Jill Kerby

2017:  A YEAR OF FINANCIAL SWINGS AND ROUNDABOUTS

Looking a gift horse in the mouth is never recommended, but there’s really no other way to review the personal finance events of 2017. 

In a land where ‘swings and roundabouts’ is the norm, 2017 was no different:  good news about the economy was tempered by bad news on the housing front; jobs growth was strong in the FDI sector, but there was little wage growth in the wider economy.

And yes, a well-diversified stock portfolio rewarded most asset holders, but few ordinary workers have any surplus earnings to invest and pension membership in Ireland continues to fall.

So how was the past year, financially, for you? 

Did your standard of living improve or stand still, as so many people are reporting? Was this the year that your family home came out of negative equity, or were you one of the 30,000 victims of the great tracker mortgage scandal? 

As a first time buyer, did you benefit from the easing of the new borrowing rules and the introduction of the Buy To Help scheme – or did these change overtake you in a market where prices kept rising?

Nearly all the official government indicators show an economy in recovery, with nearly 5% GDP in 2017, though this is distorted by the foreign multinational sector and the convoluted way it reports its accounts and value of the intellectual property it registers here.

Officially, inflation is still very low at about 0.5%, but the rise in the price of many imported goods – via the UK – is noticeable in grocery line check-outs even as the price of some raw food stuffs, like domestically produced vegetables has never been lower, putting Irish farmers under huge pressure.

Health, transport and education services continued to rise throughout 2017.

The overall tax take rose in 2017, but income tax growth was not as robust as forecasters predicted. Too many of those new jobs in the domestic economy are either so low paid or temporary that there is no income tax to be paid.

Even the relatively small change in the hated Universal Social Charge in Budget 2017 has been sited as a reason for the weaker than expected tax take at one point. Swings and roundabouts indeed…

One of the enduring disappointments of the last year, and of Budget 2018 is the negligible return on savings. Personal debt, including mortgage debt continued to throughout 2017, but the banks, post office and credit unions continued to lower their deposit interest rates and dividends. Bank of Ireland became the first Irish bank to introduce negative interest rates on large deposits while bank and post office closures and credit union mergers continued.

The only good news was that the government finally lowered the DIRT tax on deposit yields from 40% to 39% - it will fall again to 37% in 2018 – but 37% tax on zero is still a zero return.

The lack of reward for savers hasn’t discouraged those who do have some money to squirrel away but a combination of the housing shortage and nil returns on cash have fed the house price and rent bubble with over half of all house sales in 2017 undertaken by cash buyers.

The ECB stuck to its zero base interest rate in 2017, which is good news for euro-zone countries with substantial personal and national debt legacies, like Greece, Spain, Portugal, Ireland and Italy – but by the year end, this long-standing position changed in other countries like the US, UK, Canada. Where they go, we usually follow but perhaps no time soon.

Our debt legacy is one of the most enduring with 50,000 mortgage holders still in serious arrears at year’s end.

The best return of all in 2017 for any surplus earnings in Ireland (aside from reducing expensive debt like credit cards and personal loans) was a pension fund, if only for the 20% or 40% income tax relief on contributions. Underlying assets still grow tax-free and at retirement you can claim a tax free lump sum worth 1.5 times your final salary or 25% of the fund if you are self employed.

Well-diversified, risk-balanced pension funds also performed pretty well in 2017, yet membership continued to fall. The government claimed once again that plans are afoot to introduce a universal (sic) pension scheme (universal to the private sector only) but amid such a great housing crisis it was all talk and no action.

If 2017 proved anything at all – and not just here but in most western societies - it was that job uncertainty, housing uncertainty (and homelessness) and the growing cost, especially of medical services, has grown more acute.

Amidst all the talk about the rising economic tide, what seemed lacking was the sight of lots more little boats sharing the harbour again with the gleaming yachts.

RUNNING OUT OF TIME FOR THE IMPOSSIBLE-TO-BUY-FOR? READ ON

With just a few days left before Christmas, and readers running out of time and maybe a few ideas for what to get those impossible-to-buy-for loved ones, I have dusted off the MoneyTimes ‘Last Ditch Christmas Present List’ which is long on ideas and short on expense.

Of course, for the giver with no budget restraints there’s always the purchase of a Bitcoin or two. The original virtual currency, it was priced at a giddy €14,421 ($16,465) per virtual coin at time of writing, and a Daddy or Mammy Warbucks can make their purchase entirely on-line and not leave the leave the comfort of their own livingroom and laptop.

The virtual wallet in which Bitcoin resides comes with a unique passcode which you don’t ever want to misplace. Bitcoin, which would have cost about €800 this time last year is completely anonymous and outside the supervision or adjudication of banks and regulators so if it goes missing or is stolen there’s no one to turn to for restitution or compensation.

Compared to the original Bitcoin, (there are now hundreds of imitators) precious metals like gold, at just c€1,060 for a one ounce real coin at time of writing, looks like a bargain.

The price of gold has been moving sideways for about the last five years after slipping c18% from its 2013 all time high, or since the euro crisis in Europe eased after the Greek debt disaster was averted (just about.)  

Now that Bitcoin is heading towards the price stratosphere amid periodic gut-wrenching pullbacks a nice shiny gold coin at the bottom of a Christmas stocking is unlikely to cause quite the same heart palpitations if you’re the sort who can’t resist watching the daily virtual currency price rollercoaster. (My financial adviser’s view of Bitcoin’s price movement, for what it’s worth, is akin to his view of the 16th century tulip mania or the dot.com mania or Irish property price mania: “Crazy prices last only until the get-rich-quick wannabees decide they don’t make sense anymore and stop buying.”

Not quite as exciting or expensive as Bitcoin or gold, this is my tried and tested 2017 MoneyTimes ‘Last Ditch Christmas Present List’ :

-       A gift vouchers from your local neighbourhood shop, whether the butcher, baker or candlestickmaker …or the wineshop, restaurant, hotel, florist, beautician, cinema, electrician, clothing boutique or hardware store.  Just be sure to double-check any expiry date and then remind the beneficiary that they mustn’t forget to use it before the deadline.

-        A Gift-for-All card.  Extremely convenient and handy, these plastic cards are sold in your local Post Office and can be used in thousands of retail, outlets and shopping malls (including grocery stores and utility providers) around the country. Hopefully, whomever you give one to will spend it locally.

-        Prize Bonds. I’ve never been a fan of the Prize Bond company – these are not ‘investments’ as they pay no interest or yield.  They are a game of chance, but now that deposit accounts pay no real return either, a gift of Prize Bonds is a perfectly fine last minute gift you can buy at the Post Office and they remain current even if you win a prize.

-        Any coin collectors on your list? Check out the Central Bank’s www.collectorscoins.ie website. The latest issue celebrates the 350th anniversary of the birth of Jonathan Swift. It may not arrive in time if ordered this late, but you can download the page and details and pop that into a gift card. 

-        Theatre, music or art lovers on the list will enjoy getting tickets or becoming a ‘Member’ of their local concert hall or art gallery. Members of the National Gallery enjoy ticket discounts or free entry to exhibitions that charge fees. (Membership to most organisations like these can be done online and the documentation downloaded into a Christmas Card.)

-        Make a donation gift. There’s no shortage of good causes or charities that you could make a financial donation to on behalf of your entire family, or particular members (or even in memory of a loved one who has died in the past year.) 

-        Give a gift of time. You know the drill by now if you’re a regular reader: offer a set number of babysitting or grannysitting hours. Help someone milk their cows or dig their Spring garden. Offer to give music lessons or math grinds or any other kind of expertise you may have – cookery, candlemaking or car maintenance.

Finally, I know someone, a retired bachelor accountant who every Christmas anonymously tips €3,000 – the amount anyone can give anyone entirely tax free in the course of a year -  to a random stranger, usually someone he meets working in the hospitality or retail industry.   

A Happy Christmas indeed.

PROPERTY IS NOT THE PANACAE TO POOR DEPOSIT RETURNS

House prices are still rising at a rate of about 12% per annum according to Daft.ie; meanwhile, the average rent in Dublin will go up by 5%-6% each year until 2020, according to the property agent Savills.

No one expects much of a let-up in these soaring prices until at least 2020-21 when a big enough stream of new social and private properties will finally be for sale and the market begins to stabilise.

Which makes it all the more important that anyone thinking of making a property investment is extra careful in weighing up the pros and cons of being a landlord and to investigate other destinations for your money before you sign a contract, and especially before you seek a mortgage. 

Cash continues to be king when it comes to property. It is reckoned that at least half of all residential houses and apartments are still being bought by cash buyers, often older people, often new retirees with pension lump sums or a significant balance from the sale of other assets. These buyers typically reveal that they have been unhappy with the miserable nil returns from a safe deposit account.

Yet over the past 20 years, the average net return from residential property, both here and in the UK has hovered between 2% and 3%. The reality in Ireland is that high income taxes and costs like insurance, property tax, rates, on-going maintenance and repairs and refurbishment have take their toll on private property investment yields, despite the fact that rents in cities like Dublin, Cork and have pretty much exceeded pre-crash levels. 

Meanwhile, renters, who now make up 20% of the population, according to the recent Savills report, are horrified to see the relentless surge in rents due to the ongoing shortage of new developments (and social housing), further fuelled by strong employment and the population rise around Dublin and other cities.

A quick survey on Daft.ie of working class Dublin 8 (where I live) shows plenty of small two bed apartments renting for as much as €1,700 a month, the Dublin average, but purchase prices are typically in the €300,000-€350,000 range producing an annual gross yield from that kind of rent of between c6.8% and 5.84% respectively. Deduct all the landlord’s taxes and costs and they’ll be lucky to walk away with a clear profit of 2% or 3%.

What is now tempting some prospective landlords is the far bigger profits available by turning residential properties that may have housed a family into one where individual bedrooms and even a converted dining room are let as single units to two or three occupants who then share the kitchen and bathroom.  Others are buying ex-family homes for short-term tourist accomodation.

A recent PrimeTime Investigates programme highlighted the uglier side of this business – the properties with four, six, eight people per room that are breaking numerous local authority planning by-laws, tenancy and fire regulations. Fortunately the Revenue Commissioners are now understood to be investigating these cash-only rentals. Widespread tax evasion is also suspected.

Turning ordinary apartments and houses into AirBnB tourist accommodation are also proving to be popular with investors, despite being subject to all the same taxes as regular landlords attract.

The downside of cramming in tenants or opting to satisfy demand for short term tourist lets (without breaking the law is being a landlord is not an easy job and your biggest threat will always be the fickle State.

 will a toughaside from you still can’t escape changes in planning or tax legislation that, along with more overall supply, could have a serious impact not only yield, but capital values.

Where amateur landlords continue to go wrong is a) to underestimate how much government’s meddle in property markets and overestimate the possibility of a large capital gain. Working against that possibility is:

-       an increase in supply by c2020-21 that could have a dampening effect on yields;

-       future interest rate increases that will dampen house prices;

-       an upward adjustment in property taxes from 2019, the next rate setting date;

-       new regulations and legislation to provide greater security of tenancy and/or rent controls;

-       the reneging by the government on the restoration of 100% mortgage interest on residential property. (Partial restoration continues. It will be 85% from January 2018. If it stops there more landlords may opt to sell, putting downward pressure on prices.

Property is considered a long term capital investment (only speculators ‘flip’).  But it’s also a physically depreciating asset that carries maintenance costs as the boiler eventually dies, the roof needs replacing and fixtures and appliances wear out.

No matter how attractive Irish investors believe ‘bricks and mortar’ to be compared to volatile stock markets, investing in an single asset class like a single property carries more risk than most people imagine.

Finally, anyone thinking of linking a property to their pension fund needs to just keep in mind that you’re only adding another layer of risk - this time to your retirement plans.

The 2018 TAB Guide to Money Pensions & Tax will be appearing in bookshops and on line soon. See www.tab.ie for ebook edition.

WILL THE BANK OF MUM & DAD BE A HOLIDAY BURDEN OR A JOY?

Will the Bank of Mum & Dad be opening its virtual doors for business for the first time this Christmas?

Will it be tapped by teenagers looking not just for some extra cash to pay for a night out with their mates, but also by younger children, eager to take part in the holiday shopping experience? (“Oh, Mammy, can I get that for Grandda? He’ll love it. Pleeeaase?” 

With no money of their own, the elusive BM&D and credit line (“Ah sure, I’ll use the credit card”) is quickly identified by the kids as a source of retail pleasure and success.

I am of two minds about the Bank of Mum & Dad. 

Properly constructed and operated, even as a ‘virtual’ concepts, the BM&D can be an excellent learning tool for youngsters who see their parents saving money into it (child benefit payments, for example) for the good of the family and into which they can add their own money in their own “account”.  This accumulating money can then be drawn down for worthy purchases – school trips, family holidays, Christmas presents, family donations and eventually small loans that can be repaid. 

Savings rewards that parents mete out – like interest (no longer paid by post offices and credit unions on tiny sums) and even annual saving bonuses -  can act as important savings incentives and can even youngsters understand the downsides of instant gratification.

A child who is given their first piggybank at an early age, into which they ritually saved part of a weekly allowance, payments for special jobs around the house or garden, or birthday money can then graduate to either an account with the BM&D or a conventional post office or credit union account. The BM&D that adds a top up reward  - “For every €10 you save, the BM&D will add 5%, or 50c” – is always going to be more appealing.

Spending some of their savings or earnings on other people – at Christmas, for example – is an experience that young children really enjoy and if all goes well, the properly run Bank of Mum & Dad can also become a source of loans and credit (and yes, gifts) for stuff that matters:  school trips, college fees, weddings and yes, even house down payments because it has accumulated real and emotional/social capital from the chief savers/investors, the parents, as well as a the children.

Unfortunately, a recent conversation with an accountant friend suggests that the Bank of Mum & Dad (even if they don’t call it that) is too often just an endless drag on financial resources by adolescent and adult children who a) can read the guilt signals emanating from exhausted, working parents; b) have been discouraged to work in their spare time to instead devote as much time to the points races c) are already life-long consumers who know no better.

It’s a dangerous combination, she said, especially today’s middle-income parents of “high achiever” children who already live paycheque to paycheque.

“Inevitably, at this time of year [tax deadline] some client will admit to being approached by an adult child for substantial money – say for a downpayment on a house, but also for post-graduate fees or even a wedding.  It could be €20,000-€30,000.

“They often say, ‘we’ll have to take it out of our savings, or retirement lump sum, or borrow it’ for them. They ask if there are any tax deductions. They are often embarrassed to admit that they just can’t say ‘No’”.

For those semi-resigned BM&D parents, my accountant friend suggests they take tax, legal and financial advice. 

Accumulated cash gifts that exceed the annual €3,000 capital acquisition tax (CAT) exemption could eventually carry a CAT liability for the beneficiary if they exceed the €310,000 lifetime tax-free threshold between parents and children and the €32,500 limit for grandchildren. All third level/post graduate education costs are exempt up to age 25. That full time college student under 25 can live rent free (and gift-tax free) in a parent-owned property. So are wedding expenses paid for by the parent, but not the wedding gift that exceeds €3,000…or that house downpayment.

Banks of Mum & Dad work best if founded with the best intentions, like not wanting youngsters to be burdened by student debt upon graduation, or by recognising the big property wealth transfer that has happened in Ireland, by helping your less advantaged children to become first time buyers.

But realistically, unless you have substantial resources, most parents will need to assess the impact that cash gifts might have on your long term financial position. Can outright gifts be turned into zero interest loans? Are there tax implications? To avoid accusations of favouritism should you adjust your wills?

It’s Christmas. Is the Bank of Mum & Dad open or closed?