Tuesday 16 January 2018

Home truths: 'Catch 22' rentals are not the first to suffer

Mark Keenan

Mark Keenan

Those Irish parents in their 30s and 40s who find themselves caught in the 'Catch 22' rental trap might justifiably feel very hard done by indeed.

In a country where society has considered home ownership an expected rite of passage prior to starting a family, thousands have already had their children and are still unable to buy a home because of lending restrictions.

They have ended up stranded and insecure in rental because the pace of increasing rent has left them unable to save deposits. The Catch 22 family are frustrated at, and fearful of, the insecurity that rental brings as landlords rack up the price every two years; or else cash in their chips and sell up their property as prices rise.

We have found ourselves in a society where a substantial number of city families can expect to move house (and often their children from schools) every couple of years while the cost of that roof overhead increases steadily in biannual increments.

Amidst the housing emergency, it might seem that acquiring a property is almost impossible for wage earners. But what we often forget is that it has never been easy for home buyers in Ireland.

Each and every generation has had its particular problems to wrestle with in order to get on that first step on the ladder. For couples, acquiring a first property has always been particularly difficult.

You might think "I wish I had bought a home seven years ago" - when prices were on the floor, reduced in some cases by 60pc thanks to the worst property crash in memory. But the reality was that very few professionals could get a mortgage at all in the five-year period right after the crash, no matter what value was on offer.

A mortgage famine was why prices were on the floor in the first place. The successful buyers who benefited in those years were those who could pay the full asking price with cash.

Go back another seven years and you run into the negative equity set - those couples who bought when both property prices and wages were at their highest and credit was at its most fecklessly fluid. Easy credit against a restricted supply of homes meant that they paid prices which were one third and more above today's levels.

Almost all of these buyers have been left in negative equity today, with their homes worth far less than they owe.

Not only that, but there's a very strong chance that one or both lost their jobs during the recession - just a few years after they bought that property. Those who had to get new jobs or held onto their positions through the recession years are also likely to have had some drastic salary cuts. Many have ended up stuck in a different trap - living in small starter apartments or very small houses with their children - unable to move to a larger property because they are saddled with a home which is worth far less than they owe.

Their household costs have also increased in accordance with having growing children. These couples likely live in a world in which every penny has to be watched in order to feed an outsized mortgage. If they bought an apartment during the boom years, they may also already be contending with inbuilt fire-safety issues that have cost owners in some blocks up to €20,000 each to rectify. Otherwise, they will be living in dread of similar faults being discovered in their blocks and the costs which may be incurred. Some have ended up renting anyway- renting out their small apartment to someone else and paying more to rent a family-sized home.

Another factor that has hit boom buyers hard is the lack of inflation since their purchase. In times past, wage and general inflation reduced the impact of mortgage payments as the years went on. With wages not much higher than when they purchased back in the day, their boom-era mortgage repayments have not been softened by inflation, except perhaps in comparison to rising rents.

Go back further again to the 1980s and early '90s and potential buyers were in an entirely different world of pain again - one in which banks again wouldn't lend - unless you had been saving steadily with them since school-leaving age over many years. This was the lending culture at the time: you needed to prove an ability to save hard from an early age if you were to be considered for a mortgage.

If you achieved the savings standard and got that mortgage, you were next contending with interest rates of between 11pc and 14pc through many of those years - something almost unimaginable at a time when rates have been below 5pc for most of the last decade. Some lenders pushed their rates up to as high as 19pc during the currency crisis of 1991. The result was that buyers were paying almost nothing but interest in vastly inflated mortgage repayments through most of the first years of ownership.

To make matters worse again, endowment mortgage products were all the rage. These offered homeowners the prospect of paying money into a pension-like fund. They were promised a big payoff at the end of their term which would clear their mortgage and pay them a nice, fat lump sum when the term ended. Unfortunately, most of these endowments flopped disastrously and homeowners were left with huge shortfalls in repayments for their homes. It didn't help that in the 1980s, unemployment touched 20pc. While today's Catch 22ers watch their rents rise, and await climate change in the market only a steep increase in supply can bring, they're not the first generation to pull their hair out on the housing front.

Indo Property

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