Jill Kerby

PEER TO PEER LENDING – WHERE RISK AND REWARD MAKES S€NSE

When will interest rates go up?  No time soon is the consensus view of EU economists and money-brokers who are think the ECB 0.15% interest rate could even drop to zero. 

This column has already looked at the consequences of such a lot rate: tracker mortgage holders end up at the top of the feeding chains as their loans fall in value with the ECB rate while at the bottom are savers who see their deposit returns collapse, and the ‘real return’ on their money depreciate after DIRT and inflation is taken into account.

Borrowers are also disadvantaged:  the banks, still trying to get their own balance sheets into positive territory, further tighten their lending conditions and hike up fees and charges.

Is it any wonder that savers, pensioners, unlucky variable rate home-owners and people running small businesses are finding so little solace in this “recovery”?

Last week I met Peter O’Mahony, the founder of Linked Finance (see www.linkedfinance.com) a company that has identified a market gap between the shortage of affordable lending to small business and the need of savers for an acceptable, risk-rated return on their savings.

Based on the eBay model that brings willing sellers and buyers together to an auction that determines the price of the good – a loan, in this case. The loans last for three years and the borrowers must be owners of small limited liability companies, sole traders or in partnerships. Their firms include the proverbial butcher, baker and candlemaker, all sorts of other, high tech and medical device companies, breweries and financial service providers.

About €4m of finance has been arranged so far, said O’Mahony and the average borrower has secured about €28,000 from an average of 189 lenders, each of them investing about €150. Each lender (6000 are registered, only 1000 are active) has lent to nine different borrowers.

“No single loan can be more than €2,000 – which means that lenders with larger sums must spread their risk.”

The on-line auction determines the interest rate at which the borrower secures his/her loan, with the lowest rate, the winning bid. “The average interest rate is 8.9% per annum.” he explained. “The equivalent unsecured loan from a bank – and all our loans are unsecured – would cost the borrower between 9.5% and 13%.” 

That 8.9% gross annual return (7.7% after Linked Finance take their fee) is far more than any saver will earn from a deposit account. But P2P lending comes with a very real risk that you could lose your capital if the company you’ve lent to defaults on their repayments or goes bust. 

It is early days, “but not a single borrower has missed a payment” claims O’Mahony.  “That will change,” he says, “but that’s why we have a €2,000 per loan limit and why lenders are encouraged to spread their loans.”

Peer to peer lending is coming into its own here and in the UK because of the shortage of lending from the banks, and the lengthy, tiresome hoops that they make small borrowers jump through “for relatively small amounts. Many of our owners tell us that given how much easier [Linked Finance] is they will never go back to the banks if they can avoid it.”

Linked Finance provides borrowers and lenders with both the on-line auction platform and the lender with a segregated account “into which they receive 36 monthly, amortised, direct debit payments of capital and interest”. They can either withdraw their monthly return or leave it there to compound, or lend on to another borrower, O’Mahony explains.

And while Linked Finance vet borrowers and post this information on the web-site and do credit checks, they don’t rank the borrowing companies performance or prospects – that risk determination has to be the lenders’ alone, says O’Mahony. 

But their experience is that many loans come from the borrower’s own community and they are encouraged to keep up that goodwill by offering their lenders product vouchers and discounts.

Peer to peer lending is not for anyone who is so risk averse that they need a capital guarantee (albeit one that will be eaten away by inflation.)  You should never invest any money that you have to live on.

Peer-to-peer lending is a remarkably simple, transparent concept. It hasn’t been hit - yet - by intrusive government regulation or levies yet that add layers of costs and complexity. The conventional banks don’t see it – yet – as a threat.

Until then, it may be worth checking it out for what it is:  a great idea that rewards a manageable level of risk.

If you have a personal finance question you would like answered, please write to Jill at jill@jillkerby.ie

MORTGAGE INDEMNITY BONDS ARE A GOOD IDEA, JUST NOT PAID FOR BY THE TAXPAYER

It’s only one of many proposals in the Construction 2020 Strategy for Ireland, but the government’s idea of committing the taxpayer to pick up a potential negative equity bill for the next generation of first time buyers has hit such a brick wall of incredulity that many are now suggesting if will be quietly withdrawn.

This monumentally stupid idea involves first time buyers purchasing newly built houses with just a 5% downpayment and the taxpayer, via a mortgage insurance dictat by the Department of Finance, providing a balancing 20% negative equity guarantee to the lender. 

Once upon a time, this insurance was commonplace and it was purchased by buyers who borrowed more than 75% of the asking price of their home. It was  known as a mortgage indemnity bond. (MIB)

This is a definition of the bond from the 1999 edition of my book, The TAB Guide to Money Pensions & Tax:

“If you borrow more than 70%-75% of the value of your home, you may also have to buy a mortgage insurance bond from the bank or building society. These bonds guarantee the total repayment of your loan in the event of your home being sold for less than the outstanding loan amount. Indemnity bonds usually cost 3.5% of your borrowings above the specified limit and, while the cost can be absorbed into your 20 or 25 year mortgage term, it is more cost effective over the longer term to pay it all at the offset.”

Mortgage insurance bonds were already going out of fashion by 1999. The Celtic Tiger property boom was already established by then and with taxes falling, employment, wages and productivity rising and generous mortgage interest relief and first time buyer grants, the banks and building societies were already loosening their lending criteria. 

By 2002, after the massive post 9/11 credit stimulus from central banks, just about anyone with a beating pulse could raise a 100% mortgage for a home and even investment properties. The pimply-faced youth recruited to sell mortgages by the banks and mortgage brokers’ had never heard of MIB’s and old timers who worked beside them were too busy counting their commissions and bonuses to give this prudent tool a second thought.

Given that we live in one of the most debt burdened states in the world and the price of the average home in Dublin is over €399,000 or 10 times more than the average industrial wage, is a 20% - 25% mortgage indemnity bond requirement a good idea?

I think so.  But the buyer should be required to pay for it, not the taxpayer and that means a higher down payment and that might discourage some buyers, which is the last thing the government wants.

The government claimed last week that this mortgage subsidy is all about helping first time buyers get on the property ladder by lowering the bank’s lending risk and buyers’ well-founded fears of negative equity.

Dear, oh dear.

If that really is its motivation it only shows that government policymakers have learned nothing from the property bust and its causes – artificially cheap credit, over-lending and a disregard for its inevitable consequences.

The Construction 2020 document, suggest political commentators is nothing more than trying to boost construction employment and even more cynically, to boost house prices. (More mortgage money chasing inadequate supply is sure to push up the price of any newly built home in the Dublin area.)

Higher property prices, on paper at least, lowers the negative equity value and makes the bad loans the banks are holding look a lot better to EU stress testers and the bond markets.  Outwardly,  “recovering” property prices suggest a recovering economy.

Anyone who was burned by the boom knows better.  We can only hope that the under 30s, the only cohort untouched by the property debt fiasco that began more than a decade ago will see this latest ‘stimulus’ proposal for what it is:  a cynical exercise in driving them into a lifetime of over-indebtedness.

Somebody please tell Mr Noonan why rents are rising

The Minister for Finance Mr Noonan has been out of the loop for many years when it comes to finding an affordable roof to put over his own or his family’s head, otherwise he would not have suggested last week that cheaper, interest-only loans for investors only is somehow going to be a good thing for hard pressed renters in the capital.

Rents in Dublin, according to the latest PTSB/ESRI rent index are up 6.4% year on year to September, while still declining by 0.2% in the rest of the country. For houses, rents averaged €1,157 compared to €1,095 a year ago, and €1,042 for apartments in Q3, compared with €983 a year ago.

There is certainly no evidence to show that special lending terms to investors, even foreign ones that Bank of Ireland say they will lend to, will bring rents down or magically improve supply.

Why would anyone enter a market if they knew that rents were sure to fall?  Surely the banks will encourage new investors to buy their repossessed buy-to-lets with sitting tenants? That hardly increases the supply problem.

Dublin residential prices are being driven up by a limited number of cash buyers seeking yield, young professionals starting families who were not burned in the crash and have big deposits and a supply problem that has only grown larger since the 2007 crash. Now the banks are going to fuel it by offering preferential interest rates and borrowing conditions to investors who will drive Dublin rents even higher.

We’ve seen what happens when property markets are manipulated, mainly through taxation and interest rate manipulation and then when losses and arrears are not dealt with expeditiously. Things get worse.

Rents will stabilise and residential property in Dublin will be affordable (and even profitable again for investors) if and when we ever see the great debt burden clear, employment numbers recover and savers duly rewarded by solvent, independent banks.

Until then, anyone stupid enough to think that now is the time to become an amateur landlord in Dublin, should know that while the rules of the property game keep changing, any “special” deal from the banks is an offer you might want to think twice about accepting

 Danske Bank customers with overdrafts and credit cards will be given two or three months respectively to repay their loan balances before these services are withdrawn in the course of the next six months or s0.

Personal loan and mortgage customers will continue to repay these loans and will be unaffected by the closure of the retail side of the bank. Unfortunately, Danske Bank customers with current account mortgages remain in limbo.

Readers who have contacted me say their loans are linked to the credit balance in their current or savings accounts, “but without a current account, what happens to the mortgage?”  They want Danske Bank, who say they will be contacting all their retail customers “shortly”, to either honour their existing contacts or come up with a mutually acceptable solution.

Danske Bank mortgage holders are not the only ones uncertain about how their mortgages will be treated next year. Thirteen thousand remaining INBS mortgage customers are much worse off.

Refused a chance to bid for their loans, which are being auctioned in lots, to foreign bidders as part of the liquidation of the Irish Bank Resolution Corporation (IBRC), if their mortgages are purchased this way, they will lose all the consumer protection they enjoy under the Irish Financial Services codes of conduct and regulations.

However unfair this is, the only hope for the ex-INBS borrowers is that Nama, the national asset management agency and not some foreign vulture investor will ends up with their unsold loans.

Nama says it will maintain the regulatory status quo for the ex-INBS borrowers, even though they are under no such legal obligation. (It is not a financial institution in the conventional sense, requiring Central Bank supervision or regulation.)

It has been suggested that might even let people bid for their own mortgages, though no one should hold out getting the kind of discount that foreign bidders of will be expecting.

I may not be a fan of property investing, but over 1000 potential buyers queued outside the RDS last week for a chance to bid on nearly 150 mainly commercial and retail properties at the latest Alsop Space auction.

The residential properties didn’t catch as much the attention as did the commercial ones, but some holiday properties were picked up for a song – like the two bed apartment overlooking Kilkee Bay in Co Clare that sold for €32,000 or the modern, white-washed cottage in Achill, Co Mayo that sold for €18,000.

Meanwhile, someone decided that a two bedroom apartment in Bray costing €101,000 with a sitting tenant and an annual yield of 8.32% was good value, while another in Belturbet, Co Cavan perhaps did better by buying an apartment for just €37,000 and an annual yield of nearly 13%.

Alsop’s director of auctions naturally claimed that this record breaking auction – it took in €23.7 million - has “kick-started” the Irish property market.  Well, maybe the lower end of the commercial and retail market.

And while a few residential properties did sell with 6%-8% yields, most good advisers say that is too low a yield to adequately reward any investor after they cover mortgage interest payments, income tax, property tax, maintenance and/or management fees and insurance.

Taxpayer face high price for settling ESB pension row

Will they, or won’t they strike?  In exactly seven days the ESB worker’s strike threat bluff will be called we’ll either be sitting in the dark…or not.

But whether the power stays on or goes off, it isn’t going to change the nature of the ESB’s complex defined benefit pension scheme:  just like every other DB scheme in this country it cannot provide a 100% risk free income to all its current and future qualifying pensioners, unless the Irish taxpayer is compelled to back-stop the risk.

Defined benefit pension models, here and in every other (mostly English speaking) country where they exist are in deficit or have failed mainly because their members are living too long.

Modern era salary and service related or state pensions were created when workers only lived a few years post-retirement and annual remuneration was comparatively much lower.

Today, these schemes, which carry the risk of longevity, market performance volatility and high fees and charges that reward armies of administrators, fund managers, trustees and regulators, just can’t carry the load. 

The real scandal is that the likes of the ESB, Aer Lingus, AIB, Waterford Crystal (whose scheme failed) and so many others were ever permitted – the the regulators - to accumulate such huge deficits.

As the ESB unions rightly argue, it isn’t the company executives, administrators, or regulators who will suffer if their scheme status quo is not maintained and they are forced to accept the defined contribution model (like every other DB scheme eventually).

Nevertheless, the company is adamant that after 2018 if will not bail out the scheme again should it fall back into deficit, which it is not at the moment. The deal the unions helped negotiate back in 2010 which involved a €590 cash injection and lower pension benefits, plus three years of excellent fund performance means that no pensioner’s present or future is at risk until then when the scheme will have to stand on its own merits.

Last year a typical ESB workers’ earnings were in the region of €78,900 (including pension contributions) and their two thirds pensions, about €45,000, say industry sources.

Given that fewer than half of all private sector workers in defined contribution schemes will be lucky to get an occupational and state pension of €15,000-€17,000 a year, it beggars belief that the ESB unions are considering a nation-wide walk out.

But it would be an even greater travesty if the rest of us end up guaranteeing those €45,000 pensions if they are nationalised as the quid pro quo for the ESB workers not pulling the plug next week.

Why is Twitter Inc worth nearly $24 billion? This company has no earnings. Some analysts are finding it hard to find $50 million of quantifiable value.

As companies like Twitter and others see their share values soar, ‘mom and pop investors’ as they are known in the United States appear to be shifting money out of negative yielding deposits and into stocks and shares.

Listening to Irish people talk about investing is like being on a permanent feedback loop.  Our attachment is more to property as our investment poison of choice, especially as we see prices rising.  The higher the better, as the mini-price bubble in Dublin is showing.

Instead of ignoring the background noise produced by estate agents or brokers about how well their markets are doing, the mom and pop investor, forgets how badly it turned out the last time, and instead return to flock-of-sheep mode and follows the one out in front, bleating the loudest about how it’s time to follow the money back into the market.

In a devastating newsletter to his clients just after last months Twitter flotation, John Gilbert, chief investment officer of investment company GR-NEAM, whose biggest shareholder is Warren Buffett, wrote that “it should be obvious to everybody by now that [the Twitter] stock market largesse is made in Washington” care of the Federal Reserve whose loose monetary policies “induce investors to behave foolishly. He includes Asian emerging economies among them.

Twitter, Gilbert wrote,” is the lottery winner of the moment” but “following such a crowd is an excellent hedge against ever being financially independent.”

My Christmas gift buying list is getting smaller every year as the children dear to me turn into adults, and now qualify for home baking instead of toys.

Meanwhile, my husband and I have acknowledged, as have many friends and family, that there really isn’t anything that either of us need or even want anymore, such is the combination of luck and privilege we share as citizens of a country, no matter how economically battered, in the comparatively prosperous western world.

After recent revelations here about how donations are being spent to featherbed the wages and pensions of certain charities’ executives, you might want to pick your charity with extra care this Christmas.

Once upon a time charities were run by philanthropists and volunteers who didn’t get remunerated. The welfare state then took over and ‘charity’ became a social entitlement. Big charities seem to have adopted a similar model, convincing us that the good works they eventually do with our money couldn’t happen unless their chief executives and professional, full time staff are well paid and pensioned.

I already object to a penny of my taxes, via state development aid going either directly or indirectly to pay for the Paris shopping trips of the wives of kleptocratic African dictators or to fill their Swiss bank accounts.

So that’s why our family prefer to keep our voluntary donations local and project based. This Christmas we will give to the likes of the Capuchin Day Centre in Dublin, the RNLI and Mountain Rescue, and Dogs Trust.

Whatever we give them of course…won’t be enough.

Your money is as safe as houses – in this case, hornets’ nests

Up to now I always thought that it was only eccentrics or cranky elderly bachelor famers, genetically hot-wired to keep their cash hidden from grasping relatives or the Revenue, who planted it under the floorboards.

 So it’s quite alarming to be told by otherwise sensible people, usually older ones unburdened by heavy mortgages or personal loans, that they are seriously considering physically taking their savings out of their bank or credit union deposit accounts and putting it somewhere they think would be more secure. (They should at least look into the new private, safe deposit vault service that opened recently in Dublin.)

They site negligible interest rates, penal Dirt rates and a total loss of confidence in the banks for such drastic action. Their don’t believe the government when it says that the cost of living is going up by less than 2%: their experience is that of food, transport, energy and health care costs are soaring while their state pension has been frozen for five years and private pensions are taking a hit from the pension levy and the restructuring of defined benefit schemes.

Pensioners may not be liable for the 41% Dirt on their savings if they are income tax exempt, but they probably wouldn’t be able to avoid a negative interest rate charge, if that went ahead.

The excuse the central bankers are giving is that this would force the still indebted banks to start lending out the cheap money they’ve been lent by the central bank and this would encourage more spending and ‘good’ inflation. Individual savers who faced a deposit charge would also spend, rather than hoard their money.

If historically low savings rates haven’t already sparked such spending binges, why should a fractional negative deposit rate? Older people are more likely to buy investment property here or abroad, in the (probably ill-judged) hope of getting a positive return than they are to hit the high street shops buying stuff they don’t need. 

We might be sinking into a deflationary economic hole, and we might be ridiculously complacent when it comes to higher taxation and austerity, but it is another thing to be able to force people to spend their money against their will.

There has never been such a thing as a risk-free return, not from deposits or bonds and certainly not from property or stocks and shares.  But I cannot remember a time when every possible destination for savings or surplus wealth has seemed so hazardous.

Every financial adviser I trust says the same thing: in a financial environment where all the old rules about prudent banking, sound money and risk versus reward are long gone, and the price of money is being endlessly manipulated, the best you can do is try to save or invest only with solvent institutions, diversify your assets and get the best tax advice you can afford.

The search continues by ACC and Danke Bank customers – and I’m one of them – for affordable, replacement current accounts before these banks close up shop next year.

In the full expectation that bank charges are only going in keep rising as the remaining banks scramble to clear their toxic balance sheets, I’ve been reminded of a super-cheap current account payment strategy that was popular long before anyone ever heard of the Celtic Tiger: the credit card.

Those were the days when the “flexible friend’ motif actually fit and the prudent bank customer paid all their personal and household bills and discretionary spending by credit card. 

The sizeable monthly card balance was then paid either by cash, by a single cheque or single direct debit from an account into which their monthly salary has been paid.

By paying everything by credit card - mortgage, groceries, utilities, insurance, petrol, the cardholder could take advantage of not just

56 days of free credit, but could avoid multiple mandate charges and cheque fees.

Withdrawing cash with a credit card isn’t free. Transaction fees daily interest applies so anyone looking into using a credit card to manage their spending will need a cash dispensing outlet. The nil cost credit union or a post office deposit account might be the answer.  An Post’s free bill pay service – see mybills.ie – is worth looking at as well from which you can automatically or manually pay off that big credit card balance every month.

Great sighs of relief are being heard in a couple dozen households this month as the first completed insolvency cases under the new Insolvency Act are finally emerging.

Some debtors have voluntarily given up their homes in exchange for total mortgage debt write-offs; others have worked out deal with their banks to write off only a portion of their mortgage and other unsecured debts in exchange for keeping them. 

This month, with the new bankruptcy act finally being enacted, the first bankruptcy cases are also expected to be agreed, resulting in the eventually writing off of all debts for those people.

That the banks appear to be acknowledging that mortgage shortfalls may have to written off in some cases is certainly good news. But the successful completion of the first debt relief notices (DRN), and especially the debt settlement arrangements (DSA) and personal insolvency arrangements (PIA) still only represent a fraction of debtors who need to be rid of their crushing debt burdens.

For every successful DSA or PIA (the latter involving secured mortgage debt) there could be up to six other failed applicants, say insolvency experts. Most people they meet simply don’t have sufficient assets to be eligible to make a successful deal with their creditors and already live on less money than is permitted under the ISI’s household expenditure guideline.

For these people, bankruptcy is probably the most appropriate solution, say financial and legal advisers. Going bankrupt doesn’t automatically result in the loss of the family home (at least not one that is in heavy negative equity. What it does promise, is that the discharged bankrupt will be entirely debt free within three years.

The insolvency and bankruptcy process is explained at www.isi.gov.ie .

Mortgage holders must believe in miracles, not AIB

Maybe miracles do happen. 

Maybe David Hall’s Irish Mortgage Holder’s Organisation, a charity now working on a six month pilot project with AIB to try and resolve 1,000 of their most intractable mortgage arrears cases will succeed with just a handful of people and the €150,000 budget they’ve been given by the bank.

Maybe the process that the IMHO claim they have put in place over the past year in their dealings with AIB to sort out iMHO members’ arrears, will end up as the template for all the banks. 

Maybe Mr Hall has cracked this intractable nut which entails an estimated €100,000 people who have not paid their mortgages in 90 days. About four in 10 have paid nothing against their loans for two years. The amount of money in arrears or that has been restructured is staggering: the IMHO itself estimates it amounts to €46.6 billion of all outstanding mortgage loans.

Something certainly has to be done. David Hall says his ambitious arrangement with the IMHO’s once bitter adversary AIB, is not the only solution to the great debt crisis. No one, he says, is being forced to use their service and people can engage a private adviser.

That would be my first choice, if I was in debt distress. But only if I could afford such assistance.

The great appeal of the IMHO is that it has pledged to do its utmost to keep people in their homes and to try and force the banks to own up to their role as reckless lenders. Mr Hall’s passion has created a powerful lobby group with a powerful agenda and he has been very effective.

The IMHO also only charges people who can afford to pay them for their help and 45% of all cases they have been on a pro-bono basis Mr Hall told me. He is adamant that the IMHO’s role as the champion of the debtor will not change and their independence will not be compromised because its expenses (the directors will not get any remuneration) are to be funded by AIB. 

This question of a potential conflict of interest would never have arisen if mortgage debtors could have afforded to pay for their own financial advocate – an accountant or experienced insolvency practitioner - who could then support them in stressful debt restructuring negotiations with their banks.

The Central Bank should have stepped in long ago and insisted that this great imbalance of power between debtors (with no resources to get proper impartial advice) and the banks end by the banks picking up the cost of this independent, professional advice.

The Central Bank along with the politicians have made things progressively worse.

The deadlines they set to clear the great overhang of debt is unrealistic without massive debt write-down.

Even without that, it intentionally sidelined Mabs, the money, advice and budgeting service, with its 60 offices around the country, 25 years of experience in debt resolution and an existing budget of €18 million from both the formal insolvency process and from having an official role in the ‘informal’ representing of debtors who are afraid to engage with their lenders.

Instead the CB has permitted all kinds of regulated and unregulated bodies (like the IMHO) and individuals to operate as debt advisers, facilitators and negotiators.

As Mr Hall has pointed out, he wanted to be regulated, but that is only now possible with the introduction of new regulation for a new category of adviser, the debt management firm. Perversely, the existence of this new layer of regulation  may prevent many trained and regulated accountants, QFAs and PiPS (personal insolvency practitioners) from dispensing debt advice until they too qualify under this category.

Meanwhile, we have a generation of young people and families and a domestic economy paralysed by debt.

We have banks that cannot get thousands of its most indebted customers through the first phase of the mortgage resolution purpose – form filling - without resorting to the paid assistance of a well meaning consumer debt advocates.

And if all that wasn’t enough, the brand new insolvency Service of Ireland is already losing the confidence and respect of the people it was set up to help – the indebted, who cannot avail of its services because they are too poor to hire the compulsory personal insolvency practitioner.

In the absence of tens of billions of mortgage debt write-down it really is going to take a miracle to sort out this mess.

Inertia costs money. 

We write a great deal on these pages about the need to shop around to ensure that you get the best value financial services and products but not all of us follow this good advice as diligently as we should.

After putting off the review of two of three big household expenses, the cost of our electricity and gas bills, our bundled telecom package of telephone, broadband and cable TV service and home security monitor, we finally made the effort to compare different offers with the help of bonkers.ie, u-switch.ie and our own Money page features.

We’ve saved a total of €1,300 making the various switches.

The expensive motor insurance renewal quote that I just received is this week’s task.

Let Revenue deadlines go hang – it pays to delay

The Revenue Commissioners has decided that the local property tax return for anyone who opts to pay their tax in a single lump sum via a debit or credit card, by cash or cheque will be this Thursday (Nov 7),

This deadline is nothing but a stick they have handed you with which to beat yourself.  Don’t do it, unless you are tax masochist (the Revenue love such people who pay them in advance) and don’t mind losing access to your capital and any interest it might be attracting.

I’m told that large numbers of mostly older people have preferred the lump sum option because they don’t have a computer or don’t know how to use them for bill payments, but this is a feeble excuse in an era of Grey Surfer technology awards that are promoted by lobbyist for the elder sponsor.

The simple truth is that not making an effort to get on-line, whether with the help of a family member or friend, local Consumer Centre or library means you are financially penalised, in this case by an agency of the state.

The Revenue Commissioners do not want your cheques or your debit and credit card payments on the grounds that they will incur a merchant processing charge they decline to pay. Even post office customers will be charged €1 every time they pay their LPT in full or part-payment in cash or with a debit card.

The Revenue insisted last week that how the tax is paid is left to the homeowner. They say they have provided the widest range of methods, but by setting favourable later deadlines like March 21st for lump sum electronic payers and emphasising easy monthly electronic payments, they’ve made their preferred method of choice eminently clear.

Last week the Tanaiste Mr Gilmore tried to sound very stern by saying that the Revenue Commissioners must accommodate everyone who is doing their best to pay their 2014 LPT on time.

He clearly doesn’t understand that the logistics of this tax (and all others) are drawn up to accommodate the State’s tax collector’s first, and then the rest of us as tax serfs.

And if you don’t believe me, do read the lengthy ‘Enforcement’ section of the Finance (Local Property Tax) Act 2012 and the powers that authorised Revenue officials have – including entering your property to decide for themselves how much it’s worth and how much you owe.

And if you think this story is just a storm in a teacup, wait until the tax itself, at a mere 0.18%, starts inching up to the 1% rate that so many property tax jurisdictions charge.

It won’t be the method of payment we’ll be complaining about then.

The flurry of ‘For Sale’ signs popping up in my Dublin city centre neighbourhood in the past few weeks and even across the Liffey around the Phoenix Park suggests that the mini-price boom that began last spring in south Dublin is rapidly spreading right into the inner Victorian housing archipelagos of 7 and 8. 

The fashionable neighbourhoods of Rathmines, Ranelagh and Rathgar were infected with the new property price virus during the summer and you can’t walk down a single leafy street anymore without seeing ‘Sold’ signs everywhere.

Choice areas of Fairview, Drumcondra, Raheny are also entering the bubble’s spotlight, Glasnevin and Clontarf having succumbed around July, I’m told by friends who spent the summer observing the moving vans on their North Dublin streets.

The CSO say that the average Dublin house worth €300,000 went up by €12,000 in September alone. Long may it last if you need to sell and are no longer in negative equity, or if you are trading down or just want to get out of the country and start a new life in a place where there isn’t the risk of lifelong debt-serfdom.

I’m guessing this price surge will run out of steam once the market runs out of cash buyers, probably when someone they listen to points out the puny net return most of them are getting on their capital; when the market runs out of sufficient numbers of professional, first-time buyer couples who somehow avoided the first boom and have squirreled away big-down payments and when the banks finally acknowledge their billions in bad mortgage debts.

The latter is going to have an impact not just on supply and demand, but on prices and future lending practices until the all-clear is sounded.

God forbid there’s a rise in mortgage interest rates in the meantime though this is more likely to occur within the Irish banks than prompted by the ECB.

No one knows better than Frankfurt central bankers (or their counterparts in London and Washington) that a lift in interest rates anytime soon will tip millions into bankruptcy.

Are you as flummoxed as I am about the latest extension to the seven year capital gains tax exemption for investment properties?

The Minister for Finance announced the original tax wheeze back in Budget 2013 – early December 2012 remember when the property market was still officially in decline. He said he was exempting from capital gains tax, investment properties that were purchased between December 7, 2011 and December 31, 2013 that were held for at least seven years by their owners.  On October 14, the Minister extended the purchase deadline to December 31, 2014.

This is just more tinkering and interfering with an already hyper-dysfunctional market that has incubated a mad little Dublin property bubble while the rest of the country remains in the on-going post-Tiger property bubble.

Not only is encouraging property investing here unnecessary, but due to EU and EEA economic agreements, the 33% CGT exemption applies to domestic or commercial investment properties purchased abroad as well.

So much for spending in the Irish economy.

One financial adviser told me last week that some of his cash-rich older clients, disgusted by derisory deposit returns, 41% DIRT, and fearful of most other asset classes are again showing interest in overseas property for tax reasons.

The danger, he said, is that they’ll be part of a new flock of sheep who all get caught trying to sell their “sure thing” properties at the same time in 2015.

Negative Equity Mortgage?  No thank you.

The property market is doing as Professor Morgan Kelly predicted it would: it is taking back between 75%-80% of the spectacular prices it achieved at the peak of the bubble.

Just on cue, the government and banking industry that did everything it could to inflate that bubble, is still trying to manipulate the correction, in an effort – they say - to ‘break the logjam’ of sales.  This time it will permit heavily indebted owners in negative equity to carry their debt with them to yet another property, which will also continue to fall in price until the correction is over.

The problem is well documented: tens of thousands of mostly younger buyers purchased overvalued houses with artificially low credit. Their affordability levels - their income – was grossly overestimated if property prices fell, interest rates went up or their incomes dropped.

All three happened. The economic collapse revealed how uncompetitive the country had become and how necessary it was to freeze or reduce income (but paradoxically increase taxation to protect ‘key’ spending levels by the state - its own paybill and politically sensitive social welfare payments.)

The mother and father of all negative equity conditions now exist in this country – and will get much, much worse if and when interest rates go up.  Yet the government think letting heavily indebted owners trade up (or ideally, down) while the conditions that created the negative equity and the rising arrears risk still exist – is some kind of solution.

It is not.

The tens of thousands of first time buyers (in particular) caught by the boom need an immediate and fulsome recovery of the economy and a surge in their incomes…or they need substantial debt forgiveness.

Instead, they’re being offered another debt cul-de-sac that will give the perception that the property market can be stimulated back to life.

It can’t.

The property market will recover – naturally - when normal lending is resumed; when interest rates are not being so grossly manipulated by central banks; when the overhang of empty properties is cleared (which is happening in Dublin but not the rest of the country) and unemployment starts reversing.

Those neg-equity mortgage holders who are facilitated to abandon their distant suburbs for the homes they had wanted to buy that were closer to their jobs and parents in the city, will now end up even more indebted as the new property they buy also falls in value.

Good luck to them.

Meanwhile, the suburbs they leave will be even less attractive to live in than they are right now.

God help the poor sods they leave behind and strike up another victory for witless politicians and their creatures in central banks who endlessly subscribe to the Law of Unintended Consequences.

Misery loves company: Financial companies to be ‘named and shamed’

The decision to introduce legislation that will allow the Office of the Financial Services Ombudsman to name and shame financial institutions that it finds against has taken 20 years longer than it should have.

Better late than never.

When the first ombudsman’s offices were set up back in the early 1990s by the banking and life assurance industries, there was never any question that their members would be named and shamed.

Everyone maintained that the ombudsmen would be wholly independent of their paymasters, but there were just too many categories of complaints that were excluded or beyond their remit. The penalties were not onerous or high enough.

That isn’t to say that a good job wasn’t done within those limitations. 

Many complainants, in the years before the statutory IFSRA (Irish Financial Services Regulatory Authority) ombudsmen were set up in the early 2000s told me they were very satisfied with the investigation and settlement of their complaints and the published judgments appeared to be measured and fair.

But everyone also knew (the way everyone ‘knew’ that Charlie Haughey was on the take) that there were certain institutions – usually banks and their life assurance subsidiaries – that were chronic abusers of their own industry’s voluntary codes of conduct. But self-regulation has a funny habit of stacking the deck in favour of those who are being regulated, no matter how honourable and hard-working the ombudsmen and their staff doing the investigating.

When you pay that piper, he plays your tune.

All the same mealy-mouthed excuses were used by the State authorities when the two financial ombudsmen’s offices were taken over by the new Financial Regulator (now the Central Bank) a decade ago: that the complainants would also have to be named (to what purpose?); the firms would resist cooperating with the inspectors if there was a chance they’d see their names in lights or, worse still, as a case-study in the Ombudsman’s quarterly report (all the more reason!).

It hasn’t been determined how far the new legislation will go in the naming and shaming process, but no one gives a toss about the sensibilities of financial services companies anymore.  

The previous regulatory regime was incompetent and clearly in awe of the industry and allowed them too much influence in setting the rules and limitations of the ombudsman’s offices, especially regarding the historic mis-selling of investment products, which still needs to be addressed.

Banks, life assurance companies, insurers AND their agents always knew that ordinary folk and especially the vulnerable (like the elderly who are sold long term stock market investments) needed more protection than they ever got.

The Central Bank has been slowly but surely working its way through the banking mire that was left behind by the previous bunch, but now it is coming under scrutiny for its handling – mishandling? – of Custom House Capital. The mostly pension investors, who have lost €90 million, continued to be at risk even after the regulator discovered evidence of malpractice in 2009.

They say that misery likes company. 

The banks and insurance industry better get used to owning up to their own malfeasance, accept that the old days when they could keep repeating the same infractions year after year is finally be coming to an end, and accept that what’s left of their reputations will be lost forever, if they keep screwing their customers.

Having their ‘good’ names dragged through the mud might be just what they need to clean up their collective acts.

Has the Anti-Household Charge Revealed the Power of the People?

Yesterday, a small, but good natured group of local people – with a smartly turned out Jack Russell terrier at their head - marched down the part of Dublin’s South Circular Road where I live to join the protest rally at the National Stadium.

It was a glorious day for a demo (and for gardening) and the boxing stadium attracted over 3,000 similarly inclined people from all across the country who had decided to take a stand over the €100 household charge.

But the real test of this national protest will be next Saturday, March 31stdeadline.

Will the bulk of the households of Ireland capitulate as the Minister for the Environment expect them to, cowed by his threats of unleashing other agencies of the state on them, including the courts if they fail to pay, or will the ‘We are the 80%’ hold firm and defy the minister?

First let me say that Phil Hogan seems to be is a nasty sort. Just another jumped up power monger who was elected by a miniscule number of local supporters but is utterly disdainful of the wider citizenry who continue to pay his inflated salary, pension and expenses.

He reminds me of Dick Cheney.  Enough said.

But his recent, brutish, threatening behaviour and that of the Fine Gael minions who were shoved in front of microphones after he was yanked off the national airwaves, seems to have put a little more steel in the backbones of the protest groups and many other folk (who may have been about to pay up) who dislike such blatant intimidation.

So will the majority register and pay the household charge by next Saturday?

Maybe.

It has been my experience that most people in this country are far more afraid of the State and its agents, like tax collectors and the courts, than the State is afraid of them. (Hasn’t it always been thus, even in so-called democracies?)

But this little protest has at least provided a tiny glimpse of what happens when folk are emboldened, if only for a brief moment, to threaten to cut off the state’s source of power – taxes.The politicians, whose very own livelihoods and source of power are personally threatened by this act of resistance, end up panicking.  They say the most extraordinary things (“you WILL pay, or else”) in the most menacing of tones. 

The ‘servant of the people’ mask slips and they reveal their true nature.

Since this economic depression began, the Phil Hogan’s in all the ruling parties have of course, been lucky. The USC (Universal Social Charge), a far more blunt and non-progressive tax instrument than the household charge has had a devastating impact on personal spending power and the domestic economy.  The higher VAT is further destabilising the retail trade.

Yet the USC (and 23% VAT rate) was passed, implemented and is being collected with barely a whimper because every employer also felt compelled, under fear of retribution, to hand over this money.

Self-assessment tax collections, by contrast, only work when the taxpayer themselves decide it is in their self-interest to do so. We’ll see next Saturday how many people collectively decide it is no longer in their interest or that of their families to pay this charge and instead to defy the will of the state.

I’m guessing that a large number of people who paid directly from the government payroll or whose income is mainly derived from the exchequer and therefore ripe for a little ‘withholding’ action, will pay the household charge by March 31st.

They and many others, despite their deep unhappiness with austerity and the repayment of private bank debts will also pay because they also reckon €100 isn’t worth fighting over and they always pay their bills at the last minute anyway.

That will leave the diehards. 

The property tax

But the entire chambolic event doesn’t auger well for the introduction of the property/site water usage taxed from next year, when real money is at stake.

If the state can’t convince the bulk of the private property owning citizenry to cheerfully and promptly pay a small charge that is clearly needed in 2012, at a time of desperate economic need by local authorities, how can it possibly imagine that the same people will agree to pay a multiple of €100 next year? 

Many people are not convinced any new money raised will improve services in their community; some believe the income tax and all the other levies allocated for local authorities is already being wasted.  

Saturday’s protest was organised by parties who are not just against bailing out the banks, but who also oppose any tax that is not progressive enough to exempt their followers as well as the unwaged/poor (who are already exempt.)

The bulk of all taxes, say the anti-household charge leaders, should always be paid for by “the rich” though they are divided on whether a property tax is ever justified, except for “the rich”. (Property tax is a tax on wealth, not labour.)

If a site tax is introduced there is certainly a risk that many anti-household tax supporters, living in modest dwellings but on valuable sites, will be required to pay more than than someone who owns a fine house on a low value site. Cue demands for average industrial wage income exemptions if that happens.

Ironically, the dwellers of the high moral ground share also share the same attributes with the Phil Hogan’s.

If they were in power they too would use threats and force to make whoever they deemed rich enough to pay for the services and entitlements they believe should be free to their followers.

If Ireland is ever going to get out of this deepening economic quagmire, the part of the anti-household charge campaign that has revealed that the people do have the ability to curb the rampant power of the government - needs to grow.

But the other side of the picture, the redrawing of the function and power of the state and its servants, in accordance of the real desire of the people, how much funding it requires (as opposed to how much it wants) and whether those funds are collected voluntarily or by force, hasn’t even begun.

Until then, we’re just a bunch of debt serfs who will be led by trumped up little dictators from either the left or right.

Ends

Sunday MoneyComment – March 18, 2012

Universal Health Insurance? Only if there’s a true – government-free - market

I was stopped by a man in my local supermarket yesterday who told me that he couldn’t afford private health insurance anymore for his family. It’s just got too expensive, he said, and he insisted he knew why.

“Let me tell you a story. I met a friend recently who told me how he’d had to go to Germany for specialist treatment for prostate cancer. The cost of the surgery and treatment was all picked up by VHI – though not the flight – and for the four nights and five days it cost €10,000.

“Two years ago,” he continued, “my young son had to have a relatively minor heart condition treated in Crumlin – it was done by keyhole surgery but he was also in hospital for four nights and five days and Aviva covered the bill, which cost nearly €30,000.

“That’s why I can’t afford private health insurance anymore for my family and why 60,000 people have dropped their cover.  My friend said his surgeon said that his bill in Ireland would have been two or three times more than was charged at the German hospital. Irish doctors and Irish hospitals are killing the golden goose.”  

He’s right at least about the health service now being caught in a nasty inflationary/deflationary spiral: the more people drop private health care, the more the insurers raise their premiums and the higher the cost to the state which increases its charges to the insurers… ad nauseum.

This man’s son and his friend, like the vast majority of the other two million people with private insurance here are mainly only treated by private consultants in public hospitals and their insurance plan covers the billing of both the operation/consultant and their semi-private or private room bed (or just an ordinary bed in the children’s ward) in the public hospitals. The cost has been going up sharply in recent years since it was decided that the true price of the use of the public hospital services hadn’t been passed on.

Meanwhile, only a minority pay for expensive plans that cover them entirely in the private hospitals.

It isn’t private health care that is to blame for the huge disparity between the cost of health treatments in Ireland and Germany. So what is doing so?

How about the fact that nearly 80% of the Irish health budget is spent on salaries and pensions, and these are set by the government and the public sector unions. The other 20% of the running costs – drugs, equipment, fittings, utilities, food,– are also the responsibility of government paid administrators, and with no personal ‘skin the game’ they’ve few qualms about spending taxpayer’s money either.

Is it any wonder then that the price, both public and private, to over two million health insurance members has been soaring for years?

James O’Reilly, the Health Minister seems to think that once universal health insurance is rolled out (starting with “free” GP care by 2016) we’ll have one, wonderful health care system that is fair, and accessible and world class.

There is only one way this will happen, regardless of how many golden eggs can be squeezed out of the poor, shrinking Irish goose:  the Department of Health and the Government must be reduced to a supervisory and regulatory role only and the health care market – patients, practitioners, hospitals, insurers – must be allowed to work out a genuine service that is affordable and deliverable, based on our available resources.

Let me put it another way:  if the Department of Agriculture had also been allowed to run the provision and delivery of food in this country, we’d have all starved long before anyone would have needed medical assistance.

This lack of empathy gets you nowhere

The Central Bank Governor Patrick Honohan must think it is helpful whenever he lobs another little hand grenade into the public debate about the dire state of our banking system.

He’s wrong. It just annoys ‘the little people’.   

You know, people not like him, not on a big fat Irish government salary of c€300,000, pension and perks, who didn’t get sucked into buying a huge mortgage on an overpriced property (for their own use or as an investment) during the biggest property boom in the western world that happened partly because the central bankers of the day were incompetent and asleep on the job.

Last week, Mr Honohan said it was high time the banks start putting the boot into owners of investment properties who cannot meet their repayments and are in arrears.

Why?

Because these defaulting loans are a threat to the survival of the banks – as are the c100,000 or so homeloans in arrears – but the investment ones are not subject to the same consumer protection codes and forbearance measures. He knows that if the entire problem is left to fester, it could bring down the Irish banks once and for all. By tackling the smaller c30,000 buy-to-let problem first, he must think it will give the banks a little breathing space before they’re forced to cope with the more lenient treatment that is expected to be afforded to distressed home owners when the new insolvency and bankruptcy law comes into force next year.

What the head of the Central Bank isn’t taking into account is that a lot of those 30,000 investment loans are backed by the equity in the borrower’s principal private residence. If one goes, they both go.

Or maybe the Governor does know this, but figures it’s going to be ugly whatever the outcome and the banks have to start somewhere.

It’s their survival, let us never forget, and not yours, that isn’t making this well-remunerated government servant lose any sleep.