August 9, 2012
Childcare costs hurt -- but beware mortgage rate risePosted in Irish Independent · 154 comments ·
YESTERDAY a very important article appeared in this paper by my colleague Thomas Molloy on the exorbitant cost of childcare. In the piece Molloy examined the results of a survey carried out by the Irish Independent and KBC Bank, which indicated that many young couples are now paying more each month for childcare then they are on the mortgage.
He went on to make a broader argument about how different generations are bearing differing economic burdens in Ireland and how on many indicators, it appears that the older generations have managed to fare better than the younger generations for a variety of social and political reasons.
These are important points and deserve to be fleshed out in detail because many societies — maybe not intentionally — end up with a situation where one generation does much better than another.
In Ireland this generational split is made all the more stark by the housing boom and the fact that the very people having children now are also highly likely to be the very people lumbered with huge mortgages.
The average woman here has her first child at 31. This means that the people we are talking about crippled with high childcare costs are the generation between 30 and 40, in the main.
These are exactly the same people that were bundled on to the property ladder in the final years of the “smash and grab” exercise known as the housing boom. Therefore, they are caught in a brace between the exorbitant cost of childcare and the collapse in house prices.
In many cases, they bought into the property scam precisely because they wanted to have families.
Owning your own place was marketed as the thing responsible people did. The prevalent view back then was that this was something that responsible young people should do rather than rent and expose their family unit to the alleged vicissitudes of landlords.
As a result, hundreds of thousands were herded into the wealth destroying grinder machine called the wildly overvalued housing market. Some walked willingly into personal financial Armageddon, others were pushed and prodded against their better judgment.
But ultimately they all ended up in the same place — a land of crippling negative equity where financial hope for the future is tempered by the realisation that they have destroyed the wealth of their family forever because general house prices will probably never recover to mid-Noughties levels.
Throughout this madness I warned, in this column, about the consequence of the bubble, so what you are about to read might sound strange — but for many reasonable people, rising house prices is, or was, at least seen almost like a “social contract”.
Most people want to live decently, raise a family and by saving and investing in a house that holds its value, we can generate modest wealth, which we then hope to pass on. The house is a store of this wealth.
We are not talking here about excessive, greedy returns, but just the normal human desire to create something of value that we can call our own when all is said and done.
In our society this was taken to be a kind of “understanding” which is why the fall in house prices is sometimes termed a betrayal of a generation’s hopes and aspirations.
Whether this is the right way to regard accommodation is neither here nor there for now, this is the way our society and all other English-speaking societies have evolved in terms of the individual and the relationship with property.
Banks take advantage of this potentially volatile relationship, which is one of the main reasons why they are regulated or are supposed to be.
What happens when you discover that not only is your house not a store of wealth but quite the opposite? What happens when you realise that it is the single greatest destroyer of the wealth?
It would be fair to say that you tolerate this angrily as long as the monthly cost keeps falling, even if the value has collapsed because you don’t have to sell and crystallise the losses.
WHAT do you think will happen to this generation, caught between huge childcare costs, negative equity and falling incomes, if the monthly mortgage bill were to rise?
What choices do you think the 400,000 people on tracker mortgages might take? Will they choose their children or their houses?
This is what the choice will come down to: do you pay for the mortgage or do you pay for the childcare or do you stay at home, in which case you lose your independence and your income.
Of course they will choose their children and their own careers, which they need to maintain for their own sense of themselves and have to maintain to pay the bills.
At the moment, because of the European debt crisis, interest rates in Ireland are at historically low levels. The main beneficiaries of this are those 400,000 on trackers who have seen their monthly mortgage payments fall and fall since the beginning of the crisis.
But what happens if the European debt crisis is solved and normality returns? Then interest rates go back up and Ireland sees mass mortgage default while the rest of Europe, not mired in such personal and mortgage debt, moves on.
Can there ever have been a more ludicrous situation where failure of the eurozone characterised by on-going debt crises, summits and the like, is actually in the interest of many hundreds of thousands of citizens of that monetary union?
It is quite, quite bizarre.
As the cost of childcare remains extremely high and as, after tax, incomes fall, the only big saving the average punter can make is on their mortgages.
If mortgage rates rise, which they will do over the course of the average 25-year mortgage, the numbers will simply not add up for thousands of the generation that were first-time buyers in the Noughties.
This will most probably manifest itself in more and more mortgage defaults as the next phase of the Great Irish Housing Crash — the mass default phase — plays itself out.