Jill Kerby

PART TWO: MORE CAPITAL, MORE INCOME NEEDED TO GET ON THAT LADDER.

In this column last week I highlighted a number of the factors that are working against first time home ownership - from the mortgage debt legacy and tighter bank lending for both developers and buyers, to the negative impact of politically motivated tax and planning policies, and general incompetence at all levels of government

We seem to be particularly bad in Ireland at devising sensible, workable policy and administrative solutions to social problems like the shortage of affordable housing. But first time buyers in other places are also finding it hard to afford their own home, not just because of the lingering impact on the great financial crisis on the availability of mortgage loans, but because of the wider impact of globalisation on their working experience and their future incomes.

Very simply, the job security, affordable housing, pensionable employment and huge stock market returns that today’s 65-70 year olds have benefitted from is not the reality for today’s younger workers. This generation is also now competing on a global front for jobs at rates of pay that are slowly but surely converging with what the equivalent worker is earning in developing economies.

Unfortunately, we have a big jump on these countries when if comes to debt accumulation. We’re all hopelessly addicted to cheap credit in the West, the growth of which outruns productivity or surplus savings. Ten years after the great financial crisis, the steady flow of credit and debt is all that keeps the entire system from unravelling.

If you don’t think so, consider last week’s global stock market ‘correction’. The US Fed’s decision to finally raising its base interest rate resulted in both the price of stocks and treasury bonds to drop dramatically (and bond yields to soar). What it means is that debt becomes more expensive to service (including mortgages) and credit (which has been flowing into the stock markets for several years) tightens up.

Is it any wonder that the post-2000 generation, with their historic levels of student debt (especially in the US and UK), insecure employment contracts and snail-like wage increases are floundering financially?

The real solution of course is the end to the vast wages and earnings gulf between the asset holders -  especially the giant multinationals and financial institutions at the top of the earnings chain – and the vast majority below.

So what can be done for our struggling millennials? More overtime? A second job? A couple of years working in tax-free Abu Dhabi or Dubai?  Should we be encouraging even more immigration to richer countries with more amenable wages, living conditions and state subsidies (Anyone for Canada? Norway?)

Family dig-outs – the Taoiseach’s other solution - still happen in middle Ireland, but financial advisers warn about the risk of using pension lump sums or retirement incomes to help out their children.

“Someone in their 60s or 70s needs to think very carefully about messing with their lump sums, or with their ARFs [approved retirement, post-pension investment funds from which income growth and capital can be taken.] “ARF draw-downs are taxable and you may need this money far more than your kids some day.”

Selling other assets – shares, investment funds, land or a second property - will release cash, but may also trigger unwelcome capital gains tax or gift/inheritance liabilities. Parents or grandparents who can afford to gift or even lend cash earning nil to low deposit interest “would be far better to do this than to draw down higher yielding and taxable investments or ARFs,” said the adviser.

“There are other ways a parent can raise money to help their child or children get on the property ladder. If their children are gone – the parent could rent out spare rooms and earn up to €14,000 tax free a year which they could then gift to their offspring. It might be a better solution than having the adult child move back in so they can save on rent.”

Finally, the question has to be asked: is the nuclear family model outmoded in this post- modern world? Should we be revisiting a collective family arrangement that allows uncertain, casual and contracted incomes stretch further, even beyond one or two generations?

The last financial crisis fuelled the idea of building financial ‘arks’ by the older generation of asset owners of pension funds, paid off properties, stock portfolios and bank cash.

A variation on the ‘family office’ trusts that wealthy families operate, the Ark can be a more modest operations in which grandparents, parents, siblings and even godparents can combine surplus income or cash which can then be lent to the next generation of to help finance education fees, house down-payments and even business through a seed capital for businesses.

And in a financial crisis, the Ark might even keep more than just the struggling house hunter afloat.

The 2018 TAB Guide to Money Pensions & Tax is on sale in all good bookshops and on-line. See www.tab.ie for ebook edition.