If interest rates are zero, why does a new mortgagee face an interest rate of between 4pc and 5pc? It must be frustrating for readers to hear financial experts reiterate constantly that “interest rates have never been lower” and yet they face significantly higher rates when they go to borrow money.
It must also be deeply frustrating for the saver, who has a nest egg, to be told by the bank manager that the return on their life savings is now 0.25pc per annum, but their savings are being recycled by the bank and lent out to the first-time buyer for 4pc plus.
However, this mismatch between the cost of borrowing and the return to savings is the result of the on-going problem deep in the Irish banks. The nub of the problem is that the banks are losing money on tracker mortgages and they need to make this money back somewhere, so they are squeezing both savers and borrowers. The saver gets next to nothing and the new borrower pays not just the bank’s margin on a new loan, but chips in to cover the cost of the subsidy that is the tracker mortgage.
Just to put some numbers on this, up to 65pc of all buy-to-let mortgages held by Irish credit institutions are trackers, while 45pc of primary dwelling mortgages are held at tracker rates. An average interest rate on a tracker mortgage is just over 1pc. The average standard variable rate is 4.2pc. This is the average rate offered to Irish customers for a primary dwelling house and is the best measure of rates offered by banks for new mortgage loans.
This development is creating deep problems for the economy; for the economy to grow, the banking system has to behave “normally” but it isn’t.
Despite the fact that house price increases have slowed down, the mortgage that a young family needs to pay is exorbitant relative to (a) their incomes and (b) what should be paid back if the official rate of interest were applied.
Therefore, there is a significant likelihood that many tens of thousands of young Irish people will remain permanent renters because they will not be able to afford a starter home at current prices. This is due to the high price of houses, despite the falls after the boom; the high rates of tax which have diminished after-tax income; and this prohibitive interest rate, which is due to the banks subsidising tracker mortgages and gouging new customers to get some of this money back.
But what does this do to society?
It changes profoundly the pattern of how, where and why people settle down, when they have children and with whom. These are big issues in a society which has been nurtured on the idea of living with the parents, moving out for a time to rent and then buying a home. Whether you like it or not, this pattern has been the middle class social contract in Ireland for a very long time. We break this at our peril, particularly if there is no alternative renting system – and ultimately culture – in place. An article this week in the ‘Financial Times’ indicated that up to 70pc of young Britons believed they would never own a home.
If a similar study were done here, I would be surprised if the figure was much lower. In Britain, there has been a drop-off in savings among young workers because they’ve given up on the notion of saving for a mortgage and have decided to spend the money instead. However, the problem runs much, much deeper than its effect on savings patterns among the young. It runs deep, because Irish people still regard their house as a form of wealth.
What happens from here if young people can’t afford to buy and rent?
The income from that rent accrues to older Irish people who own the rented properties. As a consequence, we get a demographic wealth divide in the country where young workers enrich old landlords. This creates a permanent annuity for the old in the form of rental income and a permanent cost for the young in the form of rental payments.
The more this annuity accrues to the landlord, the higher house prices go because they are clearly a source of permanent income.
It’s not difficult to see how the housing market can easily become a facilitator of massively distorted wealth between young and old. I wrote about this generational divide many years ago in a book gently entitled ‘The Generation Game’. Maybe it should have been more aptly called ‘The Generation Scam’.
In truth, there are three generations involved in this game. Between the two generations – the desperate first-time buyers and the older landlords – is a third generation: the juggling generation. These are the people who bought property between 2003-2008 and are still deep in negative equity, have no prospect of breaking even on the property and who are largely only financially solvent thanks to a tracker mortgage.
I’ve done a back-of-the-envelope calculation that even if property prices rise by 10pc a year, as was the case in Dublin last year, it will take four more years for these people in Dublin to get out of negative equity.
However, if prices were to rise by a more modest 5pc per year, which is the case now, it would take another eight years.
In the more likely scenario of a 5pc price rise annually across the board, people in Meath will not be out of negative equity until 2023. This is shocking.
In Ireland we have a demographic chasm opening up in the housing market.
This could turn out to be permanent unless more homes are built and are built quickly. In addition, the gap between tracker rates and variable rates has to come down.
Maybe before the State sells AIB in the next two years, it should address this problem of interest rates gouging first-time buyers.
But maybe the Government wants to maintain the present status quo, based on the fact that the young don’t vote in huge numbers?
If that’s the case, wouldn’t it be odd that we’d enter 2016 about to celebrate a Rising that was largely driven by inequitable land ownership, run by a Government whose survival is based on inequitable land ownership?