Interest rate hikes - First-time house buyers worse off

DOUBLING the rate of mortgage interest relief over seven years for first-time house buyers in this week’s Budget was welcomed, but within hours a distinct dampener was thrown on the gesture by the announcement of the European Central Bank (ECB) that it is raising its benchmark interest rate by 0.25% to 3.5%, the highest it has been in five years.

The rise does not wipe out all of the gain made by first-time buyers in the Budget, but when taken with previous interest rate hikes, it means the first-time house buyer is actually worse off than at the same time last year.

The latest rise in interest rates is the sixth in 12 months, and there is no end to the rising rates in sight. Economists, who expected yesterday’s announcement, are predicting that interest rates will go up again in February or March of the coming year. Since the latest rise was so confidently expected, some of its impact may already have taken place.

The US dollar apparently weakened in anticipation of the interest rate hike, and if the dollar continues its downward trend, it should help to keep down inflation here, because oil and energy prices are largely influenced by the American currency.

Thus the euro strengthening against the dollar could ease pressure on both interest rates and inflation. The euro is particularly strong against the dollar at present.

At $1.33, the euro is only three US cents off its all-time high of two years ago.

When the euro was rising rapidly in 2004, ECB president Jean-Claude Trichet denounced the rise as unwelcome and inappropriate, but he is currently trying to talk down the significance of recent developments.

These matters could have a profound impact on the Celtic Tiger economy, especially in the area of housing, which has had such a strong impact on employment. Realtors are predicting that house prices will continue to rise in 2007 but not nearly as fast as this year, which is a welcome development.

The recent orchestrated pressure on Finance Minister Brian Cowen to lower or eliminate stamp duty on property sales prompted an amount of uncertainty in the housing market.

Many potential buyers held off on finalising deals in order to avail of possible changes in the Budget. But the advantages were largely confined to first-time buyers, rather than builders or vendors.

Others involved in the housing market have been largely disappointed that the Minister for Finance did not go further, but what he did do has been largely appreciated as prudent by other sectors of the economy. The predicted slowdown in the growth of house prices could facilitate a soft landing rather than a crash in property prices.

A crash could leave many people with negative equity in their property, owing significantly more on their mortgage than what their property would actually be worth. This must be avoided.