Pandemic blues: Is the worst yet to come financially?

It has had an impact like no other. Hundreds of thousands of people have been out of work for some time, many since March 2020. Hotels are closed, hairdressers shut, construction sites abandoned, planes grounded; and yet, Irish households have – thus far at least – largely weathered the storm.

Property prices continue to rise, incomes have fallen but not by much and, not only that, we’re saving more than ever before.

So as the months tick by and vaccinations increase, one could expect that the impact of the pandemic on our personal finances will subside like the wave of infection is expected to do so. But is this really going to be the case? Or could the greatest challenge be in front of us?

The last crisis

The last time we faced such a crisis was in the aftermath of the financial crisis of 2008, which brought the Celtic Tiger years to a shuddering close. The big difference this time is that households are in much better financial shape.

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AIB recently disclosed that it is now holding more than €80 billion in deposits

In the first quarter of 2008 for example, household debt stood at more than €200 billion; in the first quarter of 2020, however, it was just more than €130 billion.

And when looked at by disposable income, you can see what a weight this debt was on households across the State during that time. In the first quarter of 2008, the ratio of household debt to disposable income was more than 200 per cent; in the same period last year, it was just over 100 per cent.

At the same time, Irish households have been saving like never before; while some of that may be due to a fear over the future, it is also because people's lives have effectively been put on hold. AIB recently disclosed that it is now holding more than €80 billion in deposits – in just one bank! This means that households are well placed to cope with some turbulence.

Pandemic subsidies

The main reason the financial fallout has been so limited, thus far at least, is down to State wage subsidies.

“The impact hasn’t been as bad as most have expected for the economy overall; this is mainly because the Government has done a good job in filling the gap,” says Dermot O’Leary, chief economist with Goodbody.

Subsidies such as the pandemic unemployment payment (PUP), which is paid at a rate of up to €350 a week, as well as the Employment Wage Subsidy Scheme and other subsidies to business owners are keeping households on track.

Karl Cronin, regional manager with north Connacht and Ulster Money Advice & Budgeting Service (MABS), says these payments have given a "certain degree of stability in a household". It is backed up by statistics. A recent report from the Central Bank and the CSO found that gross income fell by just 1.7 per cent in the second quarter of 2020 when arguably the strictest restrictions were in place.

Without such subsidies, the household income of those who are less well off would have fallen by between 18 and 30 per cent, while those in the top income bracket would have seen their incomes dip 7.7 per cent.

Debt issues

The fact that Irish households have deleveraged in recent years also puts them in a better position to deal with a drop in income. According to Cronin, problems with debt have not become a big issue over the course of the pandemic.

On the mortgage front, banks initially granted about 86,000 payment breaks, for those who ran into difficulty repaying their loan due to the pandemic. However, most of these have now been resolved. Back in December, Brian Hayes, the chief of bank lobby group Banking & Payments Federation Ireland, said that customer requests for support had fallen to "extremely low levels", with the "vast majority" of customers back on full repayments.

Bank of Ireland meanwhile, in its recent annual results, said the outcome of such breaks has been "more positive than expected", with 94 per cent concluded, and only about 4 per cent migrating into "new" arrears status.

On the rental front, John-Mark McCafferty, chief executive of Threshold, which supports those in housing difficulties, says that the introduction of the PUP has also helped those in the rental sector. As a result, the agency hasn't seen a significant increase in problems due to the pandemic. Another factor has been that the availability of rent supplements, such as the Housing Assistance Payment scheme, which have become easier to access through Department of Social Protection.

Is it a temporary or permanent cut in rent? Is it understood as a reduction in rent, or rent deferral?

“I am slightly confounded because the people who are most likely to rent are those who are more likely to be in jobs most affected by restrictions,” he notes.

However, what we have seen to date, may end up being only half of the story. “It’s too early to say,” he says, “we’re at the beginning of this because it will take a while to play out”.

What might happen next

McCafferty’s fear is that informal arrangements, which may have been struck during the pandemic – such as reduced rent – may unravel if and when things start to return to some resemblance of normality.

“Is it a temporary or permanent cut in rent? Is it understood as a reduction in rent, or rent deferral? If you ask a landlord or tenant, you might get different stories: some tenants might have misunderstanding about what it is,” he says.

This is particularly an issue when it comes to properties in rent-pressure zones, which are subject to caps on annual rent increases of 4 per cent. If a landlord drops the rent temporarily, they may wish to keep this informal, as it would substantially affect their ability to increase the rent if the market recovers once the pandemic eases. But the tenant may not be aware of this.

“Misunderstandings and disputes will probably arise as we come out of this because of the informality of those arrangements,” says McCafferty.

And it’s a similar story on the debt side, with Cronin pointing to considerable uncertainty. “There’s a lot of anxiety about what the future holds,” he says, “it’s about watching and waiting for now”.

Uncertain outlook

Indeed for O’Leary, the biggest challenge may yet be in front of us, as we hope for a return to normality for the labour market. As famed investor Warren Buffet once said, “Only when the tide goes out do you discover who’s been swimming naked”, and this may become apparent as the State gradually withdraws its incentives.

When the support goes, “we’ll only know then what businesses are viable”, says O’Leary. He points to two key issues that might have longer-term effects. Firstly, structural changes such as increased working from home may mean less demand for such services as retail/food in the city centre. “And the second one, and it’s more difficult to get a handle on, is what businesses are going to be actually financially viable.”

He says Government policy is going to be crucial in getting the economy back on the road to recovery, and incentives will be needed for businesses to reopen, and training grants for those whose jobs don’t come back.

But as yet, there is no sign of a plan for reopening, as Ireland persists with one of the strictest lockdowns in Europe. “And the longer we remain restricted the more damage it does,” says O’Leary.