Read Online What If Ireland Defaults? by Brian Lucey - Free Book Online Page B

budgets arising from the income and wealth effects of increasing costs of mortgage financing and the continued deterioration in asset values in the Irish property sector are immense. Per the latest data available to us, in Quarter 3 of 2011 there were 773,420 outstanding mortgages in Ireland. Of these, 62,970 mortgages were in arrears more than 90 days, up 55.6 per cent on same period a year ago. In addition, 36,376 mortgages were ‘restructured’ but are currently ‘performing’ – in other words, paying at least some interest. Adding together all mortgages in arrears and repossessions, plus those mortgages that were restructured but are not in arrears yet, 100,230 mortgages (13 per cent of the total), amounting to €18.3 billion (or 16 per cent of the total outstanding mortgage amount), are currently at risk of default, are defaulting or have defaulted. Given the trend to date, we can expect that by the end of 2011 there will be some 107,000–110,000 mortgages in distress in Ireland. By the end of 2012 this number may rise to over 161,000 or some 21 per cent of the total mortgage pool in the country. When considered in the light of demographic distribution and vintages, mortgages that are likely to be in arrears around the end of 2012/the beginning of 2013 can account for up to 30 per cent of the total value of mortgages outstanding. This is a simple corollary of the fact that the mortgage crisis is now impacting most severely families in their 30s and 40s, with more recent and, thus, larger mortgages signed around the peak of the property bubble. These households are facing three pressures in today’s environment.
    Firstly, they are experiencing above-average unemployment and income pressures. Per the Quarterly National Household Survey, in Quarter 2 of 2011, the unemployment rate for persons aged 25–34 was 16.5 per cent and the unemployment rate for those aged 35–44 was 12.4 per cent; both well ahead of the 8.95 per cent average unemployment rate for older households. By virtue of being more concentrated in the middle class earning categories, they are also facing higher tax burdens than their lower earning younger and more asset rich older counterparts.
    Secondly, they are facing higher costs of living, further depressing their capacity to repay these mortgages. In September 2011, the prices of petrol and diesel were some 15 per cent above their levels a year previously, and bus fares were up 10.8 per cent. Since the time these families bought their houses (circa 2005–2007), primary and secondary education costs increased 21–22 per cent, and third level education costs rose 32 per cent. On average, larger families require greater health spending, the cost of which rose 16 per cent above 2005–2007 levels. The three categories of costs described above comprise circa 20 per cent of the total household budget for an average Irish household and above that for mid-aged households with children.
    Thirdly, as their disposable incomes shrink and mortgage costs rise (mortgage-related interest costs are up 17.2 per cent year on year and 11 per cent on 2006), the very same households that are hardest hit by the crisis are also missing vital years for generating savings for their old age pension provisions and the most active years for entrepreneurship and investment.
    In short, courtesy of the crisis and the government policy responses to it to date, Ireland already has a ‘lost generation’ – the most economically, socially and culturally productive one. And this generation is now at the forefront of the largest homemade crisis we are facing – the crisis of mortgage defaults and personal bankruptcies. Against this backdrop, the forthcoming Personal Bankruptcies Bill should form a cornerstone of the government’s policy.
    Bringing household debt to sustainable (growth-supportive) levels in the case of Ireland implies a write-down of circa €40–50