The high cost of mortgages and Europe, Livolsi: Reforms are needed, dealing with the EU

Rome - "With the latest adjustment in mid-September of 0,25% - the tenth consecutive - the ECB has brought interest rates to the highest levels ever.

The main refinancing rate currently stands at 4,5%, the deposit rate at 4%, and the marginal lending rate at 4,75%. Banks have tightened lending conditions. The latest data from the Bank of Italy show a decline in loans to businesses and a reduction in those to households.

Interest rates are also a burden for the state, due to the interest it will have to pay on public debt. Interest expenditure could be around €100 billion (€40 billion more than in 2020). At auctions of Treasury bills (BOTs) and Italian government bonds (BTPs), average yields reached 3,94%. Giancarlo Giorgetti, head of the Ministry of the Economy and Finance, has estimated that the rate hike will reduce the next budget by €14-€15 billion.

Ubaldo Livolsi, professor of Corporate Finance and founder of Livolsi & Partners SpA, paints the picture in the latest installment of his column 'Create Value' with the Dire agency, edited by Angelica Bianco.

"A fundamental impact is on mortgages," he writes. "A variable-rate mortgage payment starting from €456 could reach €759, a 66% increase compared to the beginning of 2022 (source: Facile.it). Applications for variable-rate mortgages have plummeted from 14,7% to 5,3% compared to the first quarter of the year, and it is expected that fixed-rate mortgages, the safest option, will continue to account for over 90% of applications until the end of the year (source: Mutuionline.it).

The rates of new variable mortgages could reach around 7% from 0,6% at the end of 2021. For a twenty-year loan of 150.000 euros, the monthly payment
will be 1.180 euros, a good 515 euros more (+77,4%) than what would have been obtained two years ago (source: Fabi). Speaking of mortgages, I would like to point out here the proposal of Maria Cristina Sandrin in favor of the purpose mortgage.

The expert emphasizes that both land and mortgage loans do not require the sum disbursed by the lender to be earmarked for a specific purpose, a characteristic that identifies and characterizes a purpose-based loan. In the latter, the purpose of the disbursed sum prevails, to the point of impacting the basis of the contract, which becomes null and void if the sums are used for other purposes.

In a purpose-specific loan, the interest component agreed upon by the parties has a different weight than the interest rate in a landed property loan or mortgage. And it is precisely this difference in interest weighting relative to the purpose of the funds that, in Sandrin's opinion, is the key to the rise in variable interest rates that has put families in crisis.

"The different approach to interest rates that exists on purpose-built mortgages," Livolsi continues, "could facilitate an agreement with credit institutions to establish a fixed rate to apply to purpose-built mortgages for first-time home buyers, which would be adjusted annually based on inflation.

Central bankers and budget authorities have fueled the illusion that years of unprecedented monetary expansion, zero or negative interest rates, and ever-increasing public deficits have caused no harm. The risk, as the Italian government fears, is that the ECB's decision will further dampen the already troubled economy, pushing it into recession. In a certain sense, the Frankfurt institution is doing its job. The goal of bringing inflation back to 2%—5,4% in August according to ISTAT—is commendable.

"For the sake of completeness," he continues, "it should be noted that last week the Fed left interest rates unchanged—the highest level in 22 years—while leaving open the possibility of another hike at the end of the year. On the other hand, inflation is an insidious threat to citizens, because it strikes in a subtle way, especially the less well-off classes and pensioners.

The government may once again place its trust in the role of banks, which are burdened by the tax on excess profits. Following the announcement of the levy—which will, however, be partially modified—motivated precisely by the increased profits achieved thanks to the interest rate hike, the government expects a more cooperative attitude from the banking system, whose practical behavior will determine the actual impact of the new interest rate hike on the economy.

The Government considers the tax – yet to be defined – a good deterrent to avoid excessive credit tightening and a further widening of the gap between lending and borrowing rates.

"The way out, as I have long argued," Livolsi continues, "is reforms that make it easier for businesses to do their job, create jobs, guarantee decent wages, make debt sustainable, and attract investment. These reforms include digitalization, public administration, taxation, healthcare, education, and competition. To achieve this, however, we need to work with Europe.

Following the European Commission's approval of the third installment of the NRRP, Italy will receive €18,5 billion. This figure is close to the €25 billion budgeted, which speaks volumes about the importance of the NRRP funds for our country. The delay in the third installment—which should have been accounted for and paid six months ago—confirms the difficulties.

To overcome these obstacles, we must try to accommodate the European Union, starting with the ESM and the new Stability Pact. Regarding the former, it's hopeful that the Ministry of Economy and Finance has declared that its reform will not push for debt restructuring and will not even increase the risk perceived by the markets on our government bonds.

Regarding the second, the European Commission, which is responsible for proposing the revision of the Pact, has essentially accepted the Italian-French approach. The project not only eliminates the pro-cyclical rules, but also recognizes that conditions vary from country to country and does not provide one-size-fits-all rules, unlike the old Pact. Furthermore, it allows for debt reduction periods, which can extend up to seven years if the country commits to implementing a reform program. There are good conditions for Italy's recovery with the green light from Europe, he concludes.