Sunday 21 January 2018

Negative equity? Who cares? The real concern for most people is negative income

Many are using credit just to pay for the bare essentials, writes Frank Conway

THERE can be little doubt that negative equity is a problem for many, especially those who purchased their homes at the height of the property market.

However, unless one must sell their home in a hurry, the issue has little immediate consequence.

What is likely to be of far greater consequence is the issue of negative income.

That's right, negative income. It is a silent financial cancer, eating away at the financial stability of many, but it rarely makes the national headlines because it is so difficult to track.

Negative income is simple to explain but near impossible to escape for those experiencing it.

Negative income can happen to almost anyone caught between falling income and the day-to-day costs of living and raising a family.

Negative income can have devastating consequences, not just financial but also social as the financial pressures become divisive. So, what is negative income and who can be affected by it?

Here in Ireland, the phenomenon will be relatively new although its seeds have been around for a long time.

In fact, it could be argued that we have always had some form of negative income but it is only coming into its own since the onset of the current economic recession and the fall in wages experienced by hundreds of thousands of people.

The simplest explanation for negative income is when one is forced, for any number of reasons, including redundancy, ill health or divorce, to use debt as a supplementary source of income to pay day-to-day living expenses, including food and fuel.

It is not just about borrowing and repaying borrowings with a healthy source of income.

Rather, it's a more unfortunate situation where, after all income has been used up to pay expenses, the only means available to pay for essentials such as food is by use of credit. This is when one has reached the point of negative income.

Negative income is likely to grow as a phenomenon here in Ireland in the months and years ahead as economic conditions change.

In 2009, a significant fall in mortgage repayments between October 2008 and mid-2009 softened a consistent and sizeable reduction to wages here, especially in some private-sector industries.

Mortgage repayments have remained low, which has eased much financial pressure that would otherwise have been overbearing for many.

However, the likelihood of a slow economic recovery in the wider eurozone will bring increasing pressures for interest rates to increase.

This will inevitably bring higher mortgage costs, which will be passed along to those with variable mortgages.

Ireland has traditionally relied heavily on variable-rate mortgages to fund the purchase of homes and other properties.

As a country, we are highly exposed to movements in the European Central Bank base-lending rate.

A quarter-point increase in interest rates translates to about a 3pc increase in mortgage repayments.

On a €200,000 mortgage, this translates to roughly an extra €326 annually. If rates rise by 1pc or even 2pc, then homeowners could be facing increases costing them several thousand euro extra a year.

In other jurisdictions, the phenomenon of negative income comes in the form of short-term revolving credit facilities being used to fund many day-to-day living expenses.

This can include credit being used to purchase food, fuel or medical costs. Their use is not one of convenience but of necessity.

It is a question of lifeline as opposed to a lifestyle choice.

For consumers who experience negative income, their decision to use facilities which result in negative income is one they are unlikely to have taken lightly.

Using those resources can often represent a financial last resort in order to survive.

Keeping ones head above water becomes far more important than the monetary cost of using such options.

In a broader context, those lucky enough not to experience negative income need to understand the reasons for such options being used. Personal biases regarding such options should be put side.

Nationally, there are a number of significant challenges that we face, many of which now seem unavoidable.

Mortgage repayment increases are widely predicted to happen at some point during 2010, insurance premium increases have already been taking place at a steady pace.

Reductions to national wages are already being pushed through at both public and private level and the prospect of increases to various taxes and levies never goes away.

There will be many pressures on stretched household budgets.

Assuming that unsecured creditors do not lose their appetite for high-risk, high-margin lending, the prospect of negative income grows louder by the day.



  • Frank Conway is a director with Irish Mortgage Corporation.


Irish Independent

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