Sunday, October 19, 2008

A French Lesson for Irish Consumers?

I really wish I had paid more attention during french classes at school. I was over in Paris for two days this week attending a seminar and meeting with some old friends and like every time I am there my lack of french comes home to roost. OK I can order a beer or find out where the toilets are, but once it gets more complicated than that, like having to ask directions I have to revert to English.

Could we as consumers learn in the debris of the financial crisis here at home from the French as well. Yes some of their banks have come a cropper on the international markets, but primarily for investing in toxic assets from the US and of course there have been now three cases of rogue traders doing serious damage to the balance sheet. The most famous of course has been Jérôme Kerviel who it is alleged cost the Société Générale bank over €4bn. On Friday when I was there another scandal broke concerning Caisse d'Epargne when four traders cost the company €600m, which given the numbers being thrown around in recent weeks sounds like small change. I had never heard of the bank before, but happened to pass what looked like one of their older branches when I was walking home from dinner on Friday night and took a photo.

The French mortgage market from what I understand is radically different from ours and that in the UK and as a result French consumers are insulated from the worst excesses of the current turmoil, where individuals and families are under terrible financial pressure with rising debts and home repossession. Most home loans are given out on long term fixed interest rates, they don't have the plethora of variable and tracker mortgages that were so popular here. And by long term I don't mean 3-5 years, I mean 20-25 years. That means that French mortgages holders know how much the mortgage will cost them many years in advance. Unlike their Irish counterparts they do not hang on the words of Jean-Claude Trichet as to whether interest rates will go up or down.

When you think about for a while, it is a bit crazy to tie the cost of our debt on our most valuable physical asset, i.e. our home to the vagaries of the financial markets and the deliberations of the European Central Bank. A 1% rise in interest rates has the potential to cause real misery for many homeowners. I suppose its all very well in good times, but the weaknesses in the system are plain to see in the current climate. That's not to say that the French system is perfect, it is much more difficult to get a home loan there, so many people here would not have been able to buy a home if they lived in France.

And of course then there is the cost, would it cost more if people could only purchase a long term fixed rate mortgage compared to the option of a short term variable mortgage? Obviously each case is different, but while in the short term the French mortgage might cost more, in the long term it would appear to cost less and of course give much more security and peace of mind. That brings me to an interesting conclusion in a report on the UK Mortgage market (Miles report) that examined the issue of fixed long term mortgages. It found that consumers really only focused on the immediate short term cost of the mortgage. Can I make the repayments in the initial months? In the UK they rarely looked at the overall cost or the cost if interest rates were to rise when taking out a mortgage, in most cases it is the same here and I can understand why. People assumed that mortgage rates would remain stable and the prices would keep going up. The lenders are supposed to highlight potential pitfalls to borrowers, but I imagine in recent years when money was being thrown at people and most people thought the party would go on forever, this was largely overlooked. However necessity is the mother of invention and therefore it might be an opportune time for Government to examine the pros and cons of encouraging the take-up of long term fixed mortgages here.

PS: The Bank Guarantee Scheme was published on Wednesday, I was on The Breakfast Show on Newstalk on Thursday highlighting how this was a great deal for the banks, but a bad deal for taxpayers and consumers. Clause 44 says "A covered institution shall not pass on the costs of the guarantee to its customers in an unwarranted manner". This is vague, meaningless and unenforceable. Minister Lenihan says that the costs won't be passed on, but once the dust settles in a few months, I wouldn't be so sure.