suggested it was those who thought the economy was paramount who were the stupid ones. There was an unhealthy “obsession” with economic growth, he opined.

I beg to differ.

Sure, when we elect a President, we realise that person will not have their hands on the levers of economic power – if that were the case, I suspect Michael D. would not have spent the past 12 years holding court at the Áras.

But the most important task for our politicians in the Dáil is to create a sound economy. It raises all boats, and is key to financing our public services.

Sure, the President tapped into the current mindset that states housing, health services, and the environment are vital issues too.

But I would argue it is only when the economy is in a reasonable state that voters will allow our politicians the luxury of prioritising these areas. If we’re feeling the pinch, that phrase about it being the economy, stupid, returns to sharp focus.

For years now – and for much of this century – the Irish economy has been in a reasonable state, but the outlook is currently parlous.

Inflation, the rise in the cost of living, and sky high energy prices have sapped consumer confidence. Now mortgage rates are soaring to levels that are causing pain and misery for thousands.

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On Thursday, the European Central Bank (ECB) raised its interest rate once again, this time by quarter of a per cent to 3.25%.

It has raised rates remorselessly from 0% since last July, and experts believe it could go as high as 5% in the summer, as it sticks stubbornly to its course of trying to keep a lid on inflation.

Behind such announcements lies a harsh reality for the home- owners affected, hitting them squarely in the pocket.

Some people heeded warnings about rising interest rates a year or two ago and took out fixed rate deals with their lenders, but those on tracker mortgages – which are pinned to the Central Bank rate – have suffered badly in recent times.

Each half per cent rise equates to an increase in mortgage repayments of €648 per year on a €200,000 mortgage, so you can imagine the effect these sustained increases have had on many people’s finances.

The total increase in just ten months amounts to an extra €4,140 per year on a €200,000 tracker mortgage – and many people will have much larger mortgages than that.

That’s almost €350 extra per month on a €200,000 mortgage – a crippling sum during a cost-of-living crisis when finances are being squeezed across the board.

But, while the Government put plans in place to assuage the higher prices of fuel and other commodities over the winter, there has been no such lifeline thrown to mortgage holders.

These increases are affecting every country in the eurozone, but Ireland particularly feels the pinch as we have a higher rate of home ownership than nations where renting is more common.

However, if a landlord keeps seeing their mortgage payments soar, one of their solutions could be to increase the rent – so it’s not just mortgage holders who feel the effect of each rate increase.

There are 244,000 tracker mortgages in Ireland, and 200,000 on variable rate mortgages, which are also exposed to ECB interest rate rises – that’s a lot of pain spread around a lot of people, families, and households.

Moreover, many who wisely fixed their rates will have a shock when their period expires and they see how much more they will be paying on a variable rate.

And, sadly, there is nothing our politicians can do abut it.

The simple – and awkward – truth for the many Irish who see the benefits of being members of the European Union, is that mortgage interest rates are an area over which we have simply ceded all control.

The ECB, like most major EU bodies, is essentially controlled by Germany, with a little input from France. If Germany wants higher interest rates, that’s what the EU gets, even though this one-size-fits -all policy is often at odds with the needs of individual nations.

This approach hurt Ireland’s interests hugely during the Celtic Tiger, when an Irish Central Bank could have acted to keep the lid on cheap money and soaring house prices by raising interest rates.

Instead, the EU – specifically Germany – wanted low interest rates early in the millennium and cared not a jot for Ireland’s needs. Eventually, this did great damage to Ireland when our economy tanked and the banks had to be bailed out.

What is happening now is a microcosm of the 2008 crash. Germany wants higher interest rates to keep the lid on inflation, even though there is a case for not raising them in Ireland.

Whether or not you believe losing our control on mortgage interest rates is a good trade off for EU membership, rather depends, I imagine, on whether you have a tracker or variable rate mortgage!

Sure, politicians in EU nations can attempt to put pressure on the ECB and ask that they hold off on interest rate rises, but that is both unusual, and doomed to fail. The ECB will always act in its own and Germany’s interests.

Our Minister for Finance Michael McGrath took the highly unusual step last month of urging the ECB to be cautious about the impact on firms and households of raising interest rates, but you can bet that went in one ear of the ECB and out the other.

“As well as the broader economic context, they do also have to take into account the real life impact on people of the decisions that are made,” the Cork TD said.

There are negative effects of continuing to raise rates, particularly for the poorest households, he added.

None of this made a whit of difference, but perhaps it served to distance the Minister from the damaging decisions being taken in Brussels, in a kind of ‘it’s not my fault, governor’ way!

Sky-high interest rates, along with other economic pressures, could well spell doom for the current Government – as Minister McGrath surely knows well.

But he won’t find any sympathy from our high-minded President any time soon…