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The Sunday Times - Money Comment 22/11/09

Posted by Jill Kerby on November 22 2009 @ 14:15

 

The Environment minister Eamon Ryan says the state has six months to come up with a credible scheme to prevent a bigger wave of house repossessions. 

Organisations that work with debtors, like MABS and FLAC, the free legal aid centre, would say that deadline is far too generous.  

Right now, the first of the 160,000 people who lost their jobs between October and May (about 20,000 a month) are already shifting onto means-tested jobseeker’s allowance. 

The €820 a month they’ve been receiving on job-seekers benefit could melt away once a spouse or partner’s income, and any other financial resources are taken into account, pushing many into arrears for the first time.   And who knows – aside from the Minister for Finance - for how much longer the state will continue to pay mortgage interest supplement at that bill creeps up towards €60 million? 

Eamon Ryan has suggested that the cabinet is already considering a scheme that will force the banks to take an equity stake – some suggest as much as 50% worth – in the property of some indebted homeowners which could then be described as an ‘asset’ to be recouped when property prices recover to 2007 levels.   

The genius who came up with this solution must be the same one who has projected that Nama will make a profit for the state within the next 10 years. 

 

Which is why we should be hoping that before any more cocktail-napkin-back-of-the-envelope policies are rushed through, the cabinet takes the proper time to study the Law Reform Commission’s wider recommendations on the reform of the treatment here of personal debt.  

At their annual conference last week the big debt picture was presented – and it isn’t pretty.  It is estimated that there is €395 billion in all private sector personal debt, about €110 billion worth being mortgage debt (according to recent Central Bank statistics) and another, €2 billion in credit card debt.  All other personal, commercial and business debt makes up the balance. 

Meanwhile, our average household debt to income ratio is now a massive 176%, says the Commission, a 276% rise between 1995 and 2008.   In other words, for every €10,000 being earned, €17,600 goes out.  In their own September financial capability study, the Financial Regulator found that 9% of those surveyed are in serious debt arrears – the kind that can result in losing your home - and another 8% had missed some payments. 

 

This problem isn’t just about the terrible negative equity problem of a generation of first time buyers, or the mounting arrears of unemployed homeowners.  It’s much, much bigger than that. This is the kind of debt that sometimes only a proper bankruptcy system can deal with, something the President of the Law Commission Mrs Justice  Catherine McGuinness said we desperately need in this country. 

I’m really sorry to keep harping on about how bankruptcy needs to be one of the options that the government should be considering, but someone has to.

Pension consultants I know seem resigned to the idea that pension contribution tax relief will be reduced in the December budget, perhaps to a flat 30%-35%, down from the 47% worth of tax and PRSI relief that applies now. 

There’s no question that higher taxpayers have enjoyed the bulk of the €2 billion plus in pension tax relief awarded every year; certainly there was no advantage to saving for a pension if you were out of the tax net or paying only a small amount of tax at 20% or 26% including PRSI. 

That will certainly change if the tax bands are widened, and draws back in many of the nearly 50% of earners paying little or no income tax right now.  That is, of course, if they can still afford to make contributions after the Budget dust settles. 

The same might apply to higher rate taxpayers.  Already, 19% of pension contributors have cut back on their pension payments according to a Friends First survey, and modest earners in the €36,000 to €50,000 pay bracket, who  are paying between 53% and 56% in tax, levies and PRSI on the top slice of their earnings and these people will most certainly think twice about tying up earnings for up to 40 years for a 30% tax break, if the retirement income they receive ends up subject to up to a much higher top rate tax. 

If a single tax relief rate is introduced, it should come with at least two new incentives – the right to access to the cash in your pension fund, and abolishment of mandatory purchase of an annuity for members of occupational pension schemes. 

The only thing worse than reduced tax relief for such people, is then to be stuck with a fixed pension for life that reflects lousy annuity rates and that then reverts back to the annuity/insurance company when you die, to the disadvantage of your beneficiaries. 

I’m a big fan of Sarah Beeny, the Channel 4 presenter of Property Snakes and Ladders and before that, Property Ladder.  Unlike so many of the fawning presenters of the ubiquitous property shows during the boom, she continually warned the stream of amateur developers that they were inevitably underestimating the cost of and amount of work involved in turning their old property wrecks into show-houses. 

She inevitably pointed out to the participants who did make huge capital gains that they benefitted far more from the bubble market than from their genius as developers or decorators, and she endlessly warned them about over-extending their borrowings, especially if they were going to pursue ‘careers’ as developers. 

Now that the bubble has burst, few of the latest participants on the renamed Snakes and Ladders have been able to sell their glammed up properties; most are renting (at a loss) or living themselves in their developments in the forlorn hope the market will recover so they can at least break even some day.  

Beeny has now spotted a niche in this depressed market and has filled it with a website for UK sellers called Tepilo.com .  

Anyone here in Ireland who finds themselves unable to even rent their empty buy-to-let should check it out for Beeny’s practical and realistic selling and pricing tips.  Especially now that Daft.ie has reported that there are over 20,000 rental properties on their site, and average rents, at €770 per month have returned to 2000 prices. 

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