Home Truths: A homeowner's absent friend
Published 18/09/2015 | 02:30
Back in the day, family members accused me of being "mad" for buying a terrace house of 800 sq ft in Dublin 14 for €55,000. It was "outrageously overpriced" they opined as they tried in vain to save me from myself.
That was in 1997 - almost 20 years ago. The mortgage, which would be paid off in two years if I hadn't traded up, stood at the equivalent of €440 per month. Every home owner over a certain age has one of these "how little I paid" stories to tell.
What it shows is that general inflation has historically been the homebuyer's friend in Ireland - once the home was bought and a mortgage held. By general inflation I mean the sort of ongoing, plodding, steady, widespread rise in the price of everything from milk to crisps to pints to wages to property.
The dual allies of time and assured inflation have long tended to reduce the impact and real worth of Irish home loans as the years progressed, not only because of the repayments made, but because of the continued steady rise in property values and in salary. Even if you held the same job for the whole mortgage term, you'd get pay rises to keep you in line with inflation.
Of course there was never a divine promise made that prices and wages would always continue to rise and shrink wrap your mortgage, but it tended to happen and we got used to it. Plodding general inflation was always one of the reasons why property has tended to be a good investment in the long term - whatever about the medium term price fluctuation cycles within the market itself. But things have been very different these last few years.
First off, wages in real terms have probably reduced in many sectors here in Ireland - as they have also been doing in the USA and in the UK. This is a global 'first world' trend and may have something to do with generally surging economies in former 'second world' blocs like Eastern Europe, China, India and parts of South America. They're getting more of the global economic pie today thanks to better education, increased economic development within these economies and their growing technology sectors.
Their citizens are also getting more of the pie inside first world economies - much like the Irish did years ago when they worked for less money in the USA and Britain - but money worth relatively more back home where much of it was sent.
The influx across borders has definitely helped to keep wages down in first world countries like Ireland.
Consider too that the bounce back from the great crash of 2008 coupled with our own massive property crash, has been a strange one. There has been little home construction because prices have not yet increased by enough to justify it. At the same time, through the last seven years the regular taxpayer has seen an increase in tax burdens and costs in the absence of significant wage increases. There has been a continued climate of low interest rates which has enabled the rich to borrow (the rest of us couldn't) and invest that cash to get richer. The result is the wealth pool is now split more unevenly than it was. Fewer people control more wealth and more people are generally poorer in real terms.
In this strange new world an Irish home owner also has more taxes and utilities to pay than he did back when I bought that house in 1999 - now there are bin collection charges, property taxes, water charges and the Universal Social Charge. These are coupled with additional technology-linked utilities which didn't exist formerly - mobile phone bills, expensive pay tv and broadband for example. So while the price of some things - property included - have gone up recently, the cost of food, clothes and almost everything else has remained reasonably stable. There has been no upward pressure on wages as a result and the pay packets of many have continued to shrink in real terms.
In the absence of that old fashioned plodding inflation (especially of wages) that we had long become used to, the person who bought a home some years ago has lost out on that 'shrinkage' effect to their mortgage burden, as previous generations did.
In fact, many of those still in negative equity will have been experiencing the exact opposite effect. Their mortgage loans now loom much larger by impact on their lives than they did a decade ago.
The Eurozone and Britain now appear to be moving towards deflation, a sustained period of which means that the payments required to service a mortgage begin to represent a larger amount of purchasing power than they did when the mortgage was first incurred.
Alongside the Central Bank's new lending measures, real wage stasis may be a reason why prices in middle estates in Dublin are now shrinking while smaller home values remain strong. Real wages, real spending power and deflation could have more impact on the property market going forward than we might expect.