WellTax Blog

Why Trump’s tax cuts could increase mortgages in Italy

January 10, 2018

What does Trump have to do with mortgages in Italy? It certainly has something to do with the globalized economy. The tax reform so desired by the 45th president of the USA – which essentially offers benefits to US companies that repatriate capital – could push the European Central Bank to raise rates earlier than expected. An increase in rates would inevitably also impact the installments of variable rate mortgages.

Let’s try to connect the dots ranging from the USA (Trump) to Europe (ECB) up to Italy (mortgages). The most obvious effect of a repatriation of capital from the USA is an increase in capital flows to the United States. This increase would inevitably impact the dollar (which would therefore have an upward push) and inflation in the US. If everything went as planned, the Federal Reserve would be “forced” – to avoid overheating of the economy – to raise rates at a faster pace than expected. Also because the tax reform should push the US budget deficit towards new records. Another reason why the new Fed Chair Jerome Powell could adopt an even more restrictive policy.

At that point the ECB could not stand by and watch. Already today the spread on the cost of money between the USA and the Eurozone is equal to 150 points (while the spread on US-German government bonds is even wider and around 200 points). If the ECB were to further postpone the next rate increase, the decoupling phase – that is, the divergence of monetary policies between the two areas – would be difficult to sustain on the financial markets.

For this series of reasons – which however originates from the cascade effect caused by Trump’s tax reform – in the last month the estimates on the timing of the next ECB tightening have shortened by 5 months.

If in December an increase was hypothesized over the next 20 months (therefore at the end of 2019), today the futures on the Euribor indices, but also the “Morgan Stanley First hike Eurozone”, they reduced the time frame to 15 months.

The next increase could therefore arrive in the spring of 2019. This means that variable rate mortgages could start to rise again for the first time after ten years of downward pressure. An increase of 10 basis points is currently estimated. Of course, not much: around 5 euros per month for a 20-year mortgage of 100 thousand euros (the calculation is necessarily flat-rate because it depends a lot on the residual duration of the mortgage). Until 2022, Euribor futures currently assume an overall increase of 100 basis points. An additional element for the evaluation of those who today are choosing which mortgage to take out or replace.

But there could also be a “Trump effect” on fixed rate mortgages. These are not linked to Euribor but to Eurirs. These indices summarize expectations on the trend in the cost of money in the medium to long term. In recent weeks they have already been rising (unlike the Euribor which will actually only rise when the ECB raises rates) anticipating the chain of events that could trigger the US tax reform in Europe.

Article from “Il Sole 24 ore”

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