Heavy burden: working full time but still in arrears

A couple of weeks back a Central Bank analyst called Yvonne McCarthy published an illuminating piece of research that revealed that the vast majority of people in mortgage arrears in Ireland can't make ends meets despite going to work every day.

The research exposed the myth that unemployment and negative equity are the sole drivers of a mortgage crisis that has left more than 100,000 in arrears. It painted a picture of many thousands of people who work long hours but still don’t make enough to cover the cost of home loans taken out at the height of the boom.

“While a significant portion of borrowers in arrears are still in employment, many of them have experienced a deterioration in affordability,” McCarthy said. “The results show that the current mortgage crisis, and efforts to prevent a further deterioration, requires more than simply targeting overall unemployment or negative equity. Rather, such efforts should also aim to strengthen labour market conditions and job security as well as targeting long-term unemployment.”

So if unemployment is not to blame for this ongoing crisis, what is? It is easy to point the finger at reckless borrowers or reckless lenders, but, when you look at the numbers, it seems clear that this Government and the previous one shoulder the biggest portion of blame for widespread “deterioration in affordability”.

The pain started in October 2008. After that first slash-and-burn budget, a public-sector worker earning a gross salary of €30,000 saw her take-home pay fall by €133 a month – or almost €1,600 a year – through a combination of increased taxes and pension levies. The take-home pay of a colleague on €70,000 fell by €316 a month, or €3,792 a year. A private-sector worker with a salary of €50,000 saw his pay fall by €132 each month, while those in the private-sector on salaries of €90,000 saw their monthly net pay fall by €270.

But things were only just starting. The supplementary budget of April 2009 cut pay further, leaving the public-sector worker on €30,000, with €175 less to spend each month than they had 12 months earlier, while their better-paid colleague was down €500 a month – 12 per cent of their income. The private-sector worker on €50,000 was worse off by €251 a month, while the one on €90,000 was worse off by €550 each month once all taxes, levies and PRSI were paid.

So within six months, two savage budgets had cut the pay of a public sector worker on €30,000 by €2,100 while their colleague on €70,000 had seen their annual take-home pay fall €6,000 – or over five monthly mortgage payments on an average sized tracker.

The end of 2009

Those in the public sector were

hit again at the end of 2009, when then minister for finance Brian Lenihan imposed a 5 per cent cut on the first €30,000 of their salaries and 7.5 per cent on the next €40,000. At a stroke, this left the lower-paid public-sector worker worse off by another €125 a month, while the higher-paid one was down a further €375.

Then children’s allowance was cut by €16 per child per month in a move that took €384 from the annual income of a two-adult, two-child household. All told, then, the public sector worker who had bought a house at the height of the boom while on a salary of €70,000 a year was earning just shy of €11,000 less each than they were. That is almost an entire year’s mortgage payments.

And we were not even halfway through the times of austerity.

The last Fianna Fáil budget, at the end of 2010, took more money from middle- income families, as a couple with two children and a household income of €75,000 saw their net annual income fall by €1,800, with a further €250 going in children's allowance payments.

The Fine Gael-Labour Government's first budget, in 2011, steered clear of more tax hikes but was still harsh. The weekly PRSI allowance for workers was abolished, costing workers about €264 a year, while the household charge of €100 was introduced. The following year it was replaced by property tax, which will see the average Irish household worse off by about €300 a year. Motor taxes went up as did student registration fees and Dirt tax. The last budget spared many people except for the young and unemployed, the pregnant, elderly and sick, who were all hit hard.

Health insurance
Other changes that had a negative impact on the disposable income of the working poor included those to health insurance. A decision to charge private patients the full whack for beds in public hospitals put enormous pressure on health insurance premiums, while changes to tax relief added significantly to the cost. In 2007 the average price of a health insurance premium was about €700. Today it is about €1,100, so household with two adults and two children with fairly standard insurance have to find about €1,000 a year more to cover the cost. VAT has also increased from 21 per cent to 23 per cent, a move that cost households around €500 each year.

Adding up these numbers, a public- sector worker with health insurance who had bought her own home with a salary of €70,000 in 2006, just before the bubble popped, has seen her income slashed by about €15,000 as a direct consequence of cuts imposed by successive governments, while someone in the private sector has seen his income fall by slightly less – or slightly more if he worked in a company that imposed wage cuts, as many did.

And despite all the cuts, Ireland remains among the most expensive countries in the euro zone, with Irish consumers paying 14 per cent more than average for a range of essential goods and services, according to a Forfás report sent to Cabinet late last month.

While Ireland is no longer the most expensive country in the single-currency area, having dropped two places since 2008, it is still very expensive.

The European Central Bank has come in for some well-deserved criticism for not allowing Ireland to burn the unsecured bondholders at the height of the financial crisis, but, ironically, it is that severe institution that has kept many thousands of Irish homeowners afloat in recent years.

Nearly 400,0000 people – or more than 60 per cent of the total home-loan market – are on tracker mortgages, and they have benefited from five ECB rate reductions in the past two years. A person with a tracker mortgage of €300,000 will pay about €225 a month less than they were paying in autumn 2011 thanks to ECB financial policies – that is an annual net saving of €2,700.

Were it not for that, how many more of us would be in the poor house?