April 9, 2015

Young paying too high a price over the failure to act on interest rates

Posted in Irish Independent · 56 comments ·
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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?


  1. savagepeter

    “but their savings are being recycled by the bank and lent out”

    Maybe you were simplifying things with this statement but I thought banks created mortgages essentially from thin air using double entry accounting. They don’t directly funnel funds from borrowers to savers.

    • EugeneN

      Yes, true. very good bank of England paper on this.

        • Michael

          If in fact – banks create money from nothing and lend it into existence at the touch of a button in a near ‘free act of creation’
          ..then why is it..
          we all have to pay back, say – a mortgage through labour over thirty years PLUS interest for what was in essence a near zero energy input / digital act of creation?

          • savagepeter

            Why indeed!

            “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

            ? Albert Einstein

    • CallerNJ

      The bank can generate a mortagage out of thin air, but at the end of the financial year they do have to show a certain capital base (partly your deposits from depositors) on the books. Otherwise why bother with all this Tier 1 talk.
      So McWilliams is correct here. Recycle they do, it doesn’t just sit there waiting for the depositor to return some day to collect it.
      Basically what he is saying here is that they work the money in whatever way (not neccessarily a mortgage, could be some other way) and in essence the depositor should get some sort of a return on the capital invested.
      The return is so small in Ireland it is like your money isn’t even making the minimum wage in the world of deposit interest. IN fact due to inflation you are paying the bank to make money off of YOUR money. Better off investing it in something than let the bank have YOUR profits.

  2. kinsele2

    Seems an almost impossible problem to fix. Doing my own back of the envelope calculation as someone without a first home in my early 30′s, if the 5% rise per year does happen and by 2023 those thousands now in negative equity are no longer, it just puts a first home even further out of sight for anyone without one. I’m pretty confident my salary won’t increase by a guaranteed 5% per year, and even if it did the increased tax paid would mean I would see maybe just over 2% of it as income that could be used for a mortgage.
    Would like to see an article on bank repossessions and why they have chosen now to ramp this up. I’m a renter and my place was repossessed in the last month, and I’m hearing similar stories from friends living in rental accommodation, so it seems landlords are being targeted too. Once they decide to go ahead with it it’s a pretty ruthless process!

    • I’m also around your age and I don’t see myself getting a mortgage unless if it had to be rented out, the rent would cover the mortgage. I assume the 8 years to sort out negative equity does not include mortgages in arrears – actually I suppose the banks would have acted by then on all arrears. Sorry to hear your place was repossessed. I worked out that it should be roughly one in eight rental properties that have a mortgage in arrears (including the many properties not registered with PRTB), so that is good odds for people renting but obviously doesn’t include the landlords wanting to rent out to relatives.

    • EugeneN

      Then you need to vote for a government that runs on a platform of lower house prices, and higher building. Hold your nose and vote for Sinn Fein if you have to, although I don’t know their specific policies. I do know that the Labour party in Britain is committed to building more houses.

      And one of the things which will cool the market is the government saying it has a policy of lower house prices, that *alone* will discourage investors.

      As for the whiny developers, the government can introduce a carrot and stick policy. Stick is a tax on land banks, carrot is a reduction on VAT on materials and costs etc.

  3. Colin

    …. And you want Irish living abroad to come home to this scam and be plucked like a goose? No thanks.

  4. EugeneN

    “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.”

    Ah come on David you used to be better than this. In times of housing shortages people get what they maximise out on from the bank as a percentage of their take home pay.

    If the price of credit goes down the prices of the limited supply of housing goes up. Paying back 1% on 500K would be as easy as paying back 4% on 300K so housing goes up and the only thing we guarantee is future hardship when interest rates actually increase.

    “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.”

    Why would we want that? The only way to get these people out of negative equity is to go back to boom times. Insane.

  5. EugeneN

    If you want cheaper housing, once again, build more houses. This isn’t rocket science.

  6. uncle fester

    Very disappointing that you’re repeating the myth that high variable rates are subsidising tracker mortgages. It’s actually the 100k+ mortgages in arrears that they are subsidising. Honohan previously stated that trackers are actually breaking even and that it’s the arrears that are causing the high variable rates.

  7. jccusack

    “banks are losing money on tracker mortgages”.
    So what is the fundamental underlying problem? Tacker mortgages are linked to the ECB rate and the banks then borrow back-to-back from the ECB. They still can and do have borrowings from the ECB. So, Are they really losing money on Trackers, or it the write downs on non-performing loans on all types?

    The “banks are losing money on tracker mortgages” is being accepted as fact. David any chance you could shed some light on where the losses are in each of the banks…possible focus on the areas of excessive profit as well?

  8. douglaskastle

    Sadly there is nothing to see here really. Remember it is a banks responsibility to make money for it share holders, always has been always will be. It is amoral in these things, not immoral* (even if the two sometimes look the same). When the banks were privately owned they made decisions that were legal and were/are being done worldwide. It just so happens that the banks, in Ireland, got so on the wrong side of the “tracker mortgage” instrument. As Carter Burke once said, “It was a bad call Ripley”, now they have to make up the shortfall what ever way they can.

    However now that the government owns most of the banks we, the people, are the shareholders, but they only way we can flex our power over what happens with the banks is to get involved politically, but as David points out “the young don’t vote in huge numbers”. We should, but we won’t, we are too ADD and twitterfied to last a full election cycle and term to be around standing when change can be effected.

    *Sadly the same can’t be said about antic recorded in the anglo tapes, what those guys pulled was wrong, straight up and down.

    • jccusack

      Douglas,
      Tracker mortgages are getting the blame…surely its the non-performing loans and write off’s that they are ‘cross financing’ (I typed that as ‘dross’ financing, probable a better description)
      Any idea how the banks are losing money on the trackers? Surely they are not losing money on each and every one? Do you know if this info is in the public domain? Cheers

      • EugeneN

        They aren’t. They are losing money on non-performing loans.

        Throwing cheaper credit at this market will not help young people buy houses. More houses will do that.

      • douglaskastle

        JC,

        I’m sure you are right, there is more likely a lot more going on in the banks than the tracker mortgage problem. But it is being used as the smoke screen when people complain about the high interest rates. As to info in the public domain, that would be lovely, but will it ever happen? Can I ask the bank that I own (sorta) to give me that information?

        My feeling that that the government is cleaning up the banks for a quick sale and will halt/hinder any reporting like that and it will be up the the future buyer to find out if they have bought a pup.

  9. Old homeowners and landlords die – eventually the equity gets passed to someone younger. Maybe not fast enough though.

  10. DB4545

    David what are you suggesting should happen? I entered a contract with the bank for a tracker mortgage. Like all contracts voluntarily entered into there was an offer, an acceptance and an agreement to enter a legally binding commercial relationship. I’ve held up my end of the bargain during the meltdown that hit this Country. Are you suggesting that the banks should be able to ignore their legally binding contract? Are you suggesting that contracts are only binding on the perceived weaker party?

    • Paul Williams

      Yes David…. what are you suggesting as a solution.

      Both of the business reporters on “The RTE” 6.01 news make this same hint every time the “tracker problem” gets mentioned as reason for the banks ripping-off mortgage holders.

      The reality of the “hinted solution” is that an emergency bill is passed by the “house” that will temporally suspend contract law so that the banks can get out of the “legal contracts” they gladly entered into and will then be able to rip-off the tracker customers aswell…..all in the name of fairplay and them having being converted to socialism(for the moment, don’t u know).

      I’ve personally had various mortgages since 1989, I’ve been trying to switch to a tracker since the currency crisis of 1992 that pushed my mort. interest rate to between 14-17% at the time(yes folks you read that correctly..you variable rate whingers have it easy).

      I never managed to meet the convoluted criteria to be eligible
      for one till 2007 when Halifax/BoS came here and started offering them from their pop-up banks(yes a guy with a laptop on trestle table and folding chairs rented from O’Meara camping).

      Of course our local lads(not to be out done by the blow-ins) started to offer them at knock down rates to all and sundry to compete and so we have the stage set for the perceived problem.

      “Typical tracker rate 1 pc” ? where did you get that figure from DMcW ?

      I also would love to see the ACTUAL figures on the trackers, the tracker rates on offer(from my memory) where not actually that great(they where more expensive than the var ones for sure) till very close to the end when “the blow-ins” started offering 0.55% trackers just to wind-up the local lads(sure what overheads have we, just the table rental.. didn’t that check we sent to O’Meara’s bounce :). Just before they jumped town as they realized there wasn’t a buck to be made here anymore.

      I know my mortgage was “sold on” so if by some crazy moment of madness the Govnmnt decided to collude(again) with those (socialist) bankers and some how increase my tracker rate.. no Irish mortgage holder(or Irish banker for that matter) would benefit financially from the dirty deed. Just some lad who bought a a portfolio of “non-performing” mortgages for 40c on the dollar living comfortable on a Caribbean island.

      I believe his name is “Adam Subscribe” and he signed the documents in the Caribbean…so presume he lives there ;).

      If that day ever comes I’ll personally be done with the country of my birth for good …..

      and so might some of the Govnmt’s precious FDI multi-nationals who park their patents here when they realize that a legal contract here made one day may not be a legal contract tomorrow at the whim of the Govnmt.

      No bother hey….see ya…»» down the town.. ;)

  11. Divide and conquer is the rule.
    David divides the population into us and them and lets each party have at it.

    One week it is to urge everyone to go borrow and spend. “your spending is my income”. Never mind go into debt and stimulate the economy.

    This week is to berate people for not saving. Also turning young against old, renters against landlords.

    Any shift in fiscal policy, and change in monetary policy will disturb the equilibrium. Any manipulation of interest rates, any edict to prevent development, any subsidy added or removed will change the market direction as all things adjust.

    any individual, corporate, state decision will change the market forces and what people are able to do or not.

    Has it ever occurred to you that all the meddling, all the good intentions, all the local zoning, all the malevolent intent, distort the markets to such a degree that they no longer function as a method of price determination no matter what section of the economy is considered.

    Has it occurred to you the there is no real market anywhere, that provides economic price discovery? Nobody. anymore, gets proper information about the economy, only lies and deceit. Therefore all people are misinformed and make improper decisions because the data presented on which decisions are made, are all lies.

    Start at the root cause of the problem, David. Perhaps you should deal first with the macro economic problems before commenting on the micro.

    Quit stirring to pot and come up with legitimate solutions that can be logically debated without the emotion you foment.

    It all starts with the money system. The fiat money conjured as a debt at interest is the principle fraud upon which all the others rest. Deal with this first and the rest of the solutions will follow. Graft and corruption rule the day from top to bottom. Am amoral, even immoral? , banking system leads to an amoral people, an amoral society, and social decay and total corruption.

    It is in front of your eyes. Deal with it. Stop setting one sector of society against another. It is no solution. We need to work together not fight each other to the benefit of the Rothschilds’ etc.

      • Grzegorz Kolodziej

        It does occur to many people, Tony, and certainly on this blog, but most people had been educated (even many economics students – just look at the seminal but stillborn textbook of Paul Samuelson) in a way which ensures there never will be a political party whose program will be to deregulate the market in a way that provides price discovery. Look at all the protest parties in Europe! Syriza, Podemos – they do want to overthrow the system, they want to be part of the system. They are in favour of market distortion, but are frustrated that they are on the wrong side of the distortion. As to David, I have been following his publications and public appearances for a decade and he always was on the demand side of the economy, but I have noticed that recently he started to modify his views looking for new solutions, so give him a chance. I would attribute his oscillations between savers and borrowers to that modifying thought process.
        I disagree with some of his solutions but you have to give it to him that many of his diagnoses from the ‘Generation Game’ turned out to be true. If I were to oversimplify I would say that he is now more Steve Keene than Paul Krugman if you know what I mean…

    • juniorjb

      Sure Tony, it’s David Mc that turns the young against well-upholstered moralizing old blowhards like yourself, not the fact that they face the long term prospect of a massive transfer of their earnings into the pockets of the merely old and fortunate landlord. You protest too much…

      • So what problem have you just solved with such a brilliant deduction. You are a typical result of the divide and conquer mentality. I have yet to a positive suggestion from you.

        • juniorjb

          A very lazy argument Tony.

          • Well I guess it is the result of the company being kept on this thread.

            You talk as if the old and fortunate merely arrived that way. They all started of young and show what prudence and good management can do for their good fortune in later years.

            The old and fortunate are a fine example for the young to emulate.

            Many old and fortunate hand gifts to younger family to enable a start.

            In North America and around the world one can see the the neighbourhood Chinese grocery stores in business in good times and bad. It is families and community supporting community plus a dose of hard work that leads to survival.

            No bitching and complaining about the old and fortunate here. No divide and conquer evident in those places.

          • juniorjb

            That’s too simplistic Tony. As it happens, in my neck of the woods, Chinese communities typically club together to fund the start ups of younger members looking to get a start in life. By contrast, I just had a conversation with an employee who has to consider moving out of town and cutting her hours because rents have moved beyond her means. This situation has arisen for various reasons but the division and antagonism are the outcome of real material circumstances that favour the interests of older investors over the young. You cannot understand history or society without a theory of antagonism and it is here that one of the fault lines rests. The theory of antagonism you offer is a convoluted mess that rests on an idealistic and unprovable theory of market efficiency with all agencies of government and the banks in the bogeyman role. The situation is far more riven than that and not as a result of some deliberate tactic. In fact it is precisely your ideology that is currently deployed in a pragmatic way to justify the intersecting agencies and interests that have brought this about. They additionally favour a theory of society and politics that denies the rifts and conflicts that necessarily divide us precisely in an effort to stall analysis of these facts.

          • It is too simplistic to say one part of the community takes advantage of another. But that is the way of mother nature. Each bird feathers its own nest.

            The trick is to give each an equal opportunity not a guaranteed equal result.

            looking at everything on a general basis one sees the deck is stacked by the favoured few who control the banking system. After that all is skewed against the rest.

            This favoured few keep everyone one else busy fighting each other over the breadcrumbs falling from the table, too busy to see the real cause of the problem.

            I am not interested in fighting you, but you regularly resort to name calling. I may criticize David as do others but we respect his person.

            So bring on your solutions and let as see what you have to say as a resolution to the financial, and social inequities you see.

          • “The individual is handicapped by coming face to face with a conspiracy so monstrous that he cannot believe it exists.” … J. Edgar Hoover – ex-FBI Director

        • juniorjb

          I don’t disagree with you on the dominant role of banking interests. My argument is that you cannot use the opposition of financial elite vs. everyone else as an overlay that to paper over all the other conflicts as you seem to be suggesting. Some of the older investors we are talking about are a risk averse lot who bought cheap when prices were favourable, often on the back of secure public service jobs when few others could get a loan or are simply fortunate in having been born at the right time to find themselves with a small mortgage while riding a wave of rising wages (a situation which they deserve some credit for). What we have seen is a convergence of these interests with those of the banks and financial classes at the expense of the young. This isn’t a conflict we can safely ignore and it seems to me that David is on the money in emphasizing it. Government and banking policy is currently in favour of deepening this divide but not deliberately, more as the result of institutional capture by sectoral interests (financial, developers and landowners). I’ve been lucky to have the example of many people of the generation born in the forties whose exemplary work ethic helped create so much who nonetheless on moral grounds refused to partake of the buy to let frenzy because they would not buy housing out from under the upcoming generation to feather their own nests. We all have choices and must account for the foreseeable consequences at least.

          • juniorjb

            Having 3,5, 10, 20 buy to lets is hardly crumbs from the table?

          • juniorjb

            Of course, it hardly goes unnoticed that you have a particular soft spot for that class of rentier, for some reason (what could that be?). Post-hoc rationalisation, anyone?
            BTW, to provide equal opportunities for all without concern for the outcomes, you would at a minimum be required to have a once-off equal distribution of resources to all parties. If the outcomes are to be regarded as fair the initial conditions have to be fair and free of inherited inequities. Funny how these breezy appeals to theory run aground when you think them through.

  12. For a starter list of the lies and deception on the information affecting the economy read this and the attached links within.

    http://www.silverseek.com/commentary/fed-transparency-revealed-mr-goldman-sachs-himself-14290

  13. Grzegorz Kolodziej

    I think that when people say that we need cheaper houses they fail to address the main problem of the Keyenesian economy which is that the cost of everything is too high and that the ongoing experiment with stimulating the economy via fiat money and near-zero interest rates for savers (and in some cases negative interest rates) is going to end some day and it’s going to end with a big bang.

    David often emphasizes that the Irish economy is tied more with the US economy and the UK economy than with the European economy, which is of course true. Well, the ongoing experiment with near-zero interest is going to end in the US when dollar loses its place as the world reserve and trade currency and this will be in our lifetime (if my memory serves me correctly its share went down from 80% to 605 within the last decade).

    As Jccusack pointed out, and I quote, “Tracker mortgages are linked to the ECB rate and the banks then borrow back-to-back from the ECB.”.

    So what will happen with the housing market if the ECB and FED interest rates go up by 5% or 10%? Obviously we do not know when it will happen and how much they will go up, but what we do know is that this system of fiat money and the levels of debt are unsustainable and that China is hoarding more and more gold so the question is will they overthrow the dollar before their property bubble bursts?

    Just so that everyone can visualize how high the cost of everything is: I once checked the weekly expenses of an average unskilled worker in Dublin in 1913. An unskilled Dublin worker was spending only 30% or less of his weekly expenses for renting the whole apartment (do not tell me about the state of those apartments which was actually not bad at all considering technological developments for the last 100 years and the state of many apartments I have seen – not to mention the state of apartments in socialist countries 50 years later) while I, as a skilled worker, was paying 46% of my weekly expenses towards rent during the boom-time property peak (for interested in the subject, in 1913 2s 6d of unskilled worker’s expenses was going for rent and 2s for fuel, light and heating, out of 18s of a weekly salary).

    Sadly noone addressed David’s question from last week whether the US-Iran deal will make the Middle-East a safer place.
    It will be interesting to see whether Iran continues to make those mad threats to Israel and whether mad Netanyahu countinues to make his threats. Like I said, it may as well be that the goal of this deal was to prevent Iran from acquiring a modern defense system which would make Iran’s nuclear facilities immune to bombing (like they have done in the past).

    As to EugeneN comment. Sadly I do not see any party at the moment I can vote for. Sinners? I remember seeing Gerry on TV during the boom when he was asked about his economic program and his answer was 50% corporation tax and that was pretty much all he could say. They have not came up with much more ever since, although they now let Pearse Doherty speak on economics, who makes half-sense (as opposed to people who make no sense and only half-sense because he does not have an economic background).
    Maybe they would be a little bit firmer in foreign politics but this is big maybe and I doubt even that considering that Mary Lou voted as an MEP to make MEPs expenses secret and then she said it was a mistake, as was voting for the bank guarantee, as is most of SF economic program.

  14. DB4545

    David,

    You warned the Country time and time again about the dangers of the housing bubble which eventually burst. You could have joined the rest of the lowlifes for a handy buck and an easy life selling bullshit real estate “investments” in Cape Verde or Antartica or wherever some Cork “financial adviser” could pick up handy commissions for an endorsement. You stuck to your guns and for that you have my respect. But spinning out an article peddling a line that every other mortgage holder provides a subsidy for tracker mortgage holders is misleading at best. I’ve declared my vested interest as a tracker holder so my reasons for defending my interests are clear. We either have the rule of law and predictability for contracts or we have anarchy. Who would want to invest a cent here in the absence of the rule of law? It’s why people invest in Switzerland rather than Somalia or Zimbabwe. If you want anarchy then crony capitalism and corporate communism is the way to deliver it.

    DB

    • jccusack

      DB – Well said from my viewpoint.

      We know who pays the piper, we just don’t know what for! “Subsidizing Trackers” is handy PR and I challenge DW to prove this is whats happening.

    • StephenKenny

      The idea that a ‘contract is a contract’ and is somehow inviolable is just not true, even in Switzerland (think bank secrecy)!
      Governments and courts are there to change the playing field, for all social and commercial activity: Putting up the tax rate of this or that may destroy a business that relies on the current rate; A government may decide to stop excessive encouraging property buying, so it starts to remove subsidies for first time buyer mortgages – the subsequent fall in property prices would be ‘unfair’ on those who took out mortgages with the subsidy. The list is endless – look at every finance act in every country – there are always winners and losers.

      The problem is political, and clearly unsustainable. Every government knows that the young are the motors of the consumer economy, and of business. Make them poor, and unable to start to accumulate assets, and the economy stagnates, which actually means goes into long term decline.

      The political problem will arise when the young start to realise that they can change the playing field by voting. They’ll vote for a party that will actually do something about it. After a bad year, they’ll sit in their little rented room, say ‘f*£@’ it, and change their vote from those of their parents.

      It always happens – countries end up with a period of extremism that ‘sorts out’ the unsustainable mess. We’re seeing it in Greece, Spain next, probably the UK at the next election, the US is already there in many ways, and so on.

    • Deco

      Ah…yes…what next for that Cork “financial advsisor” ? How about politics, but in a role where the electorate will be thoroughly ignored (as against being ignored for all of five years, except 5 weeks).

      He is better at playing the cowboy than Clint Eastwood.

      • DB4545

        Deco

        If you conduct a few basic searches that gentleman’s former business links should preclude him from being dumb enough to offer himself to the electorate. He’ll be torn apart by his political opponents and quite a few people in the long grass with longer memories.
        On the tracker issue the Sunday Times made a good point recently. The government might engage in hand wringing about the big bad banks and the plight of variable rate customers but they won’t touch them as the money that’s being raked in makes the banks more attractive to a potential buyer down the line. The real danger for the banks is a new entrant to the market unburdened by legacy issues and therefore able to offer mortgages at rates closer to European norms. When that occurs we might be in a position to state that property prices have stabilised until then it might be prudent to hold off buying. The ordinary punter may be wise to let a new entrant to the mortgage market carry out the expensive due diligence. Why should punters walk where bankers fear to tread?

  15. oe1

    The real root of the unfairness is the variable mortgage holders in negative equity. With property price collapses by 70 per cent, they were sold a pup by an unregulated banking sector. IMO there should be a discount applied to these loans until such time they are no longer in negative equity. This will restore fairness and show culpability by the financial sector. Maybe it would limit future credit booms if penalty clauses exist for negative equity loans.

    With the first profits coming back into AIB making profits for 8 years, this issue is much more worthy than any other.

  16. Mike Lucey

    Young Irish voters will not get involved in current boring politics until a new brand of politician offers them direct democratic involvement via current technology, their iPhones and iPads being the means by which they can exercise their voice and be involved on an ongoing basis instead of giving over total control to banksters and their lapdog politicians for periods of 4 years at a time.

    I’m patiently waiting for the collapse of the current corrupt financial system and a return to the a solid proven system probably a crypto-gold/silver based system. The sooner this happens the quicker the world will be a fairer place when it comes to its citizens having some control over their financial matters.

  17. wideeye

    David, Why is there not one single mention of practically ZERO repossessions in this country? A situation unheard of anywhere else in the world. Ever. This is one of the biggest contributory factors to high SVRs (strategic defaulters – and don’t kid yourself, there are plenty – being subsidised by those the rest). I can only conclude this omission is deliberate. But WHY?

  18. A start in the right direction. Strip fractional reserve banking from the banks.

    As the article says, it is not prudent to leave the creation of money in the hands of a central bank even if under the direction of politicians.

    http://www.thedailybell.com/news-analysis/36220/Iceland-vs-Banksters/?uuid=6F800609-5056-9627-3C5071902B060BF2

  19. Deco

    [
    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.
    ]

    I disagree.

    I suspect that the savings rate has declined, because the starting wages for workers has dropped since the onset of the recent recession.

    Globalization is driving down wages. The quantity of NEETs increased in 2007/2008/2009 in Britain. And this drove down starting wages.

    This is a disaster for the housing market, though it is helping drive up stock market valuations, as a result of cheaper marginal labour in the economy. The “solution” that will be envisages will be state intervening in social housing so as to soak up the bottom of the market, and apply more pressure on the workers on the bottom rung of the ladder.

    We already see the institutional state pushing for that here. It is making matters worse. But it keeps the housing index from falling.

    • StephenKenny

      “The ‘solution’ that will be envisages will be state intervening in social housing so as to soak up the bottom of the market, and apply more pressure on the workers on the bottom rung of the ladder.”

      Of course there’s also the population density ‘solution’ – forcing people to live in smaller and smaller spaces. With only the existing population (i.e. people brought up in the country), that would be difficult as it’d be fighting against expectations and perceived ‘standards’. But introduce a net 300,000 a year from outside, and you have a huge pool of people who have no idea what to expect in the UK – they may even think 3 to a room is normal.

  20. michaelcoughlan

    Hi,

    You don’t seem to have considered what will happen if the bubble in assets and bonds blows up and interest rates skyrocket.

    pity.

    Michael.

  21. The biggest price the young pay is being prescripted and sent to war to die and be maimed. Wars are breaking out all over. The more control the money meisters lose over the economies as they print the economies to oblivion, the greater the hype for war.

    http://usawatchdog.com/wnw-185-iran-nuke-deal-falls-apart-will-fed-raise-interest-rates-economy-getting-worse/

  22. Pat Flannery

    “The nub of the problem is that the banks are losing money on tracker mortgages and they need to make this money back somewhere”. Wrong.

    This glaring falsehood is being widely repeated by the Irish media. It is a flat out lie originating with the banks’ PR people.

    Where do these media “experts” think the Irish banks got the money they loaned out as mortgages? From customer deposits? Of course not!

    The Irish banks got the money through SECURITIZATION. That is the key word that is missing from all Irish “expert” commentary on tracker mortgages, or any kind of Irish mortgage for that matter. The lack of Irish media understanding of how mortgage finance works is abysmal.

    The truth is that the “originating” banks are merely “servicing” the collateralized mortgage bundles they created and sold on the bond market. THAT is where they got the money! The banks merely “originated” the mortgages.

    As part of the “securitization” process they receive lucrative “loan servicing fees” on every securitized mortgage they originated, securitized and sold. That is the business they are in. They are not “lenders”, they are mere “servicers”.

    The Irish media “expert” commentators are either too lazy or too dumb to study up on all this. They just print whatever tripe the banks tell them.

    As for any residual liability the banks may have, each originating bank has a pre-agreed limited ‘first loss’ written into each collateralization agreement. It applies to defaults only! There is no residual bank liability for investor “yield”, which is combination of interest rate and investment.

    The component parts of a bond’s “yield” are its purchase price and its known or anticipated interest receipts. Each purchaser/holder in-due-course of a securitized mortgage (bond) calculates an acceptable yield based on these variables, which are continually being “discounted” in the mortgage security bond market. That’s what markets do.

    The “originating” Irish banks are no longer liable for any interest rate “losses”. It is time for the Irish media to stop repeating the Irish banks’ lies. That is a big part of the problem.

    • michaelcoughlan

      “The “originating” Irish banks are no longer liable for any interest rate “losses””

      Jesus H Christ. Not surprising thought.

  23. One of the reasons interest rates are so low is because they are manipulated by the BIS and Central banks.

    http://gata.org/node/15257

    “To recover its democracy each country will have to wage its own struggle. Satisfying as it might be, nuking Basel tonight wouldn’t really accomplish much. The bankers quickly would find themselves another clubhouse somewhere else, equip it with the most sophisticated computers and market-rigging programs, and be back in business in a week, with the trading room of the Federal Reserve Bank of New York picking up the slack in the interim — at least until some financial news organizations dared to attempt the sort of journalism they’ve long been leaving to Zero Hedge.”-Chris Powell

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