OPINION:It would be facile to dismiss this latest blow as negativity but a change of mindset is sorely needed, writes RAY KINSELLA
THE INCREASE of between a quarter and almost a half of a percentage point in Bank of Ireland’s variable rate mortgages is not a one-off. It follows rises earlier this year by Permanent TSB and by the EBS.
The banks and mortgage lenders have their own narrative on these – and future – rises. The rise in market-related interest rates (as opposed to the European Central Bank rates); the squeezing of “margins” which impact directly on their still-vulnerable balance sheets, together with the need to roll over a very high dependence on external funding – all of these factors are impelling the banks to increase rates.
We should have started from a different place – but that’s another story. Still, it is difficult not to feel the pain that these developments will bring into homes across the country.
Any increase in borrowing costs adds to the funding burden of both businesses and households. AIB’s recent results pointing to very high levels of impaired loans, highlights what is happening to the business sector and to the economy more generally. This is contributing, directly and indirectly, to the continued rise in unemployment.
The rise in mortgage rates compounds these difficulties.
Firstly, rising unemployment (standing at 13.5 per cent) in homes across the country makes it more difficult to service mortgages at their existing rates. Secondly, the inevitability of increases in mortgage rates translates directly into pressure on household budgets, on domestic consumption and, most important of all, on morale.
It is facile to dismiss this perspective as “negativity”. A change in sentiment and mindset requires a change in policy instead of, as is being forecast for the budget, more of the same, which is clearly not working.
In an economy that is simply not functioning, this latest round of mortgage rate increases represents another twist of the knife which is draining the life out of the economy and putting families under enormous pressure. Where will we be by Christmas? Notwithstanding the battering sustained by the Catholic Church in recent years, Ireland is still primarily a Christian country. Christmas is special. In truth, Christmas is the defining backdrop against which to assess the realities now impacting on our country.
What we do know about the homes in which Christmas will be celebrated this year is this: more than half will be in negative equity. But the real killer is the psychological burden of continuing to service a mortgage which is now worth significantly less than its purchase price.
There are well over 30,000 homes where the mortgage is 90 days in arrears, an increase of 13 per cent since the end of last year. That number too will have risen, as unemployment rises and becomes entrenched. When the 90-day period is breached, red flags begin to wave.
Mortgage lenders, together with the Financial Regulator and the Irish Bankers Federation are pushing a wide range of schemes to keep loans “active”. But at some stage, home owners, crippled by unemployment, and the mortgage lender, run out of options. The number of homes repossessed will rise.
Behind the hall doors, close on 500,000 people will be on the Live Register, with all that means at Christmas time.
For those fortunate enough to have a job, this Christmas will be more about fears than peace or goodwill. Christmas will be the cusp of a New Year which, given our present economic trajectory, will see further falls in employment and a corresponding rise in unemployment.
There is this, though. Christmas has always signified how the darkest time is transformed by hope and by the reality of a new beginning. We need a leadership that understands and nurtures this hope. Very soon the whole budgetary process will kick into place – which is the whole point about writing this now. We need to start lighting candles instead of cursing the recession. Research by Alan Grey points to the potential for a more competitive and flexible Ireland to benefit from foreign direct investment.
This will take time. EU governments need to get real about the pace of “adjustment” – an issue which has sparked off a major debate in the Financial Times. Reducing a deficit of over 14 per cent, and which is still growing, to 3 per cent of GDP by 2014 isn’t going to happen – even though the budget “strategy” continues to be based on this target.
Equally, down from this rarefied level, there is an enormous amount that could be done in our parish councils and communities to bring together those with no jobs but good ideas with businesses that have “the knowledge” and many of whom are branches of multiples with expert systems and the capability for advising and mentoring – in a quiet no-fuss manner
Yes, there is a great deal that could be done. We need to start lighting these candles now – for many it will be too late come Christmas.
Prof Ray Kinsella is on the faculty of the school of business and law at the Michael Smurfit Graduate School of Business, and author of Rebuilding Trust in Banking(www.veritas.ie)