The Sunday Times - Money Comment 02/08/09

Posted by Jill Kerby on August 02 2009 @ 20:57

How do you put a value on a house or apartment in a market where prices are still coming down and there are only a handful of completed sales?  


If the leaks from the Commission on Taxation’s report about their property tax proposal are true – and a self-assessment tax based on banded property values is implemented next year – then this is exactly the sort of dilemma that the home owners who are not exempted from the tax, will face. 


Much as everyone would like to think their homes are still worth what they were at the height of the boom, that is not the price you’d dare put in writing on a tax return. 


But without an independent, methodical, county by county, area by area, survey of the value of the nation’s housing stock to consult, do you opt instead to deduct 20%, 30% or even 50% from the price that you believed your property to be worth in 2007 before the crash began? Or do you search for that recent, singular sale in your neighbourhood of a house similar to your own, and use that price as your benchmark?


One mortgage broker I spoke to last week, who admits he paid far more than he should have for his house in 2006, says he will probably price his home at 2002 or 2003 levels, that is, before property prices exploded due to the huge glut of cheap finance and the loose lending conditions that fuelled the bubble. 


Personally, I’ve decided I’m going to use a valuation method that has traditionally been used by professional landlords to generally determine whether the asking price of a property is fair or not.  They do this by multiplying the annual rent or yield by a factor of between 12 and 14. (The better the location the higher the factor).  The sum achieved is considered fair market value because it should allows the landlord to recoup his initial investment after 12, 13 or 14 years.


The figure I’ve come up with on my own house, based on what these houses are renting for, produces a price that more than recoups our purchase price 15 years ago, but is a fraction of the hugely inflated prices that a few houses on my street achieved at the height of our extraordinary property boom.   


I’ve no idea if the Revenue will accept such a valuation.  But without strict valuation guidelines and a clear set of penalties for tax evaders, it seems like a more credible formula than the wild guesses that are being bandied about by many homeowners and estate agents these days. 


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A week doesn’t pass when I don’t hear from some just, or nearly retired reader who has been shocked by the value of their pension fund and the pension income they can expect. 


The latest story involves a 65 year old woman who worked for 15 years in a hotel and paid a small amount every week into her defined contribution pension plan.  Her contribution was so small, however, and the collapse in the value of the fund due to the stock market turmoil of the last two years. so great, that she has been left with a pension that might just pay her annual fuel bill, or perhaps the cost of taxing and insuring her little car. 


Her income was so low that she wasn’t even getting standard rate tax relief in recent years on her contributions and so probably shouldn’t have been making contributions in the first place. No one ever bothered to explain this to her. 


What bothered her the most, however, was to see how much the value of her DC pension fund had fallen in value over the last year, and even in the weeks before she retired.  She had no idea that her money, and that of her co-workers, had been invested in a fund of mainly European equities and that the pension administrator or trustees had never transferred her portion into safer assets like bonds or cash as she got closer to retirement age.


There is no legal requirement for pension administrators, trustees or sponsoring employers to do so.  Big self-administered funds often do so, small ones slip under everyone’s radar. 


There’s been a lot of pension reform talk this past year and not much action. 


Issues like the size of tax relief on contributions and whether lump sum payments should be taxed are now dominating discussions, but I think a more practical and helpful reform would be for pension providers – employers, life and pension companies and financial advisors – to be legally required to explain to pension members exactly how their pension works in language they can understand and as they get closer to retirement, to make sure they have a chance to shift their pension fund assets away from risky equities and into safer assets. 


This kind of information and the delivery of it, already exists:  A new pension administration company called Source was launched just this year by the former CEO of Hibernian Insurance Adrian Daly, that lets the member of a company pension scheme check every pension detail – the size of their contributions, the current value of their fund, the shares invested – in an on-line statement that’s very similar to the bank statements you get from a good on-line bank or mortgage. 


This sort of up-to-date, easy-to-access information about one’s pension may not solve all the comprehension problems people have, but it’s a sight better than the often unintelligible and limited annual statements that workers are only entitled to today. 

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