Inside the world of business

Buy-to-let info key to mortgage stats

THE LATEST Central Bank figures show yet again the growing crisis in the mortgage market as a further 7,207 home loans fell into arrears of 90 days or more between June and September.

Arrears on the country’s 773,420 mortgages (covering debt of €114.4 billion) on principal dwelling houses rose from 7.2 per cent to 8.1 per cent over that time.

Including mortgages not in arrears that had been restructured the total rose to 99,346 or almost 13 per cent of mortgages. These figures don’t include arrears on buy-to-let mortgages, but the Central Bank published more detail with the latest quarterly data for buy-to-let mortgages at the four remaining guaranteed banks – AIB, Bank of Ireland, Irish Life and Permanent and EBS.

Its report showed that there were 82,300 buy-to-let mortgages with outstanding debts of €19.6 billion at these four banks.

It is interesting to note that the level of arrears on the buy-to-let mortgages, at 6.4 per cent, was lower than home loans. Some 51 per cent of these mortgages were in negative equity – the loans are higher than the properties’ value, while 4.3 per cent were both in negative equity and in arrears.

The report shows that even if borrowers are in negative equity, they are for the most part still making their repayments. Adding the buy-to-let loans at the non-guaranteed banks changes the picture significantly.

Credit rating agency Moody’s releases regular figures for arrears across €53 billion of “prime” residential mortgages supporting bonds sold to investors by various lenders. Average arrears in this pool of loans tend to be higher than in the Central Bank’s figures.

For example, arrears of 90 days or more stood at 8.8 per cent at the end of July on these loans.

The gap in the data that needs to be filled is the scale of the distress on buy-to-let mortgages at the foreign-owned banks in Ireland such as Ulster Bank, Bank of Scotland (Ireland) and KBC, and at Irish Nationwide which wasn’t included in the Central Bank stats.

VAT hike to raise ire of 'fancy' breadmakers

VAT MOVES in mysterious ways, as Ireland’s bagel, brioche and croissant suppliers and retailers will testify. They’re in dispute with the Revenue Commissioners about the rate that applies to certain bread-like but not bready enough bakery products, including onion bread, garlic bread and crispbread – all the “fun” breads.

The revenue says it has issued a “clarification” notice of its position of VAT on bakery products – a clarification that essentially means that certain baked goods once widely regarded as zero-rated bread products will now be liable for the 13.5 per cent reduced rate of VAT.

According to VAT legislation, bread is defined as a product manufactured by baking dough composed of cereal flour, yeast, salt, malt extract, milk, water, gluten, fat, sugar (or honey), bread improver and dried fruit. There’s a 2 per cent limit on the amount of fat, sugar and bread improver that can be used, and a 10 per cent limit on dried fruit. This makes sense, in a way, as if you bulk up the sugar in a bread recipe, and add an egg or two, it turns into something much more exciting. It turns into a cake. (Here’s your 13.5 per cent.)

In 1979, when answering a query on bread rolls, Revenue appeared to allow a fat content of up to 6 per cent – a generosity it has now rescinded.

Clashing interpretations of VAT law are not unique to Ireland. Marks Spencer notoriously spent 13 years fighting to have its chocolate-covered teacakes identified as cakes, which in the UK are free of VAT (as are bagels, incidentally), rather than standard-rated biscuits, which is what UK tax officials regarded them to be. Several court cases – taken as high as the European Court of Justice – resulted in victory for MS and it was refunded £3.5 million.

Here, biscuits even partially covered with chocolate are standard-rated, meaning they’re scheduled to go up in price as a result of the increase in the standard rate of VAT from 21 to 23 per cent confirmed in the Government’s budget documents. But non-chocolate covered biscuits and chocolate chip biscuits are only liable for the reduced rate.

And in further evidence that Ireland’s tax system favours a return to the good old days when bread meant sliced pan and none of your fancy bagels, thank you very much, its online guide to VAT also specifies that while cakes made of ice-cream are standard-rated, baked alaska and pavlova qualify for the reduced rate – handy to know if you run a company specialising in 1970s desserts.

Contagion is catching among Europe's banks

CONTAGION IS a word that has passed into common usage since the onset of the euro zone crisis. To date it has mostly been used to refer to the spread of the crisis between nations, which has spread across the continent from the initial PIIGS (Portugal, Italy, Ireland, Greece and Spain) or periphery to so called “core” members, such as France and Austria which are now under scrutiny.

But largely out of sight the crisis has spread to the banking sector and inevitably is showing signs of pushing the wider European economy back into recession. A rash of indicators are showing a trend line since the beginning of this year that looks remarkably similar to that of 2008.

The Financial Times analysis of inter-bank lending by the four largest British banks should sound alarm bells amongst Europe’s leaders. Their lending to banks in the periphery fell by 24 per cent during the quarter. The sharpest falls were in lending to Greek and Spanish banks, but the British institutions also started to pull back lending to their Italian counterparts over the summer.

While Irish banks have been nursed along on funding from European and Irish central banks since late 2008, difficulties have now spread to banks right across Europe. With banks struggling to fund themselves it is only a matter of time before businesses feel a renewed credit crunch.

The window for political action is closing rapidly.

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