Jill Kerby

 

PART 2:  PASSING ON FAMILY WEALTH NEEDS A GOAL AND A PLAN

Irish families are a fund of generosity. Older members in particular have shared their wealth and resources with their children and grandchildren long before the 2008 economic downturn:  ironically, the helped to fuel the credit boom by giving early inheritances to their children as the cost of housing soared due to the wider central banks-fuelled credit boom.

But the boom is over and credit is now tight. Many older people are concerned about the sustainability of their own wealth and in their ability to help their loved ones.  Not everyone is happy about depleting their wealth (or what the instinctively think of as their family wealth) by occasional, unstructured and often emergency transfers. 

They want to help their children or grandchildren at a time of need, but they are also very conscious of their own potential ‘time of need’, probably in advanced old age.  I’ve also observed that there is a sense of ‘moral hazard’ at play within many families:  the older generation loves their children or grandchildren deeply, and realises that there is a very real financial need, but disapproves of that generations’ spending and lifestyle and in some cases, what they perceive as a sense of entitlement by their children to such financial help/transfers.

It isn’t too hard to understand both sides’ position.

Existing pensioners, especially the pre-1945 baby-boomers raised larger families in more constrained financial circumstances. They didn’t accumulate large amounts of debt for two reasons: thrift and prudence were ingrained and there was no easy access to credit. They were forced to live not just within their means but below them…or emigrate to somewhere where they wouldn’t have to.

However, by the mid to late 1990s they were retiring into a very different economic model, even here, in which wages, property, state and private pensions were all artificially fuelled by huge amounts of credit and access debt, especially by the generation behind them entering the property market.

The collapse of this property fuelled credit market has left this generation with monumental personal and state debts and a requirement to also keep funding the on-going retirement benefits for an older generation that is growing at a faster rate than their own.

State pension values have been frozen since 2009, some smaller benefits reduced or eliminated, but the really important ones – free travel and medical cards and preferential income and USC rates (the latter for over 70s) and the end of any PRSI contributions mean that the Baby Boomer and older generation of 60+ year olds control the greatest volume of household wealth.

Since there is no sign of any political support for the reverse transfer of this wealth (via higher taxation that is then redistributed by the state – or even the end of inheritance taxation by the state) what can families do voluntarily to meet the needs and sensibilities of both sides?

Is there a way, or process that can focus on the immediate financial needs of the indebted generation, satisfies that tribal desire of older Irish people to pass on their wealth (especially property/land) as intact as possible to the next generations but also protects them from the potentially high care costs of their own advanced old age?

I’ve spoken to a number of financial and tax advisers and these are their recommendations: 

-       Be fully aware of the current value and sustainability of your wealth: income, savings, lifestyle costs, assets like property, investment funds, pensions, life insurance, debt.

-       Understand all the savings and investment risks and rewards that you are taking or getting.

-       Understand the role taxation plays in the purchase, holding, disposal or transfer of your wealth. 

-       Set realistic immediate, medium and long-term wealth transfer succession goals, then devise a plan that can match those goals. Depending on the size of your assets, this might involve advanced tax planning (of inheritances via Section 72 policies or with a discretionary trust.)

-       Always keep your Will valid and updated. Include an enduring power of attorney.

The experience of every adviser I’ve spoken to is that that even among older people who genuinely want to pass some of their wealth as intact as possible to the next generation(s) during and after their lifetime, their approach has often been “ad hoc”, “muddled” “fractured”. Their asset base – nearly always cash – “is too narrow” and the overpayment of tax “is very common.”

A trusted lawyer, tax and financial adviser with experience in investments, succession and estate planning can get the process started. (see www.sfpi.ie/memberlist./ )

Wait too long…and who knows?

Governments seeking re-election avoid reducing the preferential income, pension and health benefits they make to older voters. But transferring wealth is always part of their plan and when they next do so…they won’t necessarily have your family in mind.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.   

  

 

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PART 1:  TOO MUCH DEBT AND LOW BIRTHRATE MEANS TROUBLE AHEAD 

It is well known that our "tax equalisation" system does not treat married/civil partnership couples very equitably: a single earner couple gets to pay the standard, 20% tax rate on income up to €42,800, while the dual income couple can earn up to €67,600, only after which the top, marginal rate of tax – 40% - kicks in.

Tax equalisation was introduced in the 1990s to encourage even more Irish women to enter the workforce. The impact was a given: with all these extra wages circulating in the market, chasing finite resources, the price of everything from housing and childcare to transport, healthcare and education went up and most young couples today have no choice but for both partners to work if they are to pay for the same bills (minus childcare) that a single income once met.

Since the transition from the single earning family (which can mainly be traced back to the early 1970s in North America) it is only the wealthy, the poor (on subsistence state benefits) or the very, financially prudent who can “afford” a stay-at-home parent.

Unfortunately, the world of finance and services – which in the West has replaced the bulk of industrial manufacturing – has also played a big part in the necessity of the dual income household.

Through the ‘magic’ of fractional reserve lending and the leveraging of bank loans over the past 30-40 years – even the stuff that you couldn’t immediately afford with two wages, such as a new car, suites of furniture or electronic goods, designer clothing or foreign holidays - could be purchased with credit.

During the property boom years of the late 1990s and 2000s, you could even maximise those discretionary loans at low interest rates (but very long repayment terms) by drawing down the credit-fuelled equity in your property.

The point was – and so many young, hard-working couples often reminded me of this during those boom years – ‘why work such long hours away from home and family, if we can’t at least drive a decent car(s), have a nice home, nice clothes and take decent holidays’?

The problem now is that western countries are addicted to credit and can’t survive without it.

Yet the growing Boomer Generation of late 50s –70 year olds have all the stuff they’ll every need and are no longer borrowers or savers. They have started drawing down their savings and pensions and are worried (rightly) about the high cost of their advanced old age.

Meanwhile, the 35-55 year olds are in serious debt and are under-pensioned.  Their childcare/lifestyle costs are still high. They can’t afford to spend much and are not particularly good credit risks.

The 20-35 year olds may have missed the property bubble and are relatively debt free (unless they have student debt), but they have no assets. High unemployment means their wages are kept relatively low and their prospects of home ownership, early offspring and a comfortable retirement are poor. They face the greatest state debt repayment burden of all.

As a powerful voting block, ageing Boomers, (I’m one of them) and their similarly ageing political representatives are hardly going to vote any time soon for this uneven playing field to be levelled.

The most obvious way would be to get rid of unsustainable universal state pensions that today’s 30-40 year olds must fund, but that few of them will ever collect (at today’s value) and replace it with universal invested defined contribution ones.

Another reform would be to end the tax-free sale or transfer (between spouses) of the family home but allow it only between older/younger generations. This would release more family sized properties onto the market, help to moderate price growth and prevent property bubbles. It might even help increase the birth rate. 

In spite of the signs of economic recovery, there is a great deal of concern among families about all these problems. They are certainly helping each other: the older, wealth-holding generation is providing lots of free childcare, they’re paying for education costs, health insurance bills, even mortgages. 

Could we be doing it in a more structured, efficient way? Next week I share the views of financial, tax and legal experts on how to best conserve, preserve and distribute family wealth to the benefit of all generations.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.      

 

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CAN THE FINANCIAL WORLD GET ANY CRAZIER? YOU BET…PROTECT YOURSELF

 

The single, common bone of financial contention with older people today doesn’t appear to be how much extra tax they are paying since 2008, or frozen pensions, or the high cost of healthcare - though all of those things are a worry.

It is what they perceive to be the extremely low return they are getting on their savings.

With the exception of a single rate hike in July 2008, the European Central Bank base rate has fallen steadily since then, from 4.25% to its current rate of 0.05%.

Neither savings or even tracker rates are that low, of course, and here in Ireland, savers are paid higher interest than practically any other Eurozone country (except Greece).

With the printing, by the ECB, of €60bn worth of euro every month until the end of next year interest rates, and certainly government bond yields were expected to continue to fall. They certainly did in March and April. 

But this is a story that changes by the day. As I write, German and other European bond interest rates have risen dramatically and there is growing concern that the great sovereign bond bubble that began about 30 years ago may finally be approaching its pin.

The complex bond markets don’t usually feature on the ordinary person’s radar. But as their prices have loomed, and the interest they pay falls, this market has an impact on every saver, whose deposit yield disappears, every debtor whose debt inflates away and retiree whose income for life shrinks.

These days, deposit interest is puny (just like tracker mortgage repayments.)

Back in 2008, Irish demand deposits paid as much as much as 5.25%, a 1% margin over the ECB rate of the day and as much as 8% for one or two year fixed rate accounts. Someone with €100,000 could expect between c€5,250 and €8,000 (albeit from the likes of Anglo Irish Bank or Irish Nationwide BS) annual gross income. The DIRT rate was just 20%.

Today, after seven years of central bank manipulation, the same €100,000 in an Irish demand or fixed rate deposit account might yield its owner, c€1,555 - €1,700 with a DIRT rate of 41%, not 20%. Meanwhile a tracker mortgage holder with a €100,000 loan and a 0.55% interest rate has a monthly repayment of €55. (Yes, €55)

Anyone buying a German government 10 year bond last month (like a pension fund which must invest in very safe assets) would only get 0.5% annual interest. Today, as I write, it – and most other Eurozone bonds- has risen to 0.7%. That may seem like a tiny jump, but not for the bond markets and you need to go back to 1999 to find this kind of sudden volatility in the German bund market.

An immediate consequence is that despite all the quantitative easing, which usually boosts stock market prices, as I write European stock markets are falling and the euro – which had sharply weakened in March and April against the dollar and sterling – has strengthened.

iAll this market activity might have reversed by the time your read this. But we are caught in an upside down, topsy-turvy financial world, dominated by an insatiable dragon:  Debt.

No wonder ordinary folk, clinging to their hard-earned life savings, are confused.

The single, common question I’ve been asked at my Active Over50s seminars (in Letterkenny last month, Killarney this past weekend) is how to get a better deposit return with as little risk as possible.

Aside from shopping around for the best short-term rate and being prepared to move cash around regularly, there is no simple answer. Cash itself carries real risks of devaluation and debasement, in the form of QE money printing (when it works); confiscation – if you keep more than €100k in any single EU bank and there is another ECB “bailout” (remember Cyprus); and inflation, whereby the % rise in your cost of living exceeds the % amount you earn in interest after DIRT.

So consider lessening those risks:

-       Don’t leave cash over €100,000 – the deposit guarantee - in any single bank/credit union.  

-       Choose a credit-worthy bank/credit union with a top-notch reputation.

-       Consider diversifying your assets, including cash, especially if they/it represents the bulk of your wealth. This is really important for pension fund holders who have many years before retirement.

-       If retirement day looms, larger holdings of cash and short term bonds means you are less likely to see a big collapse in your fund if the stock or long term bond market experience a big correction. Get a review from your pension trustee or adviser.

-       Consider buying a small percentage of gold/silver as catastrophe “insurance”. Unlike paper and ink money that can be intentionally devalued, debased, recalled or lost forever (paper burns), the coins and bullion you own are immutable. They answers to no third party once in your possession.

-       If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.      

 

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This is a selection of my comments about property from 2005

ST Comment – June 5/05

JUST 5% GROWTH FOR 2005 – A SOFT LANDING?

The projected 5% growth in house prices for 2005 sounds considerably more realistic than the crazy, double digit increases of just two or three years ago, and with absolutely no sign of an interest rate rise in sight, that soft landing in the property market appears to have happened. 

The collective sigh of relief amongst first time buyers can be heard from every major town and city in the land.  According to another piece of research conducted by Bank of Ireland, couples have seen their salaries rise by 64% in the past 10 years €39,251 in 1994 to €64,409 while sole applicants salaries are now €47,024 for men and €42,970 for women.

The April house price index has thrown up others signs that the property market here is calming down, even if borrowing remains very strong.  For example, 55% of first time buyers are buying second hand homes, the price of which grew at a slower rate 0.3% nationally than for new houses, which went up by 0.6% in April.

It isn’t clear sailing for everyone though and one has to question the wisdom of relying on an interest-only mortgage (as a way of keeping monthly repayments down) in a slowing market.

It isn’t inconceivable that prices may flatten out altogether in another year or two, which is not the best scenario for buy to let investors in particular who were counting on ever increasing prices to justify buying at a time when rental yields are also tight.

 

 

STComment June 12/05

DUBLIN RABBIT HUTCHES BIGGER THAN NEW YORK RABBIT HUTCHES

It’s nice, in a perverse sort of way, to know that there are other people even more obsessed with the price of property than Dubliners.  A recent trip to New York showed that not only is the price of property in Dublin city centre a steal compared to Manhattan, but that our rabbit hutches are a lot bigger than their rabbit hutches.  In the world of property one-upmanship, this all counts.

With the average Manhattan apartment now costing nearly $1.2 million, what was surprising is how many people in tiny, but valuable, apartments are quite satisfied with their lot.  A survey in last Sunday’s New York Times showed how 56% of Manhattanites are satisfied with the size of their flat – despite the fact that a typical studio is about 400 square feet.  People with children are, naturally, less happy with their accommodation than those without, but once their kids leave the hutch, parent satisfaction levels rise again. 

Apartment dwelling is a relatively new phenomena here and while I suspect that an Irish equivalent survey would probably show that most Irish flat dwellers yearn for a house in the (inner) suburbs once they have children,  the cost of buying and selling is going to force more of us, and our families, to permanently adapt to apartment living if we want to remain in the city. 

One difference that gives us a huge advantage over New York apartment dwellers – and one has to wonder how much longer it will last – is the lack of property taxes or rates in Dublin.  A friend of mine who is about to buy a tiny, but lovely Edwardian one bedroom flat on East 77th Street for just under $400,000 will be paying another $670 a month in co-op fees and property taxes.  This is on top of her $1,500 mortgage repayment.

And we think property is expensive here…

 

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This is a selection of my MoneyComments about property from 2008

STComment - Feb 3/08

ECONOMIST ‘MOUTHPIECES’ TALK UP THE MARKET

What is it they say about economists?  That they make weather forecasters look good?

The mortgage banks just cannot resist sending out their economist mouthpieces at every opportunity, and ideally when a microphone or TV camera is in the vicinity, to “reassure” the public that all will be well in the housing market. 

Last week it was IIB bank’s turn to tell the nation that once average house prices fall another 5% (for a grand total of 16% since the start of last year) the bottom will have been reached, the ‘soft landing’ achieved. 

Would anyone listen, let alone believe such a prediction if it was delivered by the bank’s mortgage boss, or the PR guy?  Of course not.  They’d dismiss it for what it is – marketing propaganda to drive a few more first time buyers down into the jaws of the mortgage monster out there with the sign around its neck that reads ‘negative equity’ if they also happen to be seeking a 100%, no money down, interest only loan. 

Luckily, prices and interest rates are still so high that such mortgages are only being bestowed upon bewildered, but ring-fenced civil servants.  Everyone else seems to be doing the sensible thing by ignoring the bank’s cheerleaders and waiting for prices to do what they inevitably do when a bust happens – revert to the mean, which in the case of domestic property, is when people can actually afford it again on an average income.

It isn’t just the banks that refuse to acknowledge the new reality: the building firm, McInerney Holdings plc, had just 594 private housing completions here in 2007 compared to 1,025 in 2006 and at the start of this year, has only 282 deposits on hand compared to 380 at the same point last year.

They too blame “negative sentiment and the tightening of credit” instead of just saying that their houses are too expensive and don’t offer good value. 

They even say, “This adjustment should provide a more stable housing market and should be advantageous to our business model.”

You really couldn’t make this stuff up.

Ends

[McInerney Holding was put into examinership in Oct 2010)

 

ST MoneyComment – Feb 17-08

THE PARTY IS WELL AND TRULY OVER

Do you feel rich?  A wealth survey from National Irish Bank says you should, given that the average Irish household has wealth and assets worth more than €650,000, and is symbolised by “the preponderance of expensive cars…exotic holidays and even the increasing ownership of private jets among the super-rich.”

The bulk of our wealth, once the super-rich and the super-poor are eliminated, is actually tied up in the value of our rather ordinary family homes, never the most liquid of assets at the best of times, and especially not during a falling market.

Even those homeowners who did tap into the rising value of their homes during the boom years and refinanced other debt, or extended their mortgages to buy yet more property, might now be regretting the degree of liquidity they did enjoy.

The end of any price bubble always delivers the same, cruel lesson:  that your house, shares, art, etc are only worth what the market says it’s worth. That and the fact that paper millionaires are never quite as impressive as the ones with solid bank balances and little or no debt.

Surveys like this – which purport to show that our collective household wealth is now over one trillion euro “for the first time ever” – are a subtle way for the banks to try and encourage us to keep spending and borrowing when our natural instinct, in the face of falling house and share prices and rising unemployment, is to buy less and save more.

Of course, things aren’t so bad in Europe or in Ireland that the ECB and state governments have to frantically incentivise us with rate cuts and tax rebates to keep us spending and speculating, as has happened in the US.  And thank goodness for that.

But someone needs to tell the banks that the decade-long party ended nearly a year ago; surveys that remind us what fun it can still be seem a bit pointless when most of the partygoers have already gone home to sober up.

 

STMoneyComment – March /08

TIGHTER CREDIT MEANS FALLING HOUSE PRICES

You have to have faith to be an investor, and I suppose that’s why so many people – from bankers to estate agents to ordinary punters – think that property prices, share and pension funds and even the cost of living will improve when the ECB lowers interest rates again.  

The faith part I understand.  If you give up hope, you are left with despair. It’s the expectation of lower interest rates soon that I don’t get, especially given that the ECB has a single mandate: to manage inflation and protect the euro. 

The problem with cutting interest rates to ‘stimulate’ the economy as the Americans are doing, is that it usually results in yet higher prices.

If you’ve hosted a big party (for the past decade) and everyone has pretty much drunk the place dry and are clearly now worse for wear, the responsible thing to do is to let them sober up. You don’t slap another bottle on the table and encourage them to keep partying.

As prospective home buyers have now discovered, tighter credit means prices fall back.  Eventually, the price of other assets return to price levels that people can genuinely afford again with their incomes, savings and affordable loans.   (That assumes, of course, that things haven’t got so out of hand that prices don’t stop falling – rather like happened in Japan’s great ‘deflation’ between 1990 and 2007.)

The post 2001 credit boom has been a disaster in the US and hasn’t been very good news in other overspending western countries either.  Price inflation, generated by the inflating of the credit supply, is now also being fuelled by the huge global demand for energy, food and other commodities and the falling value of the US dollar.

If America is in recession, and the lower interest rate campaign doesn’t work, then the next hope is that less US demand will let some of the air out of the commodities markets and bring down inflation there, and in Europe.

It looks like that might be what the ECB is also counting on by leaving our interest rates where they are for the moment.

I don’t have a crystal ball, so I don’t know if the Euro-bankers will cut rates this Spring, but I am wondering if perhaps someone in Frankfurt thinks that the battle against inflation needs to be won, and that the credit and stagflation trouble the Americans and Europeans to a lesser extent are experiencing – nil to low growth but rising prices - was caused because everyone deluded themselves for too long that wealth and prosperity could be created by reckless borrowing and spending, instead of by prudent saving and investing. 

Ends

 

STMoneyComment – May/08

DESPERATION SETTING IN AS LOWER RATES ANTICIPATED

You have to have faith to be an investor, and I suppose that’s why so many people – from bankers to estate agents to ordinary punters – think that property prices, share and pension funds and even the cost of living will improve when the ECB lowers interest rates again.  

The faith part I understand.  If you give up hope, you are left with despair. It’s the expectation of lower interest rates soon that I don’t get, especially given that the ECB has a single mandate: to manage inflation and protect the euro. 

The problem with cutting interest rates to ‘stimulate’ the economy as the Americans are doing, is that it usually results in yet higher prices.

If you’ve hosted a big party (for the past decade) and everyone has pretty much drunk the place dry and are clearly now worse for wear, the responsible thing to do is to let them sober up. You don’t slap another bottle on the table and encourage them to keep partying.

 As prospective home buyers have now discovered, tighter credit means prices fall back.  Eventually, the price of other assets return to price levels that people can genuinely afford again with their incomes, savings and affordable loans.   (That assumes, of course, that things haven’t got so out of hand that prices don’t stop falling – rather like happened in Japan’s great ‘deflation’ between 1990 and 2007.)

The post 2001 credit boom has been a disaster in the US and hasn’t been very good news in other overspending western countries either.  Price inflation, generated by the inflating of the credit supply, is now also being fuelled by the huge global demand for energy, food and other commodities and the falling value of the US dollar.

If America is in recession, and the lower interest rate campaign doesn’t work, then the next hope is that less US demand will let some of the air out of the commodities markets and bring down inflation there, and in Europe.

It looks like that might be what the ECB is also counting on by leaving our interest rates where they are for the moment.

I don’t have a crystal ball, so I don’t know if the Euro-bankers will cut rates this Spring, but I am wondering if perhaps someone in Frankfurt thinks that the battle against inflation needs to be won, and that the credit and stagflation trouble the Americans and Europeans to a lesser extent are experiencing – nil to low growth but rising prices - was caused because everyone deluded themselves for too long that wealth and prosperity could be created by reckless borrowing and spending, instead of by prudent saving and investing. 

 

ST MoneyCommenty – May 26/08

BANK EXECUTIVE WONDERS HOW IT ALL WENT WRONG

Whenever a Roman general or emperor was awarded a triumph for some great far-off victory, he was drawn through the streets of his grateful city on a golden chariot. Behind him a slave held a laurel wreath over his head; but the slave’s other task was to keep whispering in the emperor’s ear, “Remember that you are but a man…”

Chief executives like Brian Goggin of Bank of Ireland, when invited to triumphantly declare their annual results on national radio, really shouldn’t be let out of their offices without such a flunkey at their side.  Last year, after crowing about financial victory over the markets, he then predicted that Ireland’s employment growth, retail sales and government finances would all remain positive going into 2008.

Last week, interviewed again by the same reporter, but with a very different set of results, he insisted that the pace of the global economic slowdown in the last six months to March was “more pronounced than any of us expected.”

Really?  Is he saying that no one in the bank knew about the catastrophic build-up of trillions of dollars of bad debts and leveraged bonds, described as “financial weapons of mass destruction” by none other than Warren Buffett nearly five years ago?  Or that he had no idea that inflating the money supply after 2001 wasn’t just replacing one bubble – technology shares – with another one, property?

Given how Mr Goggin didn’t have a clue back in May 2007 that the house-that- debt-built could topple over so dramatically, he shouldn’t be too surprised if not everyone believes him when he says that “the basic fundamentals are strong” in Ireland.  If they are, then why aren’t house prices still going up?  Why are food and fuel prices here soaring and unemployment on the rise?  Why are tax returns short €655 million so far this year?

Bank of Ireland Private Banking thinks it’s time that we “return to equity markets” which it claims “may have hit the bottom of the cycle.” It even says there are signs the US dollar and economy is “bouncing” back.

Since clearly, no one who has any sense is whispering in Mr Goggins ear, the least he should do is listen to his customers.

They will only invest again when they’re pretty sure they won’t lose their money.  In the meantime they will reserve their biggest cheers for the banker who offers them the most competitive interest rates.

 

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This is a selection of my MoneyComments on the property market in 2007

ST Moneycomment – Jan 31/07

 

HAUGHEY’S LEGACY:  NOW WE ALL SPEND LIKE A CHARLIE

Charlie Haughey’s true legacy to the Irish people is surely the example he gave us of how rewarding it is to spend beyond one’s means.  His family may hope he will be treated more kindly by future historians, but I think he’s already become the pin-up boy for thousands as the wildest spender of them all.

In his case, he achieved his lavish lifestyle through tax-free handouts from his business cronies, by intimidating spineless bank managers and by outright theft, but that doesn’t diminish for a second how seductive and inspirational was that lifestyle. 

It may have taken us 30 years longer than Charlie, but today, nearly everyone with a half decent job and a modest mortgage can draw down a ‘mere’ €100,000 (as someone recently described it to me) of equity in their home and spend like a Haughey.

As our current Taoiseach subsequently discovered, after Charlie filled in the blank cheques that Bertie signed for him back in the ‘80s, you can buy a lot of bling with other people’s money (or OPM, as it is also known.) Today, it buys factory girls and bankers alike widescreen tellies, shopping weekends in New York, helicopter rides with the mistress, and if not the island itself, plenty of visits to one.  You could even have a portrait of yourself on a horse painted for €100K and still have change left over.

Of course, the old crook didn’t have to pay back anywhere near the €45 million of OPM that he took.  So if the Irish consumer is to learn anything from Charlie’s example, it is to cultivate a circle of rich businessmen before you get too fond of Charvet shirts.

ends

 

ST Moneycomment – Feb 3/07

DELUSIONAL PUNTERS KEEP FEEDING THE BUBBLE

The level of complacency in this country about personal debt is mind-boggling:  a new homebuyer survey shows that 45% of the people queried said they would happily pay higher mortgage interest rates if it meant they wouldn’t have to save for a deposit. That figure rose to 50% for first time buyers and those in Dublin.

The respondents didn’t say how much extra interest they’d be willing to pay, but let’s assume it would be just 0.5% extra, or today, typically 5.5% instead of 5% interest. In the old days when deposits were mandatory and 100% loans unknown, you’d be expected to put c€30,000 down if you were buying a €300,000 property. At an interest rate of 5%, spread over 30 years (a typical term today) you could expect to pay gross monthly payments of €1,430 and a total repayment of €512,200.

By happily paying 5.5% on a €300,000 mortgage, where no down payment has been made, the same person now has gross monthly bill of €1,680 and a total repayment over 30 years of €604,200.  That chance to avoid paying a 10% down payment will cost €82,000.  This example assumes that the rate stays at just 5.5% forever.

Unfortunately, there’s no shortage of buyers and lenders into this kind of monumental stupidity.  And despite what the banks say, the proper stress-testing of loans, especially with first-time buyers, practically never happens.  Nine out of

New buyers I meet say that not only are they never told the total cost of their loan, but they are never provided with a written schedule of rising rates and repayments to look at to help them determine whether they could afford their new home if rates were to rise by a further one or two percentage points.  The suggestion now is that the banks are so sure that such an eventuality will never happen again – that is, that home interest rates could never reach 6% or 7% - that they are justified in not bothering with such rigorous tests.

One hundred percent loans are unsuitable for first time buyers.  So are interest only loans and extended repayment terms, especially when the property market has been so overheated. Now that price increases have fallen back and interest rates and inflation is rising, there is a genuine danger that the person who is buying, or recently bought an apartment or house on such terms risks negative equity. 

The demand for the lowest repayment loan possible is rising according to Genworth Financial, which undertook this latest debt study. Half those surveyed have taken out 35 and 40 year loans and seven out of 10 said their mortgage was somewhat of a burden. One in 10 said it was a heavy burden.

 

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MORTGAGE DEFAULTS?  “IT COULD NEVER HAPPEN HERE”

Coincidentally last week, the Permanent TSB, one of the biggest mortgage lenders, announced that it is going into the sub-prime lending business with investment bank Merrill Lynch. It’s all part of the huge global mortgage securitisation market in which lenders like the Permanent TSB sell big bundles of mortgages in the form of bonds which are then bought by pension funds, hedge funds and other institutions.

The new company is called Springboard Mortgages but they don’t like the term ‘sub-prime’.  Instead they call their products, “specialist” loans, a nice euphemism for higher than average cost debt for people with poor or irregular credit records who otherwise wouldn’t qualify for a more typical loan, even the 100%, interest only, 40 year variety.

A number of US sub-prime lenders have gone bust in the past couple of weeks.

There’s even a web-site (www.mortgageimplode.com) devoted to tracking these lenders which shows that 11 of the other top 25 such providers are either shutting down offices, laying off staff, are up for sale, have already been taken over or are involved in major lawsuits.  And it’s all due to the end of the US property bubble and the inability of sub-prime borrowers – clearly at the bottom of the specialty lending food chain – to repay their risky loans.

 “While the failures [of the sub-prime lenders] so far are small in number,” reported the New York Times on January 26th, “some industry officials are concerned that they could be the first in a wave. The subprime sector, which produced loans worth more than $500 billion in the first nine months of last year, could shrink significantly.”

Wall Street firms, explained the NYT, “were attracted to such lenders because they helped feed a pipeline of securities backed by the mortgages, a market bigger than the one for United States Treasury bonds and notes.”  

Merrill Lynch, the Permo’s partner in this new Irish venture, “securitized $67.8 billion in residential mortgages in the first nine months of 2006, up 58.4 percent from the period a year earlier. But, says the report, “an increasing number of borrowers are defaulting on subprime loans earlier now than they did a year ago, often within six months of having taken the loan out, shaking Wall Street’s confidence in its subprime partners.”

It could never happen here, of course.

Ends

 

STMoneycomment- March 5/07

MORTGAGE INNOVATION GIVES ME A SINKING FEELING

When I hear about innovation in the mortgage and property markets, I get a sinking feeling.  For example, I don’t think 100% mortgages, interest-only or 35 year loans are necessarily a very good idea, especially not for first-time buyers. 

And while holiday leasebacks in France (and now in other countries) may have been the flavour of the year in 2006, the ‘guaranteed’ rental returns and ‘convenient’ management package they offer come at too high a price for my liking. 

Anyone who really wants a holiday home or apartment in France should check out the market with the assistance of a good, local estate agent and then agree a management and service fee with them.  You don’t have to tie up your money for an agreed nine to eleven years, pay back any waived VAT bills if you sell before then, and you are not restricted to buying in ‘qualifying’ leaseback destinations that the French government has licensed.

Anyway, the latest twist on this holiday home investment market is the condo-hotel, which is gaining popularity in the US, especially in popular beach resorts in Florida.  The owner buys a room or suite in a hotel which they can book at any time for themselves while also enjoying a share of any income when it is rented to other guests.

The best buys, say property analysts, are in top grade hotels in top resorts with projected high occupancy rates, but it is a very new market and investors are warned that there is no re-sale track record yet. 

No doubt this idea has already spread to popular Mediterranean resorts, but I can only imagine how hideously complicated the maintenance and management contracts would have to be to ensure the success of such schemes, not to mention the exit clause.

Given our insatiable desire for overseas property, condo-hotels will undoubtedly appeal to Irish holiday-makers cum speculators who prefer staying in hotels to self-catering villas, and who would prefer to pay a small, rather than vast fortune for their very own piece of the Algarve or Riviera.

No doubt these promoters will be making an appearance at a property show near you soon, if they haven’t already.

ends

[Some well known Irish people subsequently lost money in the ‘invest-in-a-room’ scheme at the Powerscourt RitzCarlton Hotel]

 

ST MoneyComment – March 18/07

IT WILL ALL END IN TEARS HERE TOO

Anyone who is determined to buy a house they cannot afford should have no trouble raising a loan – there are now five sub-prime lenders who can’t wait to take your money.  But this may not always be the situation.

The news from the United States about the meltdown of the sub-prime mortgage market – and the effect it has had on global markets - should be a timely warning to borrowers and lenders here that when interest rates start to bite, and house prices soften, it’s bound to end in tears.

A couple of months ago I noted in this column that a dozen or so US sub-prime lending banks had gone bust or were letting staff go. As of last Tuesday that number had risen to 36, the biggest of which, New Century Financial with a staff of 7,000, had its trading on the New York stock exchange suspended after the Dow fell 2% on that day alone, in response to the huge losses New Century was declaring.

The sub-prime market is in its infancy here with only a few lenders, the latest being Permanent TSB and the SHIP subsidiary Nua, offering higher cost loans to people with poor credit records. This market is already worth €1 billion and could grow to 10% of the €40 billion Irish mortgage market say its promoters, but if the US market, and increasingly the UK one is anything to go by, there is also a far greater chance of default risk than anyone predicted.

Sub-prime lending is big business because it can create big profits if everything goes to plan and borrowers keep meeting their monthly payments. But I would have thought it doesn’t take a financial genius to work out that people with bad credit records, who borrow huge sums at higher than average interest rates, are going to find it harder than the more prudent borrower to pay their bills when rates go even higher. 

One of the consequences of a global property bubble is that lenders and borrowers leave their brains at home when they have their sights on even the most modest three-bedroomed, suburban semi-d.

The time-delay factor between here and the US means that our version of the sub-prime story will, I suspect, probably happen sometime in 2008.  It won’t be a pretty sight.

 

STMoneyComment – April 22/07

PROPERTY INDUSTRY DENIES THE BUBBLE HAS MET ITS PIN

I was wondering how long it would take for the ‘shoot the messenger’ reaction to happen after last Monday night’s PrimeTime report [with Richard Curran] on the possibility of a property crash here.

The ‘what if’ scenario was left to the closing minutes of the programme, which ended at 10.45pm, but at 9.04am the next morning my inbox had received the first angry denial.  “Last night’s programme should be dismissed as fiction…a soft landing for the Irish housing market is still possible and is the most likely scenario,” insists Marie Hunt, of CB Richard Ellis, who mainly sell commercial property.

Ms Hunt said “all the fundamentals that have been supporting the Irish housing market for the last decade are still intact but the pace of buying activity has essentially halved as a result of nervousness and uncertainty.” The “unfounded doomsday scenarios …will only fuel this negativity further.”

Aside from the irritating music, I thought the programme pretty much encapsulated what every price, employment, productivity and inflation survey has been revealing for the past year:  that when all the features that create an asset bubble begin to unwind, prices fall. 

In our case the ‘perfect storm’ of conditions that created a bubble far bigger in Ireland than the American, US or Spanish ones, included not just the excess cash that central banks have been artificially pumping out since 2001 when the dot-com bubble crashed, but historically low interest rates as well.  Coming as these did with lower personal and corporate tax rates here, record levels of immigration and high demand, there was nowhere for property prices to go but up.

Lending standards inevitably fall during credit booms, and Ms Hunt is talking through her hat when she criticises the programme for suggesting that “the ‘negative equity’ scenario that occurred in the late 1980’s in the UK could occur in Ireland considering that Irish lending institutions are working under the remit of the Central Bank and continue to stress-test potential borrowers to 2% above ECB rates.”  

The Central Bank could do nothing for years but wring its collective hands at the sight of banks shovelling money at buyers with wholly inadequate incomes, who could barely pay their credit card bills let alone get a downpayment together without parental assistance.  Why else does she think the 100%, 40 year, interest only loan is such a big hit with first time buyers?

I don’t know if there will be a property crash in 2008 or a soft landing.  But contrary to what the industry believes about ‘negative sentiment’ causing the end of the boom, the history of asset bubbles suggests that there is going to be a lot of pain before the current cycle ends and starts all over again.

The last thing the government and the property industry want is for us to batten down the hatches.  But there are two Ireland’s to contend with:  the one where people have lots of equity in their homes, very little debt and substantial savings.  And the other, younger Ireland with no equity, no savings, lots of debt and no job security unless they work for the public service.

The property market will recover its glory days and people will spend with abandon again when lots of high value jobs are created, exports surge and the cost of borrowing becomes cheap again.  It will help if the US economy does not go into recession.

And that’s going to take more than wishful thinking by people who rake in big commissions flogging bricks and mortar for a living.

ends

 

ST MoneyComment – May 6, 2007

LABOUR CAN’T RESIST MEDDLING …EVEN AS BUBBLE COLLAPSES

“A new approach to housing policy is needed,” says the Labour Party manifesto.  And they are absolutely right, but just not their approach. 

Under their new ‘Begin to Buy’ scheme, which promises to enable “every working household…to begin to buy a home” in their own community a young Dublin couple, for example, both earning the average industrial wage and with mortgage approval of just €250,000, would seek the approval of their local housing authority to buy a property worth €400,000. The housing authority then guarantees the balance of the loan by taking a proportionate stake in the property.  The house-hunter undertakes a minimum quarter stake in the home.” The couple then repay their approved mortgage of €250,000 “while the housing authority will also finance the balance, through a new Housing Assistance Fund which will be established through the National Treasury Management Agency.”

Once the house is secure, it is up to the occupant to increase their share by buying more of it from their partner, the housing authority, or they can sell their share and even, says the Labour Party, move onto their next house under the aegis of this same scheme “if necessary”.

Since that’s all the information about this scheme in the manifesto, you could be a long time chatting on the doorstep before you find anyone to flesh out how much this plan will cost the taxpayer. 

But how will this scheme be funded? With current tax expenditure which the NTMA already uses to pay off the national debt and fund future pensions? Or with new taxes or local authority charges? On what grounds will the applicants qualify?  Income only?  Social need?

They way I see it, a young TCD graduate couple, or example, earning €33,000 each from their first jobs are less likely to be able to buy a home in their family neighbourhood of Dalkey than the young couple earning the same wages, but eager to find a home in their Darndale neighbourhood. Will they both be treated equally by Pat Rabbitte’s new housing agency?

A big part of the housing market mess in this country is already down to years of relentless government meddling in property in the form of tax incentives and relief.  That, and relinquishing control of interest rates when we joined the euro.

How anyone thinks that the affordability problem would be made anything other than worse by local authorities getting directly involved in the subsidized buying and selling of starter-homes is mind-boggling. It would only distort the true price of the property, and maybe incentivise a few developers and sellers to hike up prices, though I doubt if anything except a reverse in interest rates will stop the market’s day of reckoning.

 ends

 

STMoneyComment – Nov 19/07

SMUG GOGGIN THINKS HE’S DODGED A FINANCIAL BULLET

The only financial ‘bullet’ of any merit that we have dodged in recent years, is the one with ‘sub-prime’ written on it, and even then, only because there was insufficient time for the sub-prime lenders and brokers to sell them in any great quantity before the market blew up in their faces. 

Anyone who thinks we wouldn’t have also had our own little toxic brew of bad mortgages – given a chance – hasn’t been paying enough attention to the size of so-called ‘prime’ personal debt that we’ve marked up in the last six or seven years.

I’m sure Bank of Ireland’s chief executive Brian Goggin knows just how lucky he is – he certainly sounded smug enough last Wednesday at the announcement of his billion euro plus profit results for the past six months.

He was beside himself on RTE’s Morning Ireland, gushing about the strength of his bank and his optimism for the economy and the housing market, if not for 2008, then in 2009, once we get over this little “modest correction” in property prices.

Even the huge increase in bad retail loans in the past six months, from €33 million to €57 million, doesn’t seem to be alarming the optimistic Mr Goggin, who dismissed the rise by saying this came from an historically low, “unsustainable”  base and “looks more dramatic” than it really is.

Rising indebtedness is a bad thing. It’s serious and worrying, even if it isn’t ‘sub-prime’.  As the biggest mortgage lender in the state – to first time buyers with no money down seeking interest only, 35 year loans as well as to the more financially secure – he must suspect that the prospects of defaulting loans and foreclosures is only going to get worse, not better.

Brian Goggin, and every other banker and broker in this country has no choice but to talk up the market.   But how does he know that in 2009 there will be some magical reversal of fortunes and that credit will get cheap again, incomes will soar along with house prices and the threat of higher oil, food and healthcare costs will somehow all disappear?

Perhaps he needs to look more closely at his crystal ball.  For goodness sake, Bank of Ireland’s share price has dropped 40% since the start of the year – he certainly didn’t predict that.   And aside from the unexpected rise in bad debts, his forecast that mortgage lending volumes would finish up 12% for the year to March has been downgraded to 9%. 

Just because Goggins’ crystal ball is cracked doesn’t mean that he shouldn’t pay attention to what’s happening all around him: only four out of every 10 households could even afford a typical Irish mortgage today, says the Central Bank. 

Oh, and the OECD just reported that we have the highest income to debt ratio at a whopping 175%: that is, we owe €175 for every €100 we earn.

 

ST MoneyComment Dec 2/07

AN ECONOMIC SINKHOLE IS OPENING BENEATH US

Will he or won’t he – lower the top rate of tax, cut stamp duty, raise the excise on ‘old reliables’ like cigarettes, the pint or petrol?

We’ll know for sure by close of business on Wednesday when the Minister for Finance Brian Cowan has finished delivering his fourth Budget to the nation.  I think it fair to say, however, that it’s going to take a lot more than mere tinkering with the nation’s finance to plug the economic sinkhole that is opening up beneath us.

Take stamp duty, for example.  The builders and auctioneers are whining for the Minister to cut stamp duty rates in order to stimulate the moribund housing market. (They’d also like him to extend even more mortgage interest relief to first time buyers.)  

Yes, the rates are too high, and in a falling market act as a disincentive to most buyers, but especially to young families who want to trade up to bigger homes, and to pensioners who want to trade down to smaller ones. 

But no matter how much he tinkers with stamp duty, no one with half a brain is going to jump back into this market until they’re pretty sure prices have stopped falling.  And the power to ensure that lies not with the Minister for Finance, but the head of the European Central Bank, and even he cannot guarantee that in the current climate the banks would pass on the lower rates.

Stamp duty should certainly be addressed, but with prices falling is more mortgage interest relief for first time buyers really justified?  What about those young families who need more space?  And what about all those other discriminatory, wasteful and daft tax reliefs?

 Aside from mortgage interest relief, which, like private health insurance relief, is nothing more than a massive subsidy for their respective industries – why are billions in child benefit payments still paid out tax-free with no regard for income or means?  Ditto for free medical cards for all over-70s.  And why are higher earners still getting to collect the lion’s share of billions of euro of tax relief on private pension contributions?

Cutting public services, raising taxes and putting a moratorium on hiring new teachers and Gardai is the usual, lazy way the governments address tax shortfalls; a root and branch pruning of waste, tax disincentives and inequity stands a better long-term chance in restoring faith and confidence in the economy.

 

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Here is a selection of my 2006 Sunday Times MoneyComments about residential property prices

ST Money Comment - March 26/06

A MODEST NATIONAL DEBT (SIC)

And you thought your mortgage or credit card bill was out of control?

Last week MoneyWeek magazine tried to put the new US national debt limit into perspective. Having just breached the $8 trillion limit earlier set by Congress, the limit was extended to $9 trillion to allow the US government to borrow another $781 billion this year. 

Anyway the $9 trillion equates to $1,500 for every man, woman and child in the world, the value of all the tea in China for the next 2,000 years and enough money to re-house every Israeli and Palestinian family in a €2 million euro house in Henley-on-Thames, where the famous regatta is held every year.

With our own comparably modest national debt under the judicious control of the National Treasury Management Agency (even if our personal debt is now the equivalent of 180% of average incomes) it’s easy to ignore the massive indebtedness of the United States. Especially when a leading Irish stockbroker, NCB comes out with a hugely optimistic report that suggests that our own economic success is so secure that the good times are going to keep rolling for at least the next 15 years.

Let’s hope they’re right in suggesting that our younger population, higher birth rate and steady influx of immigrants and indigenous economy will be enough to buffer us from the day when other people stop lending to the Americans and they stop buying stuff (from us and everyone else) that they clearly cannot afford right now.  

Just in case it doesn’t pan out that way, it might make sense to keep that $9 trillion figure in mind the next time you add another couple hundred to your credit card or your bank manager tries to convince you that doubling your loan is perfectly affordable.

 

ST – MoneyComment - April 3/06

INSATIABLE, GREEDY AND NAÏVE…IN DUBAI

Aer Lingus may not have filled its inaugural flight to Dubai last Tuesday, but there were plenty of people at the Dubai property exhibition at the RDS last weekend who said they booking flights to check out property there.

Dubai property prices appear very good value compared to here – which isn’t saying much anymore given our hyper-inflation – and the average size and luxurious finish of even the most ordinary buildings makes Dubai property very impressive.  The concept of this brand new glittering city in the desert, with its combination of commercial and financial centres and world class tourist, sports, healthcare facilities is a remarkable one, but the danger of property exhibitions lies in the glossy front they put on everything from the brochures and glass-encased scale models of buildings still just in the planning stage, to the sales agent’s sharp suits.

What the promoters don’t emphasise is that Dubai will be the world’s biggest construction site and traffic jam until at least 2010. When you buy a property you automatically receive a residency permit, but it must be renewed every three years. There is no conveyancing system for property purchase – the developers and agents offer to undertake all contract exchanges on your behalf (not a good idea). It does enjoy all year sunshine (and indoor skiing), but this comes with 50 degree daytime temperatures for about six months of the year.

Nearly every promoter at last week’s show was offering rental guarantees of about 7.5% per annum for the first two years if you buy an investment property, Since so many thousands of apartments and houses are still being built and have no tenants, this is just another case of handing you back some of your money to secure the deal.  Such returns may not be sustained.

According to official government of Dubai literature, the average per capital income is about $20,000 (and rising), and while this makes it among the highest paying workplaces in the Gulf, even with a tax-free salary there won’t be too many takers for ‘modest’ €250,000 apartments with monthly rents of €1,560 iof this is the equivalent of your monthly pay.

Meanwhile, you take up the all-inclusive management and maintenance packages from the promoter at your peril:  one offered me such a service for the equivalent of 25% of the rent.

Irish property investors are insatiable, greedy and naïve, which is a dangerous combination. 

One woman I spoke to, who was thinking of buying a two bedroom apartment in a soaring tower overlooking the Gulf for investment purposes, said “I was told property here comes entirely tax-free.”  

“Sure, in Dubai,” I replied.  “You still have to pay income tax and CGT on your return here in Ireland.” 

“What?” she said. “I don’t believe you.”  

 

ST Moneycomment – April 16/06

GOVERNMENT TURNS BLIND EYE TO PROPERTY BUBBLE

I’m not sure how to interpret the Taoiseach’s and Minister for Finance’s comments about the property market.

Last Tuesday, an AIB economic unit report stated that the ratio of house prices to incomes now stands at 11 to one, compared to just over seven to one in 1998. Wage rises are two or three times lower than the average house price increase.

Yet neither Mr Ahern nor Mr Cowan seem bothered about how this is impacting on young peoples’ debt levels or their family lives, especially those who want to have children but must also factor in crèche fees. They didn’t even express concern that it could discourage those all-important immigrants from planting permanent roots here, something AIB’s chief economist Dave Begg acknowledged last week.

Mr Cowan said that if prices fall he expected it to be a ‘soft landing’ rather than a sudden burst, but soft for whom?  Himself?  Well, that’s a given. He earns a huge salary and perks and no doubt bought his house (and perhaps even paid for it) before the boom even started.   Ditto for the Taoiseach and probably the rest of the Cabinet.  Prices could fall overnight by 30% and none of them would lose a night’s sleep over the notion of their homes falling into ‘negative equity’. 

How ironic is it when the only one worried about house prices last week was a senior bank employee?

I’m not very good at reading politician-speak at the best of times, so I’m not sure if Messrs Ahern and Cowan just don’t want to risk slowing down the economy by even daring to suggest that a property bubble even exists.

But the Central Bank, the IMF and independent (of the property industry) commentators have been warning for some time that there is something desperately wrong when two salaries, a generous cash gift from your family and a 35 or 40 year mortgage is needed before you can afford a home of your own in Ireland today.

What bothers me most however is that an industry full of vested interests – lenders, estate agents, brokers and property media don’t need another cheerleader.

Mr Ahern is deliberately feeding the bubble by saying that anyone who listened to the critics over the last year or two ended up making a big mistake and will now have to pay even more for a house. 

He might as well be endorsing the notorious Liberty pyramid scheme that is hoovering up millions in the south west: it has been thriving because of the steady stream of punters who are worried that they won’t get their payoff if they delay handing over their money. 

Its operators will also no doubt blame its critics – the media, the local churches and Gardai – for frightening off new participants who are the only ones holding the pyramid up.

 

STMoneycomment –  May 7/06

THE PROPERTY PORN JUST KEEPS COMING

Do we really need yet another property show on RTE?

While scanning RTE's website I came across an invitation for anyone who is thinking about building their own house to contact the station. It seems your licence fee is being earmarked for a property TV programme for next year that will feature architects who will help you with your new-build plans.

This new show, which will undoubtedly encourage everyone with a site of land to slap on some hideous, once off 4000 square foot 'Southfork', will join the endless list of shows here and in the UK which have helped feed the property porn frenzy.

This proposed new show yet again reflects the need to find new ways to keep the lucrative property bubble inflated in a country where first time buyers are all but priced out of the major cities and where rental yields are desultory. Very simply, if the market for existing property is out of reach of the very viewers such shows appeal to, then create a new show that encourages them build their own affordable ones.

By Bank of Ireland's own admission, nearly half of all its first time buyers are opting for 35 year mortgages, compared to just 25% in 2004 and a paltry 4% in 2000. The majority of such borrowers said they needed such a long repayment term in order to maximise their loan and minimise their repayments.

Yes, I know I'm being terribly old fashioned, but isn't that just another way of admitting, "I can't afford this house unless you let me go into horrific debt that I may not be able to pay off until I retire?"

Since the banks have absolutely no compunction about extending so much credit, should the national broadcaster really be colluding with them and the commission-paid estate agents and brokers to further to further encourage an overheated property market?

Isn't there any room on next season's schedule for a more balanced view of the market, where rents don't always meet mortgage costs, the sea views in the brochures don't exist, and apartments and villas in falling value markets (like Florida) can't be given away?

Obviously not while SSIA money is coming on stream.

 

ST Moneycomment – May 28/06

SUB PRIME LENDING INTO AN ALREADY DISTORTED PROPERTY MARKET

One of the two companies that specialises in arranging sub-prime mortgages claims to have done €350 million in business since they set up a year ago.  This product is obviously filling a gap in what is acknowledged to be a growing market made up of people willing to extend expensive credit to people who are so desperate to buy property that they will pay over and above the usual asking price.

The market is there because even with rising interest rates, they are historically still quite low, and because the stigma of debt has pretty much disappeared. 

The mortgage brokers – naturally enough – soften this perception by saying that times are so good that mortgage lenders can pick and choose who they give their money to and even a single missed credit card payment can cause you to be seen as a risk.  The sub-prime mortgage is your only recourse in such a situation, and you then have to rebuild your credit record until you can return to mainstream lending rates.

 

But sub-prime lending is also another indicator of how the insatiable property machine keeps finding ways to feed itself:  we also now have 100% loans extended to first-time buyers who could otherwise not afford repayments; 40 year repayment terms for the same reason and also the encouragement of equity release loans, especially to buy yet more overpriced property.

 

The property market is so distorted now by cheap credit and loose lending practices that unregulated foreign (and domestic) property promoters are selling individual hotel rooms in popular resorts where price inflation has squeezed out the traditional holiday home buyer.  And now ‘land bank’ sellers are popping up too – selling parcels of agricultural land that the promoters say ‘may’ some done be rezoned. 

Anyone tempted to pick up a few sea-side acres of bargain agri-land in Bulgaria, for example, might want to read up on the reservations being expressed by the EU Commission about the crime and corruption issues that still haven’t been addressed there in the run-up to their joining the union: the local version of Tony Soprano might very well be at the other end of your deal.

 

*                              *                            *

“INDEPENDENT” MORTGAGE BROKERS ARE JUST LENDERS’ SHILLS

On the subject of mortgage brokers I laughed like a drain – deep and hollow – last week after listening to a spokesman for the mortgage broker’s trade association on the radio justifying bad selling practices by some of his members who claim to give objective independent advice when they are nothing other than trumped up agents of the lenders.

Responding to a newspaper article that had revealed that some self-proclaimed mortgage brokers only sell the products of a single lender, or of a few (as opposed to the dozen represented in the market), the spokesman claimed it wasn’t the single licence broker’s fault if he seemed to be misrepresenting himself to hapless clients – it was all the fault of the lenders for restricting the numbers of licenses they give out.  

Mortgage brokers – and the property sector generally – are poorly supervised and regulated in this country. What regulation of mortgage brokers there is, requires that they be awarded a licence by the bank or other lending institution, which one would like to think is based on criteria like professionalism and competency, but instead is clearly done so based on the amount of business the broker can bring in. 

A dog and stick salesman working out of his converted garage may not cut the grade and he could end up getting just one or two institutions to award him the licence.  But up goes his shingle:  Independent Mortgage Advisor.

Buyers go to brokers because they think it is more convenient and they hope the broker will smooth out the buying process.  This is often the case.  But it comes at a price, which the broker is not required to disclose and most first time buyers at least, don’t know any better to ask. 

With the average Dublin home worth nearly €500,000 now, that 1% sales commission to the broker is definitely worth not disclosing.  It certainly isn’t something they want to have to refund in part or whole to the customer – which is what the best fee-based brokers do. ouy

Before they were properly regulated, insurance brokers and their masters in the life companies made their fortunes by concealing the high purchase costs of insurance, investments and pensions. 

That mantle of distinction has been passed onto the worst of the mortgage brokers.  Beware.

*                        *                           *

EMIGRANTS DON’T NEED SUB-PRIME LOANS

I certainly hope that the hard-working immigrants who the sub-prime mortgage brokers say are coming to them for home loans because they have no credit record, realize that if they establish a regular savings record with their bank, pay their bills on time and get a down-payment together, they should be able to borrow at the same rates as the rest of the population. 

The banks are finally recognizing what an important new source of business the tens of thousands of immigrants are, and are translating more and more of their sales and account materiel into other languages, especially Polish.  AIB have even announced a recruitment drive for Polish staff. Even the Pensions Board has translated new booklets on equal pension treatment, discrimination and victimization into French, Spanish, Polish, Russian, Arabic and Chinese.

What immigrants really need – like the rest of us - is a chance to buy a decent collection of savings and investment products, adequate life insurance and a pension plan.  Presented in the right way, there should be plenty of profit and gain for both sides.

 

ST MoneyComment - June25/06

WE ARE WELL AND TRULY CAUGHT IN A BUBBLE

 The news that property prices have gone up an average 14.9% a year since 1996, according to the Permanent TSB/ESRI 10 year review, will either delight or sadden you, depending on how high up the property ladder you happen to be.  But since most people believe what they want to believe, and Irish people believe that property values always defy the laws of gravity, I expect many homeowners have a warm feeling right now about the ‘wealth’ they are accumulating in their homes.

The Permanent TSB predict that this year prices will rise by 10% and from next year gently fall (the ‘soft landing’) as the effect of higher interest rates is felt.  Prices, says the bank, will settle at increases of 5% per annum for the next 10 years.  By 2014, your €280,000 three bed semi-d out in the corridor counties, which cost you €75,000 in 1996, should be worth just over €500,000.

Well, thank goodness someone has that crystal ball.  

I’ve been getting increasingly anxious that mad house price rises meant we were getting caught up in a horrible asset bubble, just like the 1999-2000 tech stock bubble, only worse, since so many more of us own houses than shares in this country.

I was also worried that people on pretty ordinary salaries were becoming reckless about their borrowings because of the easy access to so much cheap credit; after all, what’s the point of your house rising in value by 14.9% if you can’t dip into the ATM machine just under the dining room window?

I also had this especially crazy notion that anyone who needed an interest-only, 35 year, 100% value mortgage – and access to a second income - before they could afford to make the monthly repayment probably couldn’t really afford to buy right now.  Maybe they needed to wait until they earned more, or prices fell.

Wrong again.  According to the Permanent TSB, affordability is not as big an issue as people like me say.  Everyone can afford a house in Ireland.  Not only that, but most first time buyers do come to the market with savings – about €22,000 on average says the bank.  But they prefer to spend this money on furnishing and fixing up their new homes, and so the bank gives them the 100% mortgage.

Now that’s a novel approach:  the lender allows a young couple to bypass the opportunity to avoid 35 or 40 years worth of compound interest in order that they can buy €22,000 worth of sofas, carpets, widescreen TVs, etc – all stuff that depreciates and disintegrates and should be bought with income or savings.

Clearly, I am nitpicking.  What’s €22,000 these days? 

Anyone with a typical €500,000 Dublin house will be another €50,000 ‘richer’ by the end of 2006, says the Permanent TSB.  And to think that all that new wealth will have been generated by bricks and mortar! Not an additional hour of overtime will have had to be worked; no one will need to take on a second job to earn the equivalent of a second income! Not a penny will have been risked on the stock market!

It really is magic, this home ownership lark.

 

ST Moneycomment – July 16/06

ARE WE REALLY AS RICH AS THE JAPANESE? REALLY?

Too bad a million euro just doesn’t buy what it used to.  Like a really flash house.  Or early retirement.

Bank of Ireland says there are now 30,000 millionaires in Ireland but that when the value of our property is taken into account – that typical four bed semi-d in Stillorgan - there are 100,000 millionaires in Ireland.

Only 100,000?  Surely someone is underestimating price growth, especially in Dublin.  Estate agents who keep shoving their flyers in my door insist that practically every house on my street  – and it’s a long street - is now worth a million euro.  And what about fashionable Dublin 4 and 6? And Killiney and Dalkey and Malahide and Howth? 

We now rank in the global wealth stakes – per head of population - ahead of every Brit, American, German, Frenchman and Canadian, says Bank of Ireland in its recent review of the nation’s wealth.  Only the Japanese are wealthier, according to the bank’s ‘extensive research’. Every man, woman and child in Ireland, once you divide all our wealth up equally, is worth €150,000, which will be very good news indeed to that half of the working population who can’t pay off their credit card bill this month or who has exactly zero euro stashed away in a private pension. 

Of course the bulk of our wealth is tied up in property and has only been accumulated in the past 10 years, says the bank.   A period that coincides with great economic growth here and historically low interest rates.

It’s hard to top a claim that we are amongst the wealthiest people in the world, but this report also states that our propensity to use the asset value of our property to take on more debt and invest it “to secure further growth” means that when it comes to investing, we Irish are “entrepreneurial and more risk orientated” than many other developed countries which rely more on inheritances for investment purposes.  The fears about rising debt levels “are overstated”.

It takes some leap of imagination to describe a seriously indebted mortgage-holder as an entrepreneur, but I guess for Bank of Ireland, at least, anything is possible in a country with 100,000 millionaires.

Meanwhile, it is worth reminding all those property-based risk takers out there that the interest rate cycle has only just turned, and it will be some time before the real pain begins and people start to come to their senses about the true nature of their wealth and debt:  that they are not the same thing, whatever Bank of Ireland tells you.

 

STMoneyComment – July 30/06

GAPING HOLES IN REGULATION – ESPECIALLY FOREIGN PROPERTY SALES

Have we too much consumer protection regulation, or too little?  Should the authorities be making it easier for you to open a bank account, buy a pension or insure your house, or should they be making it harder?

It depends on who you speak to – providers think they are already overwhelmed with expensive, useless paperwork – while consumer advocates (but not that many actual consumers) seem to think the public are the helpless victims of a concerted campaign by banks, insurers and other service provider to overcharge, hoodwink and generally rip customers off.

The latest layer of regulation, the new Consumer Protection Code, has been under discussion for a couple of years and is aiming to stop institutions from offering unsolicited, pre-approved loans and higher credit card balances, ensure that all charges and fees are up front and transparent and to make sure that there is a standard definition of terms and conditions and sales practices amongst all service providers; it also deals with the level of competency that people selling to the public much achieve, even top managerial levels.

Most consumers probably won’t notice any of this – which isn’t a bad thing:  who cares what hoops the salesman or manager have to jump through to deliver a product, so long as it happens and you’re happy that what you’ve bought is what you asked for, or what is suitable for your circumstances.  Suitability is an issue that the companies will have to take into account, and will hopefully end the sharp practice of selling expensive, life assurance-based investment policies to 80 year olds.

The code looks very comprehensive, but the Irish Brokers Association are unhappy that it lets bank deposits and lending products of less than a year’s duration, off the code’s hook:  the Regulator says there is no investment risk with short term deposits/loans, but the IBA say there is such a wide variation in interest rate returns that the banks should be obliged to apply the same careful selling standards and suitability criteria as they would if someone was choosing to invest their life savings into a 10 year investment bond.

Whatever about trying to safeguard the short term deposit account choices we make, it seems a shame that while mortgage lenders and their broker distributors now have clear cut codes under which they must work, which include their sales practices, why hasn’t any kind of code of practise been extended to overseas property promoters here?

The Regulator’s press office keeps reminding me that property sales are not part of the Regulator’s remiss and that it is very mean of me to keep harping on about how they can allow the kind of …well, sharp doesn’t adequately describe… the same methods under which some of these hucksters operate.

How can we have strict regulations – and now industry codes of practices – that go to great lengths to stop unregistered, unregulated boiler house operators selling shares and other investments from outside the state (or even from an office here) nut not bother to make sure that guys who are flogging Bulgarian (or Bundoran) holiday homes every weekend (and walking off with deposits), have at least checked in with the Regulator? 

At the very least you’d think someone who is supposed to be watching out for consumer’s interests – like the Financial Regulator – would expect them to at least remind their potential customers ‘that the value of property can fall as well as rise?’

 

*                                  *                                    *

YOU CAN’T REGULATE AGAINST STUPIDITY

Whatever about preventing the financial services industry from indulging in bad practices, there is clearly no way to introduce any code that legislates against the consumer’s own stupidity.

Last week I happened to meet a accountant of my acquaintance who said that she took on a couple after they had read a recent piece I wrote recommending a wealth check, at least once in their life.  They were also keen to get their tax affairs in order and to start claiming a number of reliefs and allowances they were due.

During the course of the wider consultation, where they had to go away and return with a file full of bank statements, mortgage contracts, pension and insurance policies, the advisor discovered that not only were their taxes in a bit of a mess, but that they had borrowings of €40,000 they didn’t know about.

This couple, both professionals with relatively high earnings were juggling so many credit card balances, personal loans and mortgages that they had lost track of €40,000 worth of debt.  Just like that.

They were paying so many direct debits – and occasionally doing some short term borrowing from Peter to pay Paul – that they had simply forgotten the who, why’s and wherefore of €40,000 that various lenders had extended to them.

Is it any wonder the banks stand accused of overcharging customers €118 million since 2004?  I’m surprised it isn’t higher:  if €40,000 worth of borrowings can be overlooked, what’s an extra few euros in transaction charges, or foreign currency calculations?

ends

 

ST MONEYCOMMENT – Aug 2006

BIG BUBBLES BEGET BIG BUSTS…LIKE FLORIDA

With the US property bubble now deflating in a steady whoosh, I was amused to return from holiday last week to find a flood of unwanted e-mails from mainly Florida property developers offering cut-rate deals for condo’s and villas all over the sunshine state. 

One that especially caught my eye was a buy-back guarantee for a new development in Port Charlotte on the Gulf Coast that promised a 150% return from the developer on the deposit when you sign the final papers. This represents, says the desperate promoter, ‘Hot Properties Worldwide’, a 10% discount on the selling price.  Oh, and the developer will throw in all the closing costs as well.

What, just 10%?  What about throwing in a top of the range air-conditioning,   professional landscaping and even a year’s worth of taxes and insurance?

There are finished and unfinished Florida properties that are selling for 20% less than they were last month, if they are selling at all, plus sweeteners like those above.  As one of the ‘hottest’ real estate markets in the US for the past decade, it shouldn’t come as any surprise that along with California and Nevada and the East Coast, it is now suffering the biggest chill-down. 

Big bubbles beget big busts and there are now homeowners (including a few Irish investors I know) who have had their houses up for sale in the Orlando area since last Christmas, but haven’t seen a single prospective buyer walk through the door since Easter.

Ends

 

STMoneyComment – Sept 23/06

LOWER STAMP DUTY AND INCREASE DEVELOPER’S PROFITS

In the social circles that the new Tanaiste, Michael McDowell probably moves in, stamp duty must be a heady topic of conversation.  His neighbours and friends, sitting around their polished dinner tables in leafy Dublin 4 and 6 would certainly not see much change out of €100,000 from a stamp duty bill, even if all they could afford was a €1,000,000 property in the lower end of the market.

Stamp duty has never been popular tax, but house price inflation has turned it into one of the most insidious, since it takes no account of the rampant price inflation of the past several years. 

With exemption limits of just €317,500 for first time buyers and  a meagre €127,000 for young families or pensioners who may want to trade up or down from smaller or bigger second hand properties, this has become an indiscriminate tax. Even someone buying a €2 million house in Mr McDowell’s constituency would have to feel the pinch when relieved of €180,000.

 Should it be abolished entirely?  Not if it remains the only property based tax that all buyers – home owners, investors and speculators have to pay, other than CGT on property other than your principal private residence.  But it should certainly be amended to take into account rampant house inflation and how it distorts the market.

 The problem at this late date in the property super-cycle that is the Irish property whirlwind is that any politically inspired tinkering is likely to end up making things worse for hard-pressed buyers.  Lower the stamp duty rates and you only encourage profiteering, especially by developers who will most likely hike their prices.

And if you don’t believe that would happen, you only have to look back a couple of years when the €317,500 stamp duty exemption was extended to first time buyers of second hand and not just brand new houses.  All that happened – and estate agents were the first to warn about it - was  that older houses within sight of this price range suddenly became a few thousand euro more expensive.

 

*                               *                             *

COMING SOON…ANOTHER WAY TO EXTEND A LIFETIME OF DEBT

Meanwhile, coming soon, to a mortgage broker near you:  yet another opportunity to put yourself into a lifetime’s debt with a 40 year, interest only loan.  Age no limit.

The Leeds Building Society, one of the biggest in the UK, is joining forces with the Irish Mortgage Advisor’s Federation (IMAF) and the IFG broker group to sell their mortgages here via these intermediary networks.

As the 13th lender-to-be, Leeds is targeting the ‘prime’ Irish market, says IMAF – that means only people with top credit records, and will only give maximum loans worth up to 80% of the property value, and not the increasingly common 100%, no-money down loans.  But Leeds also intends to offer up to 40 year loans, full term, interest-only repayment schedules and an income-to-loan ratio of up to 4.9 times – the highest on the market.

With terms like these, it seems to me that the line between ‘prime’ and ‘sub-prime’ lending is getting finer every day, especially when, in this case, it is commission-earning mortgage brokers, who pocket 1% of the mortgage value, who are flogging the loans.

To stand out even further from the crowd Leeds intend to also sell mortgages to people up to age 75 and to offer a standard ECB (plus 1.1%) tracker rate to all comers.

Most elderly people, except for a tiny few who buy holiday homes (and usually then with cash), take out equity release loans to boost their pensions or to make cash gifts to close relations.  These defer the monthly repayments (at a fixed rate of c6%) and the debt is cleared after their death by their estate.  This cheaper. Leeds offer could be very tempting, not just to the elderly person, but to any younger relations, and will no doubt be emphasized by the broker.

Cynical?  Moi?

But now that just about everyone can buy a pricey mortgage, regardless of savings, income, or age, perhaps the pre-teens will be targeted next.

Between the standard early inheritance, a 70 year lending term, an interest-only repayment schedule, his weekly allowance and his father and I going guarantor, my 12 year old is as likely a buyer as any these days.

ends

 

ST MoneyComment – Sept 30/06

PROPERTY BOOM TAX BUST

The tax problems faced by thousands of Irish owners of Spanish property was first revealed a couple of months ago when the Spanish revenue authorities announced they were going after the millions in unpaid back property tax and rates that they say is owed by overseas investors.

It’s reckoned that as many as 75,000 Irish owners are non-compliant – many of them inadvertently, having not bothered to register with local authorities, been unable to read tax demands because they don’t speak the language or simply because they are absentee landlords and didn’t bother providing their tenants with forwarding addresses.  There are undoubtedly some who, like here, just figured they wouldn’t pay the bill until they were on the court steps.

You really know you’re in the midst of a hot, hot market when specialist tax and legal firms start springing up to help unravel the stupid binds that such people get themselves into when they race pell-mell into a foreign investment market without proper due diligence.

With over 200,000 Irish property owners thought to be actually living in Spain, France, Portugal and the UK, at least one new tax firm is offering to do their annual tax returns for €250, which looks like a pretty good bargain, though I suspect that modest fee might rise if your tax affairs are in a really terrible mess.  (If your property is in Bulgaria or Turkey you might want a good lawyer by your side as well.)

No doubt these specialist firms will do a roaring trade closer to home, especially now that the Revenue’s offshore assets division is targeting overseas property owners to see if they’ve been forthcoming in declaring any income they’ve earned on their apartments and villas.

ends

 

STMoneycomment Oct 8/06

‘SOFT LANDING’ IS NO SURE THING

You know that an asset bubble is just about stretched to its limit when the people who have made the most money by inflating it insist that a ‘soft landing’ is a sure thing.

Thus it was last week when the estate agents Sherry Fitzgerald announced to the nation that the sharp third quarter fall in house price inflation represented “some moderation in the pace of capital appreciation. A soft landing like this in the context of a very vibrant economy is the best result for all participants in the market.”

How can a mere1.5% price hike in Dublin property during the entire third quarter of this year be a ‘best result’ when the previous two quarters reported cumulative price rises of 21.5%?  Sounds more like a ‘thud’ than a soft landing to me.

This slowdown in price growth would be good news for first time buyers if they hadn’t already been priced out of the Dublin market, but it certainly isn’t for buy to let investors who have been subsidising their tenants on the expectation that high prices would last forever. Nor is it good news for recent buyers with 100%, interest-only loans or for existing owners who have been heavily remortgaging their homes to finance new cars, extensions, holidays and foreign property.

What these figures are really telling us is that a year after interest rates started going up, higher mortgage repayments are finally beginning to pinch: the poor sod with the €300,000 mortgage is now paying an extra €170 a month interest since last November. If rates go up by another 1% in the next year, their interest bill will have risen by €4,080 in less than 24 months.

Meanwhile, at the high end of the market, auction results this season have been very poor, and vendors are being told to lower their expectations. The suggestion is that houses are taking a little longer to shift. Between interest rate hikes and the idea that horrendous Stamp Duty rates may be lowered or the value thresholds widened, the oxygen that feeds the bubble – a strong stream of new buyers and investors willing to pay anything to get onto the property ladder – seems to be getting a bit thinner. 

Prices couldn’t continue to outpace incomes by a factor of six or seven times forever and especially not when the cost of money is accelerating.  The economic news may appear very bright, especially on the employment and tax front, but the cost of living keeps rising, especially for non-discretionary expenditure like rent and mortgage repayments, heat, light, healthcare, childcare and travel.

We have been doing our best these past few years to emulate the worst excesses of the US (and UK) property bubbles: the crazy, lax, lending criteria, the media frenzy, the profligate risk-taking by buyers.  The maddest notion of all is that the ordinary homes we live in are profit-generating machines that can spew out great wads of cash at will, money that somehow doesn’t really count as ‘debt’ because it is anchored to bricks and mortar.

We are on course to a similar property meltdown to the one that is happening in the US, but, unlike the Americans, we still have some time on our side, strong savings thanks to the SSIA scheme, and, for now at least, relatively decent income growth. 

A property bubble needs two ingredients to crash – rising interest rates and job losses.  If the debt-laden US economy does go into recession because their homeowners cannot service their huge mortgages and keep buying goods we, and the rest of the world export to them, the ESRI predicts that 90,000 Irish jobs could be lost.

The only soft-landing that heavily indebted Irish property owners are going to enjoy, if this awful scenario is realised, is the one they start making for themselves now. 

Stop buying stuff you don’t need with money you don’t have. Start paying off your debts as quickly as you can. Earn more money. Then save it.

Ends

 

STMoneyComment – October 22/06

BEWARE NEW ‘DISCOUNT’ LENDING OFFERS

National Irish Bank last week announced that they are dropping their profit margin on mortgages aimed at existing homeowners with lots of equity in their properties.  They seemed to think this was a revolutionary step that will transform the Irish lending market, but I think it looks more like the natural consequence of a tightening market where first time buyers are so squeezed by inflated house prices and rising interest rates that they are an endangered species: the only players with any real borrowing capacity left are existing homeowners.

That isn’t to say that this isn’t a pretty good deal: NIB are offering a discounted rate that reflects how much house you own up to a maximum mortgage of 80% of the value of the property and should save you money, if you fall into such a privileged category.

The new loans works on the basis that if you have a property with existing equity built up, then you can re-mortgage with NIB – assuming of course that you have the income to make the repayments – at a lower interest margin. In the case of someone with 50% equity, the loan is set at the ECB rate of 3.25% plus 0.50%.  The 3.75% rate is half to one percent lower than typical market rates.

If you are looking for the maximum 80% loan, they will charge you the 0.5% margin on the first 50% of the value, a margin of 0.6% on the next portion up to 60% of the loan and then a margin of 0.8% on the remaining portion up to the 80% loan to value.  The offer is for both variable and fixed rate loans.

Mortgage brokers are usually just as keen as the banks to find more attractive and innovative ways to allow people to get themselves further into property-related debt, but even some of them are giving the NIB a cool welcome.

Peter Bastable, head of one of the biggest mortgage brokers, Simply Mortgages, said that while it will offer savings to some, it has having only a limited attraction to existing owners, of limited use to those on interest-only mortgages and of no use at all to first time buyers or investors. 

Instead of turning off the easy credit tap to help slow down price inflation and restore some sanity to this market, lenders are still tying to find other ‘creative’ ways to compensate for rising interest rates and the affordability trap.

 This loan might offer significant savings for people trading up, but it will also be used for equity release to refinance other debt, overseas property and more stuff that they could otherwise not afford based on their income or savings. 

I can think of only one good use for a lower-interest loan like this until the property bubble has well and truly deflated – to help to accelerate your debt repayment.

 

STMoneycomment – Dec 3/06

INSOLVENCY LIKELY AT END OF PROPERTY BOOM

Christmas shopping begins in earnest this week, but for one new company, Debtfree.ie it might just be that all their Christmas’s will be coming at once as spendthrift punters find they can’t pay their bills in January.

Just launched by solicitor Barry Lyons, whose firm already has one of the biggest corporate insolvency practices in the country, this new service is aimed at individuals who are facing a bleak financial future that could at worst end up in bankruptcy, and at best, end up as one long and perhaps futile round of credit defaulting as they try desperately to stay out of court.

According to Lyons, there are 86,000 people in Ireland whose credit rating is already compromised by having judgements obtained against them. Many thousands of others are ‘borrowing from Peter to pay Paul’ to stay one step ahead of a court judgement. The culprit, he says is mainly the growth of unsecured credit – now standing at about €5 billion that has been made available, a figure that is growing by 30% per annum.

Actual bankruptcies in Ireland are still tiny – just 20 last year, says Lyons, but this is because bankruptcy is such a draconian option here that destroys your credit rating, can take up to 12 years to discharge and is a very poor deal for creditors. Instead, his company helps clients put together a ‘Schemes of Arrangement’ a sworn statement of the individual’s affairs is put to his creditors and they try and work out a satisfactory repayment schedule.

The legislation for this kind of deal has been on the books since 1988 but there simply hasn’t been easy access to it for sole traders and individuals who instead try to find ways to pay off their debts – perhaps even by selling their family homes and other assets – rather than become a bankrupt.

Private insolvency-type companies like Debtfree.ie – who get paid out of the payments made to the creditors – are doing a roaring business in the US and UK where insolvencies and bankruptcies are soaring. 

In the UK, personal insolvencies – the next step down from actual bankruptcies - hit another record in the last quarter, up by 55% year on year; Individual Voluntary Arrangements m(IVAs) rose by 120% year on year and mortgage repossession orders are back to the levels not seen since the last property crash there in the early 1990s.  Meanwhile Barclaycard expects to write off €1.5 billion in bad credit card debt this year.

As usual we are just a little further behind in the lending debt cycle, propped up by an economy propped up by an extraordinary property boom. 

Debtfree.ie is in the pole position to pick up lots of new business as the boom turns into a bust.   With demand expected to grow for their services from small business people and over-extended PAYE earners, I doubt if they’ll be alone in this market for too long.

 

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These are a selection of 'Money Comment' columns I wrote about residential property in 2004

ST MoneyComment - March 28, 2004

HUGE GAP EMERGES IN PROPERTY REGULATION

The tax implications of property investments seem to be the last thing on people’s minds when they hand over their down-payments on holiday homes and buy-to-lets.  It is bad enough that investors are unaware of capital gains tax liabilities on Irish property, but worse still when they buy property abroad without knowing the tax implications in those countries.

Different jurisdictions have different ways of dealing with profits realised from property sales: for example, the UK does not tax profits earned by non-residents, while Spain – I am told - does charge CGT on profits realised within the first 10 years of the purchase.  How South Africa, Canada, Hungary, Bulgaria and Estonia – all well publicised investment destinations - tax profits repatriated by property investors and non-residents should be a pressing issue, but doesn’t seem to fill too much space in the glossy sales brochures being handed out at weekend property fairs.

Property investing has overtaken just about every other asset class in recent years yet there remains a gaping hole when it comes to the way in which it is being policed. 

IFSRA regularly investigates unlicensed, off-shore investment firms that cold-call and target Irish investors to buy shares and then publishes warning statements about them in the national newspapers. They even keep a register of such companies – and the licensed ones – for punters to check before they hand over any money or their bank account details. Yet anyone can come here and flog apartments from Sophia to Singapore without so much as a handshake from IFSRA.   Home-bred property promoters get just as easy a ride.

You can never legislate for people’s stupidity or greed, but at the very least, shouldn’t promoters be required at the point of sale to provide prospective investors with a standard disclosure document of their own costs, charges, commissions plus investment projections, tax implications, etc regarding the property? And what about the requirement for ‘best advice’ that licensed Irish financial advisors have to give their clients?

The property investing sector is playing by all its own rules at the moment, and for many unwary and foolish investors it could all end in tears.

ends

 

ST MoneyComment – March 28/04

IT’S ALL ABOUT BUILDING CAPITAL GAIN, NOT A PROPERTY NEST

I’ve been listening to prospective, first-time buyers moan so long about how it is impossible to get on the property ladder  - without mummy and daddy’s help - that I suppose I was nearly believing it myself. 

 

A report last week about how newly built, low cost authority houses have been reduced by €40,000 because there are so few buyers confirms what I have suspected all along:  not only are 20 and 30-something’s unbelievably fussy about property, but are only interested in playing the property game if they can take full advantage of the speculative fever that has gripped this country for the last few years. 

 

The houses concerned are brand new, pleasant three bedroom homes on the edge of Fermoy (one of Cork’s loveliest bigger towns) which the county council are selling as part of a low cost, shared ownership scheme for first time buyers on relatively modest incomes.  The 76 houses are selling for just €122,000, €40,000 less than the original asking price, but of the original 125 or so applications, only 35 have so far been taken up.   Apparently the same problem has occurred with similar schemes in Youghal and Kanturk.

 

There is either something very wrong with the houses – though they certainly looked very spacious and attractive to me; with the location (well, I like Fermoy) or with the rules of the scheme.  Perhaps there is a glut of low cost private houses in the area, but I don’t think so.  I expect the problem is that despite the low asking price and the reasonable purchase terms (the buyer takes out a mortgage on up to three quarter of the value for house and pays a modest rent for the balance until (s)he can afford to buy out the balance) buy you must hand back any profit if you sell the property within the first 10 years of ownership.

 

Perhaps some young singles or couples believe these houses will simply be too small for their future family, but I expect it is more the loss of a juicy capital gain after a few years which prevents them from signing the contract. 

 

Cork parents who have been the victims of the widespread and not-so-subtle pressure from their children to release equity from their own homes to help pay down payments may want to take note of this development in Fermoy.

 

End

STMoneyComment – April 4/04

SOARING MORTGAGES THREATEN NEW BUYERS

Lower interest rates seem to mean just one thing in this country – an opportunity to get even deeper into debt.  Mortgage values are growing by one billion euro a month, says the ESRI, which has warned that if something doesn’t give, we could end up in the same scenario that happened in the UK in the early 90’s when a property crash left thousands of people with mortgages that were worth more than their properties.

 

However, you wouldn’t think there was much a problem judging from the average percentages that the ESRI say we spend on mortgage payments – just 8% of disposable income. (Which they predict could rise to 10% by next year.) The mortgage in question has an ‘average’ term of just 10 years left to run.

 

I don’t know about you, but 8% of disposable income set aside for the mortgage, (or even 10%) sounds pretty manageable and might even represent the mortgage payments that anyone who bought their house in the ‘80s is currently paying. But long-standing homeowners with 10 or fewer years left on their loans are in no danger from any price collapse.

 

The threat of soaring mortgage loans is greatest to anyone who bought their three-bed semi - in some distant suburb – in the last few years.  The average industrial wage is €30,000.  The average house price in Dublin is over €309,000 and over €237,000 around the country.  If you are lucky, you get to keep about €22,000 of your gross income or €1,800 a month after tax. Yet you couldn’t buy a closet in Dublin for 8% or 10% of that figure. 

 

The only way a billion euro a month is being borrowed for mortgages is because two people are paying off a ‘typical’ €200,000 mortgage every month with about a third of their combined incomes. That’s before they pay for food, utilities, car loans, insurance, crèche fees, etc.   

 

The ‘average’ figures are deceptive, but is it any wonder the ESRI is finally beginning to get worried about the impact of lower interest rates?

 

Meanwhile, it isn’t just the ESRI that sees the writing on the wall for the property market. At the Irish Association of Pension Funds annual investment conference last week, Colin Hunt, the head of research at Goodbody Stockbrokers warned that “Unless house prices moderate to 5-7% over the next year then we could see a property crash which would have major implications for the Irish economy.”   

The next day the latest PTSB/ESRI house price index showed that house prices in Dublin are up 11.8% in the year to the end of February and 13.5% outside Dublin.

 

STMoneyComment – May 16/04

BUBBLE FED BY PRICE FRENZY

A house up the road from me which was bought 14 years ago for €38,000 is on sale for €650,000, an increase of 1,700%.   I know this should be a source of great joy for the rest of us, but after last week’s headline about how second hand homes in Dublin increased by 19.5% in 2003 this news leaves me wondering not when a property collapse is going to happen, but the size of that collapse.

My gloomy view is not shared - surprise, surprise - by estate agents, mortgage lenders or bank economists who all have a vested interest in talking up prices.  They argue that on-going, low interest rates in the EU means that buyers can afford higher mortgage loans and that strong employment figures have alleviated fears about job losses, the second ingredient in a classic property bubble burst. 

But what about supply and demand?  The Department of the Environment are of the view that there is sufficient housing – nearly 69,000 new houses were built last year – to meet demand and rents are softening. 

So why are prices still rising this year by 13% nationally? 

Price bubbles like this – at a time when other assets are rising by low single figures and inflation is under 2% - happen because of a combination of fear and greed. The fear is, unfortunately, well founded, since prices do keep going up every month and the longer the delay, the more the buyer will pay.  But the price frenzy is fed by greed as buyers hope they will get to share in the phenomena of 1,700% profits since 1990.

People need a place to live and I fully endorse the idea of home ownership.  But before you commit yourself to a mortgage that is ten times your combined salaries (house buying now being out of reach of single buyers on the typical industrial wage) keep in mind that €1.3 billion was wiped off the value of the Irish stock market overnight recently because of the merest hint that the US Federal Reserve may raise interest rates next month. 

Just imagine what will happen when the EU does eventually raise interest rates here.

 

ST MoneyComment – July 25/04

GO WEST TO SEE UGLY FACE OF THE BOOM

If you want to see the really ugly face of property speculating go visit the west of Ireland this summer.

Eighty thousand new homes will be built in 2004 – a record number – but how many of them will lay empty for half the year or longer?  

A week spent in County Clare has confirmed what many aspiring young home owners in scenic areas have complained about for the past decade:  that speculators are continuing to build and buy houses all around the country which are not only unaffordable to local buyers, but can’t even be rented because leases only extend to April when the holiday season begins.

Everywhere you drive in west Clare, along the coast and throughout the Burren, there are empty new houses built in recent years to avail of Section 23 holiday home tax breaks. The rental incomes earned by the absentee landlords average only about 16 weeks of the year, say unhappy locals from Kinvara to Lahinch. The owners leave them empty because up to now they have made up for lost revenue with capital growth.

This year however, summer occupancy levels are even worse than last year, with local tourism operators citing the poor weather, the strong euro, travel fears by Americans, and perhaps most significantly, overpricing.

“I think maybe there is a realisation that we are pricing ourselves out of the market,” said one trader in Ballyvaughan, in the Burren. “Visitors complain about the price of petrol (€101.9 at the local service station), the cost of food and accommodation,” she said.  “We’re paying for it this year worse than last, and 2003 wasn’t a good year either.”

Outside the village, huge new houses on half acre sites, designated as B&B’s sit empty, while the established places all have vacancy signs in their windows.  Meanwhile, Lahinch, an intensely ugly place but with one of the most beautiful beaches in the world, has turned its outskirts into Tallaght-by-the-Sea in recent years with endless rows of tacky semi-detached ‘cottages’, each one exactly the same, all seemingly lying idle.

Young working class people are being priced out of their own towns and villages, but I rather doubt if this worries the rich golfers from Dublin or the speculators who come down for a week to inspect their investment.

 

 

ST MoneyComment – Sept 26/04

GERMAN INTEREST RATES UNSUITABLE FOR BOOMING IRELAND

The idea of paying an extra €300 a month on a typical €250,000 mortgage doesn’t sound very promising, yet this is what has been suggested in last week’s Central Bank’s Financial Stability Report in its outlook on the short term future of the property market here.

The Bank has said for at least three years that mortgage interest rates have not reflected the true position of our market and that we’ve been funding the mother of all property binges on the back of rates that are more suitable to Germany’s relentless economic doldrums, and not out own brisk little sou’ westerly. 

You only need to look across to the UK and its similarly buoyant economy, where home buyers are now paying in the region of 7% for their new mortgages, to get an idea of the kind of rates that we should be paying.  Fearful of another property crash after the last one just a decade ago, the Bank of England has been steadily increasing British interest rates to cool down the market. Property price increases have now reversed. 

The problem here is that all the carrots have been eaten (especially the SSIA one which was supposed to take excess spending out of the economy) and all the sticks are held in Frankfurt.  Our own worried central bankers can only wring their hands and wail about how the sky will fall if we (mortgage buyers and providers) don’t start borrowing/lending more prudently.  The problem is that like the little boy who cried wolf too often, practically no one believes they’re about to be eaten, and why should they? 

The only reason the ECB will raise rates high enough to add another €300 a month to a typical new mortgage repayment is if the German economy makes a miraculous economic recovery.  Despite attempts by the government there to cut social security, the legislation is too little and will take at least a year or two before it has any significant impact on unemployment, and none on their massive pension deficit.

No, there’s plenty more expansion room in our property bubble before rate hikes start to pinch.  Judging from the recent mortgage lending figures – up 27.7% on the same rates to last July – we’re determined to fill every cubic inch before someone in Frankfurt finally bothers to take out that sharp pin and gives it a great big stab.

I can think of a few ways to take some of the heat of the market – abolishing all mortgage interest tax relief in the December budget would be the best way – but with government backbenchers already fretting about their unpopularity and an election looming, it will never happen.

 

STMoneyCommentOct 24/04

OVERSEAS PROPERTY APPETITE “INSATIABLE”

The desire for overseas investment properties is insatiable, especially this month when it coincides with the October 31 pension tax relief deadline and every property broker-cum-tax advisor has a favourite scheme to flog.

One location which this year is attracting investment interest – to my utter amazement – is Montreal, a city I know very well having lived there for 24 years.  Not that it isn’t an exciting, attractive place, and one in which property prices are on the rise.  It’s just that the property taxes are so horrendous compared to Ireland that it makes you wonder how promoters could possibly be making a single sale here.

For example, at one newly built downtown apartment complex, the combined federal and provincial sales taxes on a CAN$225,809 (or €155,000) sales price was nearly $34,000 (or 14.5%).  A city welcome tax of 1.5% or  $3,896 brings the total purchase price for this 608 square foot apartment to $263,633.

If that wasn’t enough, annual municipal tax eats up about 20% of the rental income, which in turn is subject to a non-resident rent retention tax of 25%.  Throw in substantial condo fees and rental management charges (which appeared to be set artificially low) and the annual yield might hit 4% if you’re lucky.

An overseas buy-to-let is not a venture to be taken lightly.  Too many people are buying too many houses and apartments off the plans without investigating everything from title to taxes carefully enough.  Ironically, raising the finance seems to be the least of their troubles.

 

 

ST – MoneyComment Nov 14/04

SAVINGS BONANZA FUELS MORTGAGE DEBT

The latest comments by the chairman of the Irish Mortgage Council Joe Larkin, who is also MD of the ICS Building Society confirms what every dog in every spanking new suburban estate is barking about:  that there is still more growth in a market “notwithstanding the unparalleled growth that has occurred over the past decade.”

Despite the fact that house prices have risen from €74,000 to €284,000 in the past ten years and that the value of outstanding mortgages has gone up from €3 billion to €12 billion, there is no sign of this trend stalling, let alone reversing, said Larkin.

There is an interesting theory now being touted by a well-known economist that it isn’t just our booming population that is driving on the property market.  He believes that the huge pool of savings in the 1.2 million SSIAs (the hugely generous state Special Savings Investment Account) is being used as a sort of safety net that is encouraging many borrowers – especially those topping up existing mortgages.  Knowing that they have a guaranteed fund of money to draw down in 2006-7 is giving them the extra incentive, in addition to continuing low interest rates, to extend mortgages which might otherwise squeeze their incomes or budgets which are certainly not keeping up with property inflation.

Certainly bank managers will admit privately that although the rules of the SSIA scheme expressly forbid using the SSIA in order to leverage borrowings, there is a pretty steady stream of customers who casually mention that they are expecting in the region of €20,000 (or €40,000 for married couples) from their fund in 18 months.  

“Even if interest rates were to rise one or even two percentage points in the next couple of years, and a typical mortgage goes up by €100 or €200 extra a month, a lot of people who might otherwise have not risked the kind of high mortgage repayments that are commonplace these days, are deciding that their SSIA fund will be a contingency fund.”

Ends

 

ST MoneyComment - Dec 5/04

RISING DEBT OVERTAKES RISING INCOMES 

 Indebtedness has become such an everyday feature of our lives now that most Irish people don’t even seem to recognize how much financial trouble they are storing up for themselves.

In its annual Irish Financial Awareness Report, Royal Liver Assurance has created the acronym FEATHERS - Financially Empowered Adults Trying Hard to Evade Responsibility – to describe those group of people who know they should be spending less and saving more, but who prefer to increasingly fund their lifestyles with debt. 

According to Royal Liver, the rise in incomes is not reflected by an increased rate of savings, but of the debt rate, with nearly half of all those surveyed now having at least one credit card compared to only 27% two years ago. One in five credit card owners admit they spend too much on their card and 34% say they have more personal debt today than they had five years ago.

Nearly three out of four people surveyed also admitted that because they prefer to spend their money “on holidays and treats” they have no spare money to save. Especially not on pensions, which 68% of those surveyed already believe to be sufficient to produce a comfortable retirement.  How this is possible, given that nearly 40% of respondents also believe that an annual contribution of between 1%-10% of their salary will be sufficient to provide that comfort, is anyone’s guess.

The Royal Liver probably could have saved themselves rather a lot of money on this survey by just looking at the latest Central Bank credit report to the end of October.  The year on year growth rate for private-sector credit is up over 1.7% from September to 25.2%.  The last time demand was this strong was in 2000.  The demand for mortgage credit isn’t getting any higher at 27.3% on last year (compared to 27.4% in September), but this is made up for all the higher volume of personal loans and credit card balances that we are building up.

So the party continues, and it is all too apparent this week that there is nobody around – not the Minister for Finance, not the European Central Bank – to call it a night and send everyone home to pay their bills.

 

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STMoneyComment – Jan 12/03

HEDGE YOUR MORTGAGE BETS

Now that second hand homes cost €260,000 in the Dublin area and about €200,000 in the rest of the country, the house buying experience is hardly going to be any more pleasant this year than it was in 2002.

The only good news so far, however, is that fixed interest rates keep coming down.  Not only do lower rates allow first time buyers a slightly firmer grasp of the bottom rung of the property ladder for a couple of years, but is also an indicator that interest rates generally may yet fall a little more in 2003.

First Active are now offering two year fixed rates of APR 4.3% which translates into about €900 a month for a typical €150,000 loan.  This is a savings of about €75 a month.  Even their five year rates, at 4.6% or €990 a month, is extremely competitive.

And so, I have decided to amend my usually negative view about fixed rate loans, at least to say that anyone who can secure a fixed rate under 5% APR and who genuinely believes that they will sleep better at night knowing exactly how much their mortgage will cost them for the next two or three or five years, should probably look seriously at such a commitment.  If not for their entire loan, then perhaps for a half or third of its value.

The attraction of only fixing a part of the mortgage repayment is that should the ordinary variable rate come down, as it is expected to at some point in the first half of the year, you will at least enjoy the benefit of that fall on a portion of your debt. And you won’t go around kicking yourself for being so utterly fainthearted.

For all of my change of heart, however, there is no getting around the fact that during a sustained period of low interest rates the cost of the peace of mind you are buying is very high.  The five years at 4.6% interest may only cost you €990 a month, but the guy next door, who moved into the new estate on the same day you did, may end up paying under €900 on ordinary variable rate of 4.25%. That extra €100 is actually worth €6,000 over five years. 

My half-hearted endorsement of fixed rate loans would be a lot more fulsome, by the way, if the lenders would declare in 2003 that they will finally abolish interest penalties on fixed rate contracts that are broken before their allotted time.  I don’t think any of them would go bankrupt waiving that extra pound (or euro) of flesh.

ST Comment May 18/03

PROPERTY PROPAGANDA ON THE AIRWAVES

Last week on Morning Ireland the head of a well-know estate agent had the audacity to declare that there was plenty of good value in Irish property, especially in new homes.  

So what if the average, three bedroom house outside Dublin now costs about €200,000, and closer to €300,000 in the capital?

What was extraordinary was that such a person should be invited to comment about new house starts and their effect on the market.  His job is to get the highest prices at all times for his clients, namely the builders.  The consensus from that side of the purchase contract is that, of course new housing is affordable and good value, and that no one should be delaying buying a new home since prices will inevitably continue to rise, albeit more slowly than in the recent past.

A UK property commentator recently noted that their market, which has also been overheating for the past few years, is like a giant pyramid scheme.  Prices, he said, will keep going up only so long as enough first-time buyers can be sucked into the bottom of the pyramid, panicked at the prospect that if they don’t buy now that they will miss their chance to work their way up the pyramid (like everyone else before them) and so reap the benefit of soaring house prices.  It is the only way they can justify risking taking on such high monthly loan repayments.

It will take a lot more than ‘informed’ sales-twaddle from an estate agent to ever convince me that a 1,200 square foot, three-bed semi-d, 50 miles commuting distance from Dublin, in a completely unserviced estate, is worth €200,000.

Certainly not when every sign indicates that Ireland’s euro-tied economy is seriously faltering and unemployment numbers are only going one way - upwards.

 

ST MoneyComment – June 1/03

HOME BUYING “STRESSFUL” BECAUSE YOU ARE PAYING TOO MUCH

So house buying is stressful is it?

According to a survey commissioned by the EBS, 64% of respondents say that buying a home was one of the most stressful things they have ever done.   Hardly surprising given how 61% of the same borrowers also overspend on house-related purchases.

The EBS used this data to change the application and loan offer procedure at the building society so that after a single meeting with a mortgage advisor, the new borrower will know exactly how much their house-related expenses will be, as well as all the steps they must fulfil to receive a pre-approved mortgage card.  This will tell them exactly how much they can spend when they go house-hunting with the approval set at up to 92% of the purchase price of a property.

This isn’t anything too new.  Lenders have been giving pre-approved car loan certificates to customers for years who then present it to the car salesman, who quickly does the paperwork and hands over the keys.  

This EBS card may be aiming to do the same thing, but should house buying really be made any easier these days, especially for first-time buyers? 

It seems to me that everyone is already in on the act of getting young people into horrific debt:  the ECB, which could yet bring average Irish mortgage rates down to 3%-3.25% with their next rate cut; the Irish government which continues to subsidise mortgages with mortgage interest relief, and lenders who dangle “flexible”, deferred repayment periods, and 30 or even 35 year repayment terms. 

Even parents are conniving with the banks and building societies to release money from the equity in their own homes to help their kids produce down payments.

I may be completely out of sync with the cultural and social ethos of this country that requires every 20-something to be a homeowner before they turn 30.  But the price of housing, especially in urban centres, is completely disproportionate to the quality of most properties and the very notion of achieving value for money.

What amazes me is that we can rabbit on endlessly about the high cost of food, drink, transport and every service imaginable compared to other Eurozone countries (and North America and Australia and New Zealand), yet not make the same connection about property values.

Clearly our salaries have not gone up 350% since 1993, yet property prices have. Taxes have dropped, but someone on a decent, but not outrageous salary of €50,000 a year is still paying close to 50% of their wages in marginal income tax, PRSI and levies.  Whatever money you have left over to spend is sucked away by some of the highest VAT rates in the EU and high charges for services dominated by monopolies, or near monopolies such as health and transport services and domestic utilities like electricity and gas suppliers.  

Meanwhile, the value of our retirement savings are crashing and unemployment, already on the rise, is about to soar along with the value of the euro. 

Last week I spotted a two bedroomed ex-council house in Crumlin for sale for €240,000.  The young person I was with remarked, “that looks like good value.”

No, it isn’t. And the sooner houses join the euro-list of bad value buys, along with groceries, cappuccino’s and haircuts, the better.

 

STMoneyComment – June 15, 2003

RTE KEEPS HOSTING PROPERTY CHEERLEADERS

RTE is doing it again, asking estate agents on prime time radio to comment on house prices.   

Last Wednesday morning, the regular cheerleading slot for supporters of inflated property prices was filled by Sherry Fitzgerald boss Mark Fitzgerald who was asked about the impact that the latest interest rate reduction might have on the pricing of new houses.  In the course of his answer about how average national house prices are not as expensive as people think, he stated that prices actually fell in value by 5% in 2001, went up by 20% in 2002 and will go up again by about 12% this year. 

The only one of those figures that seems to gel with reality (as I know it) is the last one.  My records – based on the ESRI survey done for Permanent TSB show that national average house prices rose by about 4.4% in 2001, by 13.3% in 2002 and in the year to date are up 12.7%.   When inflation is taken into account – at about 4.5% - the picture isn’t quite as bad as many think, said Mr Fitzgerald.

House price surveys have been a source of controversy with Sherry Fitzgerald’s figures often at odds with the Permo/ESRI one (and vice versa), but I don’t know anyone who can recall the value of their home (or family members’ or friends’ homes) actually falling in any given year in the past decade.

This revisionist view of the property boom, with all the suggestions of what wonderful value it continues to deliver, is beginning to smack of desperation from the vested interests out there – the estate agents, mortgage lenders and newspaper property supplements that have made fortunes on the backs of pressurised and desperate buyers.  

On Thursday morning Peter Bastable, a well-known mortgage advisor appeared in the rah-rah slot to give a more balanced view of the market.  Maybe RTE finally got the message to start limiting comments on property prices to those ‘experts’ whose raison d’etre is not to ensure they keep going up.

Ends

 

STMoneyComment  - Oct 19/03

GAA MORTGAGE DEAL NOT ALL TO PLAY FOR

The deal that the Gaelic Players Association has just struck for its members with Simply Mortgages - the commission-paid mortgage/insurance brokers - is an interesting one that will no doubt appeal to some players looking for discount-rate homeloans and insurance products, including life, home and travel cover.

Worth €100,000 to the GPA, which has been looking for ways to get its players some kind of financial recognition for the millions they help bring to the GAA. The deal involves a 5% discount on insurance – so long as you negotiate your mortgage through the brokerage company - and a €500 cash refund in addition to an undiscounted mortgage rate which presumably is similar, or even a fraction lower, than the rate offered to all first time or new borrowers.

What the announcement of the three year sponsorship deal did not say – and presumably what will not be too quickly volunteered with the GPA member who comes looking for his typical €200,000 mortgage, is that many lenders already offer special insurance deals to new borrowers – sometimes with up to six months (or 50%) cover free for the first year. Either way, the commission is 90% of the first year’s premium on life cover and c.25% for home insurance.

As for the generous €500 refund, the GPA member might be interested to know that a mortgage broker typically receives 1% commission on the value of the loan from the lender for bringing in the business to begin with.  In this case, that would amount to €2,000, a sum that IFSRA, the financial regulator still does not require be disclosed.

If a Gaelic player wants a good deal he should go to a fee-based mortgage advisor who will search around for the best loan for their needs (which will not involve an endowment or “investment” loan either which carries even more commission), and provides the conveyancing for a set fee.  Since any commission is automatically refunded, this money usually covers the advisor/legal fees. And if you agree to pay your mortgage protection and home insurance in a lump sum they often refund 50% of the commission payable on these transactions.

GPA players may be playing their guts out for the love of their sport, but that doesn’t necessarily make them stupid; taking up this offer however would make one wonder.

 

*               *             *

A PROPERT BUBBLE JUST WAITING TO MEET ITS PIN

The grass is not always greener – or the sun always brighter – in Spain and Portugal.

A surge in property prices means that investors who bought their villas and apartments five years ago have trebled their money, but the downside is that some are also discovering that their Iberian properties may be subject to additional service charges and regional taxes worth tens of thousands of euros; difficulties over compulsory purchase orders of pieces of their properties and persistent petty crime in some resorts like Alicante.

The high cost of flights to certain resorts also has some investors, especially older ones thinking of permanently retiring to Spain or Portugal, wondering if maybe the time has come to sell up instead.

Whatever about the problems some Irish people are contending with in those countries, you really have to wonder about the amount of grey matter being carried around by Irish investors who are thinking about buying properties in places like Bulgaria, Shanghai and Newfoundland, three property destinations now being advertised.

Whatever about the prospects about buying property in communist regimes, the fact that the island of Newfoundland is shrouded in rain, fog, icy mists and snow most of the year and is about as remote as any remote place in Canada, makes one wonder about the volume of grey matter being carried around in some Irish investors’ heads.

Allow me to put this in perspective:  Montreal, a city to which I am very familiar, having been born there, at least has a population of three million, is lively, cosmopolitan and has been enjoying something of an economic and social renaissance in recent years.  Prices are rising, but property is still much lower value that in any other major Canadian city, mainly because of the on-off political instability of the province and high city taxes and charges, which includes high residential property tax.

Montreal property has also been advertised in Irish papers (albeit, houses and flats about 20 miles out of the city) but those ads also fail to mention that the city sits under a layer of snow for five months, is consistently colder than Moscow and is not serviced by any direct flights from Ireland.

If anyone needed any further evidence of a serious property bubble erupting in this country – not unlike the dot-com one that burst in 2000 - surely it is these ads for bijoux apartments in downtown Sofia and Shanghai, and rural retreats in fog bound Newfoundland.

 

ST Comment – Oct 2003

THINK AGAIN: THE PROPERTY MARKET IS MEANER THAN IT LOOKS

The Bank of Ireland’s prediction that house prices will rise a further 6% next year suggests that there will be a real slowdown in prices from this year’s anticipated rise of 12%.  But for anyone who is thinking of buying a property, or is spending a lot of money renovating an existing one on the grounds that the capital gain will make up for any worries they may have about high prices (or borrowings) should think again.

The raising by the Bank of England of their borrowing rate by a quarter of a percent is expected to be followed by other modest increases in 2004.  Economists here don’t expect any euro-rate movement over the short term, but they are not ruling out an ECB hike (or two) over the next year.  The combination of a rate increase and a fall in further growth will sharply reduce capital gains and anyone about to buy should start factoring in much more modest increases in the value of their properties and perhaps in the kind of rents that can be charged.

It certainly puts home equity release offers for older people into perspective as well.  At the moment Bank of Ireland’s ‘LifeLoan’ charges 6.9% interest, fixed for 15 years.  In the three years since it has been available that rather high rate – double the variable rate and higher than even ordinary fixed rates - was tempered by the fact that property prices were rising by between 12% and nearly 20% per annum.

House price growth that falls to just 6% doesn’t give someone with a loan that is eating away at the capital value at a compounding interest rate of 6.9% a year much leeway to avoid a significant capital loss.

 To paraphrase the crusty sergeant in Hill Street Blues all those years ago, a time when you could buy a brand new, three bedroom house in Dublin’s Liberties for  €41,000 but paid 10% interest instead of 3.5%, be careful out there. 

The property market is meaner than it looks.

 

ST Comment – Nov 30/03

WE’LL PAY FOR GERMAN/FRENCH DEBT WITH HIGHER LOAN RATES

Anyone thinking about taking out a fixed rate mortgage might want to consider doing so sooner, rather than later after the new from Brussels last week about the ending of the EU stability and growth pact could result in a rise in the long term interest rates.  Fixed rates have already gone up in recent months with five year fixed rate just under 5%. 

I know this sounds downright curmudgeonly, coming just as the Christmas shopping season gets underway but all the publicity generated by the EU finance ministers letting the French and German off the debt hook is a reminder there is always a price to pay for being in debt.  Euro-zone countries could end up with higher inflation and ultimately higher interest rates.  Individuals who blithely ignore the consequences of overspending also get caught eventually.

The European Commission is considering what to do about this abandonment of the pact.  I bet they wish there was a giant credit card they could demand back so that it could be cut up until the bill could be paid off.  

Not a bad idea for the rest of us.

 

 

 

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The MoneyTimes postbag is filling up again…Q&As:

 

 

Ms CK writes: I have recently been diagnosed and treated for breast cancer and my prognosis is good. I have a Living Cover policy with

Bank of Ireland Lifetime that will pay out a five figure lump sum. We have no mortgage except on an investment property and is covered by the rent. I am receiving sick leave from work. We do have three children, one in college. Can you make any investment suggestions?

 

Serious illness policies which pays a tax-free lump sum for a diagnosis like cancer, are a great relief for the patient as it means that you won’t have to worry so much about the inevitable extra costs of being ill and out of work. I think they are particularly good for stay at home parents who will not have income protection insurance, often provided by employers.

 

Your personal finances appear to be quite good, but don’t be too quick to commit your lump sum to either the children’s’ college costs or any other longer term asset; you probably still have a year’s worth of difficult, exhausting treatment and recuperation ahead. The purpose of this insurance was to help pay additional medical bills, keep your home running efficiently (say by hiring a housekeeper) or perhaps even to pay for a brief sun holiday between treatments.  You can spend some of it on special treats on the - inevitably worried - children in return for their extra love and kindness.

 

If there’s much money left over when your treatment is finished, that’s when to look into investment options. Bank of Ireland has just launched a very informative website (www.bankofirelandlifeonline.ie) that will take your through all their savings and investment options, but you might want to get some independent, impartial advice as well.  (See below). 

 

 

Ms MC writes: You mention that regarding financial matters that you should get independent advice.  How do you go about getting independent financial advice?

 

Financial advice never comes free. The vast majority of us use commission-remunerated financial salesmen – brokers – who are paid sizeable commission from every investment contribution or payment . The commission – and other compulsory charges - can create a serious drag on any growth. Even if your fund/investment loses money, charges and commissions will be paid.

 

I always recommend independent, impartial, fee-based advice that avoids the payment of on-going commissions. Only a minority of Irish brokers/advisers work exclusively for fees. Some will offer both options but prefer to take commission.  The Society of Financial Planners of Ireland, part of an international financial training and accreditation organisation, encourages fee remuneration. It has just launched a register of members and an on-line map locater. (Some SFPI members work for financial institutions like banks, life assurers, stock brokers and are not impartial.) You can find the map here: www.sfpi.ie

 

 

Mr JM writes: I understand that the inheritance tax threshold between a parents and a daughter is €225,000 and there is an inheritance tax exemption for a dwelling house provided in a will of three years residence before inheritance and six years after. But do they apply together or separately?

 

The information you have is correct and yes the combined inheritance applies: your daughter can inherit the family home, tax-free, if she has resided in it with you for at least three years before getting the inheritance and she can still qualify for the tax-free inheritance value threshold of €225,000 between a parent and child. The only condition for inheriting the family home tax-free is that she must not have been the part or full-owner of any other property.

 

 

Ms EH writes: I am a PAYE worker, under age 66, and I earn more than €3,174 from “unearned income”. Will I have to pay the 4% PRSI levy on the gross or net amount of interest I earn from my bank deposit income?  Is the 4% calculated on the amount before or after expenses on my buy-to-let rental property? Finally, is the return from my Post Office savings exempt from the PRSI levy?

 

Yes you have to pay the 4% PRSI on the gross interest on the interest you’re your bank deposits. Next, you only pay the 4% levy on what remains of your rental income after all the qualifying expenses are deducted and any return from State Savings (not An Post deposits) are PRSI-free, but if you have National Solidarity Bonds only the income, and not the bonus is exempt from the 4% levy.

Mr DA writes: I have €50k that I want to invest. I am thinking of going to the Post Office for a five year fixed term account. What will this 50k be worth in five years? Are there different options I can go for? What about DIRT?

 

The current issue of the State Savings Bond will pay you a net return of 7% after five years and six months or an AER of 1.24% tax-free. Your €50,000 will be worth €53,500. However, price inflation will probably eat away at that return leaving you with much lower spending power in five and a half years than you have today.  You might want to get some independent, impartial investment and tax advice if you want to produce a genuine return from your lump sum.

 

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.

 

 

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