Annus horribilis
The list is long and depressing: severe jobs losses, pay cuts, falling property values, decimated stock prices, huge pension blackholes, tax increases and reduced services
A tsunami of bad news has swamped the hopes and dreams of many as wealth disappears in the spiralling global downturn
Wednesday December 31 2008
IT has been a year of doom and gloom on the personal finance front with our domestic banks coming close to collapse, stock markets going into freefall and a harsh Budget, to list just some of what happened.
Add in severe falls in investments and pension funds, and property prices falling like a stone, you could be forgiven for feeling very uncertain about the financial future.
The good news was that the European Central Bank slashed interest rates from 4.5pc in the summer to 2.5pc at present, with more to come.
Here is an overview of some of the main areas of action during the year.
Mortgages
The most graphic illustration of how the credit crunch is impacting on consumers came in the withdrawal from the market of tracker mortgages.
Trackers were all the rage in the past few years, as they offered good value and certainty to consumers.
When the credit crunch began in August 2007, it was possible to get tracker mortgages set at between 0.05pc and 1pc above the European Central Bank rate.
Now most lenders offer customers standard variable rate mortgages instead, and at a higher cost.
Most standard variables are around 1.5pc over the ECB rate, with some higher. Banks like standard variables because they can alter the rates whenever they choose.
But it is not just trackers that have been withdrawn -- discounted introductory rates for new buyers are also virtually gone. In fact, there are almost 40pc fewer mortgage products now on offer across the market, according to director of the Irish Mortgage Corporation, Frank Conway.
Lending criteria have also been tightened with banks now demanding deposits of up to 20pc.
Little wonder then that this year was when activity in the mortgage market hit a record low, with 30,000 fewer people taking out a home loan in the first nine months of the year.
Mortgage figures issued in November showed a steep decline in the number of people signing up for new mortgages, switching mortgages and buying investor properties.
In a record drop, €6bn less was drawn down in mortgage finance in the nine months to September.
Hundreds of thousands of houses are unsold, meanwhile, as another report showed excess supply pushed rents down to their lowest level in two years.
But there was good news for homeowners, especially those with trackers, after the European Central Bank cut interest rates three times this year. Most lenders also passed on the rate cuts to standard variable rate customers.
The ECB is also expected to cut rates again next year, analysts have concluded.
Pensions
In a year when there was not much cheer anywhere on the personal finance front, pension funds suffered badly.
The average private sector pension fund was down by a third this year, reflecting massive losses on stock markets.
And defined benefit pensions, once regarded as the Rolls Royces of pensions, were said by an internal Government memo to be nursing collective deficits of between €20bn and €30bn.
Some 250,000 people are members of private sector pension funds.
There were no such worries about pensions security for public sector workers who enjoy State guaranteed pensions worth around 30pc on top of their salaries, according to a recent academic study.
Banks
But it was not all bad news this year. Savers have and continue to do well as banks and building societies struggle to raise funds. Banks traditionally have three sources of funds -- the interbank market (where banks lend to each other), the European Central Bank and old-fashioned deposits.
Consumers with cash to invest found themselves being tempted with juicy rates of 6pc and higher for their savings as banks here exhausted the supply of money from the ECB and interbank money rates became too high.
However, consumers were not so sanguine about the safety of their savings at the end of the summer when the prospect of a run on a bank seemed like a real possibility.
This newspaper got word of long queues forming outside the doors of one of our smaller deposit takers in Cavan in September. So we dispatched a photographer.
The lensman could find no evidence of a run on the bank, but his presence outside the branch prompted the manager to come out and ask him what he wanted.
The photographer explained, only to be told. "No, there are no queues here today, but you should have been here yesterday."
That kind of panicked behaviour by people with money in banks and building societies forced the Government to announce a blanket State guarantee of what became seven institutions in September. The guarantee covers AIB, Bank of Ireland, Anglo Irish, Permanent TSB, EBS, Irish Nationwide and Postbank.
The guarantee stopped a run, but the recapitalisation of the banks still has to be sorted out.
Budget
The Budget in October proved to be a harsh one for working families as they will be hit for an average €2,000 from levies, charges and taxes.
A family earning €50,000 before tax will notice its spending power shrink significantly due to the income levy and a string of other charges.
The final cost for hard-pressed workers became clear after Finance Minister Brian Lenihan published the Finance Bill in November. The Government used the opportunity to try to deflect criticism that it hit the vulnerable in the Budget and targeted the wealthy with two major tax changes.
Mr Lenihan announced a 3pc levy on all incomes over €250,000 and closed off a loophole for tax exiles. Government sources see these changes as a shift in policy towards more taxation for the better-off.
But the Opposition said the income levy will mean a big reduction in take-home pay for all, hitting those on modest incomes hard.
The Finance Bill introduces or increases 17 taxes, Fine Gael's deputy leader Richard Bruton said. A typical family earning €50,000 will lose €500 from the new income levy, while the failure to index tax credits will cost the family €280.
Higher VAT charges are likely to cost €250, and the cut in the mortgage tax relief for non-first-time buyers will cost the family €300.
These charges, along with others, are likely to cost the family at least €2,000.
The Government attempted to deflect anger that it was relying on the old and the very young to dig the country out of a financial mess.
Finance Minister Brian Lenihan attempted to ease the ire of middle income earners by imposing the new 3pc income levy on high earners above €250,120. The extra 1pc will cost them almost €60m a year, bringing their total levy bill to €200m.
This will almost recover the €70m lost to the Exchequer when those on low incomes were exempted.
- Charlie Weston Personal Finance Editor
