Ireland’s low level of home repossessions and prolonged State control of banks are key reasons why mortgage rates in this country are higher than the euro-zone average, according to the Economic and Social Research Institute.

While the average interest rates on new Irish variable rate mortgages fell to 2.7 per cent in March from almost 3.5 per cent a year earlier, this remains well above the euro-area average of 1.9 per cent, according to the ESRI.

However, Spain, which experienced a similar boom and bust to Ireland in recent times, has one of the lowest average rates in Europe, at 1.7 per cent. One of the reasons was that it was comparatively easier to repossess properties when loans were in default in Spain than elsewhere, said Kieran McQuinn, associate research professor at the ESRI.

“If it’s more difficult for banks to repossess properties and repossess distressed loans, on average, [banks] tend to price this into their credit risk and that overall leads to higher interest rates on average,” said Mr McQuinn.

He was speaking at a press conference in which the ESRI cut its Irish economic forecast marginally for this year, as the upcoming UK referendum on EU membership weighs on the performance of this country’s main trading partner. The ESRI sees gross domestic product expanding by 4.6 per cent in 2016, which still makes Ireland the fastest growing economy in the euro zone.

Bailouts

The Government’s continued involvement in the banking sector following the financial crisis, and Fianna Fáil’s successful initiation last month of a Bill to give the Central Bank powers to cap variable home loan rates, were damaging competition and contributing to higher mortgage costs, Mr McQuinn said.

Taxpayers own 99.8 per cent of AIB, 75 per cent of Permanent TSB and 14 per cent of Bank of Ireland following multi-billion bailouts.

Minister for Finance Michael Noonan said last month that the Government was unlikely to start selling down its stake in AIB, which cost €21 billion in bailouts, until next year, as financial markets this year had been volatile.

However, Mr McQuinn said he would accelerate the sale process, even if it meant a lower overall recovery of the rescue funds. Mr Noonan has repeatedly said he wants to recoup AIB’s aid in full.

“Obviously people will look at it and see it from the point of view of maximising the return to the taxpayer,” said Mr McQuinn. “But the point we’re making is that because Irish firms and Irish households are facing higher interest rates in the market, there’s also potentially a cost associated with that State involvement which maybe people aren’t focusing on.”