The return on a Government stimulus package would be substantially greater than has been estimated to date because of the bank guarantee, according to new research from the Central Bank.
The research estimates that a €2 billion stimulus package would save the State €663 million within two years because of the effect it would have on the numbers defaulting on their mortgages.
However, the same study assumes austerity measures have a larger negative effect than believed up to now because of the increased demand they create for State support for the banks.
A reduction in mortgage defaults would be of direct benefit to the public finances because of the way the government guarantee put the State on the hook for the capital requirements of the guaranteed banks, Central Bank economist Kieran McQuinn told a conference in Dublin today.
Mr McQuinn, who works in the bank’s financial stability division, told the conference - How to Fix Distressed Property Markets - that he and his fellow researcher Robert Kelly were struck by the strength of the relationship between unemployment and house prices. The level of unemployment appeared to more accurately track house price movements than many other, more commonly used proxies.
The study by the Central Bank looked at projected unemployment rates, house price rates and loan default rates and, using the ERSI’s Hermes model, at how these would be affected by a €2 billion public stimulus package.
The study found unemployment would be approximately half a percentage point lower at the end of 2014 as a result of the stimulus package, at 13.5 per cent. As a result, house prices would be almost 2 per cent higher. This in turn would result in projected losses on the banks’ mortgage books of approximately 7.5 per cent, as against 8 per cent without the stimulus package.
This small drop in percentage terms would constitute a large amount of money given the size of the mortgage books. The Central Bank’s estimate is that the savings involved for the banks would be €663 million. Of this, €303 million would come from primary-dwelling mortgages, and €360 million from buy-to-let mortgages. The savings would in turn be channelled into a benefit for the State because of its responsibility for the banks’ capital requirements, arising from the State guarantee.
Earlier estimates had indicated a benefit of more than €600 million arising from a €2 billion stimulus package, given its impact on economic activity generally. So the overall cost of a €2 billion stimulus package would be approximately halved, Mr McQuinn said. He also said the multiplier effects used by the Hermes system were conservative.
Michael Moore, a banking specialist working with the International Monetary Fund, told the conference that in the US the mortgage and housing markets are recovering after a period of five years. He said the banks in the US were forced to recognise troubled mortgage loans promptly and the level of non-performing loans on the banks’ books was, as a consequence, much lower than it is in Ireland.
He said states in the US that had greater foreclosure rates are recovering more quickly than those states where there has been less prompt seizing of people’s homes.
