Irish Mortgage Brokers Blog

What a fascinating clip from a man who has embraced the idea of conflicts in visions being at the root of many issues in human life. This is philosophy at its most practical. Enjoy!

What if there is a way that we could

1. Create Jobs?
2. Do it without seeking Government grants or subsidies?
3. Give people a chance to have a local say in their local future?
4. Allow people to invest and make tax free gains in the future?
5. Create funding for businesses that doesn’t rely upon banks? Thereby removing our reliance upon  them   for SME’s?
6. Develop businesses that are not indebted from the outset but instead, which have ‘equity partners’ on an even keel with the entrepreneur?
7. Turn Ireland into a genuine ‘Silicon Valley’ of Europe when it comes to start ups? And that would release millions in start up funding without an up front cost to the state?

One way to do this is via Local Investment Opportunity Networks (LIONs)

They are a combination of ‘Dragons Den’ style finance, MicroFinance , Group/Crowd Sourcing, and Islamic Finance , taking different positive aspects of each.

From Dragons Den you get the vetting process, MicroFinance and Group Sourcing are the funding approach, and Sharia’a compliant finance offers the investment method - which is an equity stake rather than the creation of debt (recent finance bill specifically supporting Islamic investment – it would also open this brand of investment to the 40,000 Muslims in Ireland).

A simple outline is as follows: Every parish or otherwise formed locality in Ireland will be given a chance to start an investment club that up to 500 people can join, the commitment in joining is that they will pay €101.00 per month in after tax money into the common fund. With all but €1 going toward the fund (the €1 goes towards the platform provision mentioned later)

Then, as a group they have a pool of up to €50,000 per month to invest in local businesses, people who want to start a company in that community can then apply to the group for funding. The group will determine what projects obtain funding and in turn they take an equity stake in the project.

The LION would choose an investment committee from amongst it’s own members, as elected representatives of the group fund they would vet applications and determine which applications to the fund should be underwritten.

The LION can also decide that their community needs (for instance) a crèche and thereby tender for an operator with the LION providing the start up funding.

Effectively, it gives local people a say in their own local future and allows business to form without needing government assistance or putting concentrated risk onto the person starting the company.

Equally, it removes banks from the funding process and if an entrepreneur fails they don’t do so ending up in debt that would prevent them from trying to start a company again in the future.

Irish people are saving aggressively, having tripled our savings rate in the last three years . Much of our investment ends up overseas via the stock and fixed income markets, this is acceptable, but at least some savings could remain and be invested in the country by people who want to see a real benefit in their own locality.

If the investment is made with post tax income there is no exchequer loss in the process, at the same time, using a tax break on profits approach (as they do with ROTH IRA’s in the USA), any future capital gains could be waived, and in that respect there is a future waiver for the investment rather than a tax deferral as with other expenditures.

People need hope, communities need businesses and jobs, bank funding is farcical and looking for government funding support could not come at a worse time, instead, Irish people need to take control of their own future and this facilitates this view.

The only work that would need to be done from a government perspective is to provide an online platform that facilitates the clubs/groups and keeps them in line with SI 60 (which covers MiFID  – Markets in Financial Instruments Directive, a pan European law). The development of the platform need only cover reporting requirements, so the state need only act as a facilitator on the compliance aspects of the programme which would otherwise be too costly for single funds to run - due to requiring a full time compliance officer etc.

If we had a chance at fixing our own problems I believe we’d likely do a better job than the Government can do with a top down approach to create jobs, the unrealised potential in this country is huge, and we can turn savings into investment.

How can savings equal investment?

Saving (S) is equal to your disposable income (YD) minus consumption (C)

S=YD-C so what you don’t consume you save. Where does Your Disposable income come from?

It’s YD=Y-T, total income minus taxes. Perhaps it would have been better to say that savings is equal to income minus  taxes minus consumption.

S = Y-T-C

Where would be be without the state? Public saving is equal to taxes (net of transfers) minus government spending, (T-G).

When G>T, government runs a deficit, when G<T, we have a surplus.

Production in a closed equilibrium system is equal to demand, which is the sum of consumption, government expenditure, and investment. (we’re leaving out imports exports for now)

Y = C+I+G

Take taxes from both sides, move consumption to the RHS:

Y-T-C = I + G-T

Now slot in your savings identity, you have

S = I + G-T.

Or

I = S+(T-G),

This says that equilibrium in the goods market requires that investment is equal to saving–the sum of private and public saving.

Imagine an economy with 1 person in it. This one person has essentially the same investment and saving decision. The macroeconomy is one thing, though composed of millions of parts. So, in a closed system in equilibrium I=S.

Hat tip to Stephen Kinsella who helped me join the dots (as in did all the actual work!)

This will appeal to the Malthusians (and in particular the commodity bulls!), an interesting take on logarithms as a tool for interpreting the world around us.

This panel discussion from the Davos Annual Meeting is a ‘must see’! I hope you enjoy it as much as we did.

We have seen a growing trend in our brokerage of people getting mortgage approvals (mainly first time buyers) and not drawing down, this might indicate some pent up demand in housing - which if it comes will be regular houses as opposed to apartments - or it indicates fear of buying in general.

The thing that is pervasive is the ‘price’ of housing, and the idea is to wait until we reach the bottom. That is a perfectly rational concept, and when you are not purchasing over a long term then the price now (we’ll take from financial market vernacular and call it the ’spot price’ of housing) is the main thing to focus on.

However, that is only one part of the ‘price’ because the majority of new buyers are not buying for cash. The other price is the price of money, the financing costs. We indicated in our annual outlook that banks would, in 2011 alone, increase rates by a further 100bps or 1%, that any bank which isn’t government owned will have variable rates in the region of 5% come the end of the year.

So what does that mean? If you believe in another 10% price drop then do the calculations, or whatever percentage drop you want to use, the proxy is really down to your own belief of where the bottom is or may be. We’ll take a look at a further 10% in a Dublin market (for no reason other than that we are familiar with that market).

A house that is costing €250,000 today falls - in line with the assumption - by 10%, to €225,000 and the person instead (by waiting until 2012 to buy) takes out a mortgage of the same term as a person who buys today.

Our belief that fixed rates will be temporarily removed from the market would lead us to believe that in 2012 a long term fixed rate won’t be available, so the figures will be based on the following:

2011 loan: 90% of €250,000 using a 4.39% rate over 25 years
2012 loan: 90% of €225,000 using a rate that will be c. 5.2% (no fix in line with our projections) over 25 years

Cost of the 2011 loan: 1st 5 years: €82,500
Cost of the 2012 loan: 1st 5 years €80,460

so the net difference - and don’t forget that the person buying in 2012 gets no TRS in 2011 wheras the person in 2011 does, we are not factoring in the rent paid during the year of waiting for a price drop, nor are we considering that rates may go up even more if the ECB move higher.

Equally, don’t forget that the balance in year 5 is vital: for the 2011 loan it’ll be €219,000 for the one done in 2012 it will be €200,000 and in that respect you are onto a winner.

But long term capital differences of that amount (remember that this is skewed on the front end of the loan because we haven’t factored in ‘rent’ nor on the back side because there will be a year when the renter is paying a mortgage during which the buyer is mortgage free) don’t seem to make that much of a difference when you look at it over a 20yr+ term. And of course, several pro-buyer factors have not been included.

The real argument is therefore: should you buy at all or rent? The long term financing costs versus the long term renting costs are below, we factor in a 1.5% increase every year in a rent that starts at €1,000 p.m.

2011 buyer total cost of credit over 25yrs: €376,000+€82,500 = €458,500
2012 buyer total cost of credit over 25yrs: €344,000+€80,500+€12,000* = €436,500
Renter total cost of rent over 25yrs: 331,000
*(we add on €12,000 for rent paid in year 1)

(in this calculation we took the balance at year 6 and applied a 6% rate for both mortgages from that point on in order to make the calculations the same)

So it is clear that buying makes no sense from a ‘cost’ perspective. And that waiting to buy is also a winning strategy even if you get hit with a higher funding cost in one year, but don’t forget the assumptions!

1. TRS is not factored in in 2011 in our figures - and the person buying in 2012 will miss out on two years of TRS at the end of it (2017).
2. The ECB could push up rates and the idea of them settling at 5.2% over the 5yr period for the 2012 buyer could turn out to be fairly conservative.
3. Our example is based on a house in Dublin which has already had significant price drops, if you don’t get your 10% price drop then the calculations here don’t work out.
4. Rent prices may go up by more than 1.5% p.a. We accept that they are heading down now but there is evidence of a floor forming (in cities) and this is likely a secondary rather than secular trend.
5. The renter still has to live somewhere! The buyer will be rent free in 25 years, if the buyer was 30 at the outset then from age 55 to 80 (taking an average life expectancy - which will probably be higher in the future) then you have to add on another 25 years of full rent costs at the end. Even if they saved the difference every month (€600 p.m. and never spent a penny of it) they would have only €300,000 in year 25 and it is unlikely that you can buy a house in full for cash for that price given today’s valuations.

So rent or buy? It’s actually not very cut and dry, we would suggest that you weigh up the odds and make a decision based upon what you want in your life and the cost that is incurred depending on your perspective - the main lesson is that price and cost are two different things they are not the same and you can’t compare ‘value’ on the basis of a headline price alone.

Susan Hayes - Options Trading Ireland, talking to Karl Deeter of Irish Mortgage Brokers from Irish Mortgage Brokers on Vimeo.

We were delighted to have Susan Hayes of Options Trading Ireland (and The Positive Economist) come by for a chat about options trading, what it is and how it works, in the video Susan uses her trademark ‘no nonsense’ approach to explain options in clear and concise English so that even the likes of Karl can understand it. Well worth watching, if you want to contact Susan you can reach her at either of her websites which are in the links above.

found out that the PRTB was going to increase the price it charged to a landlord to register a tenancy and decided to email them asking for a justification for it (it’s going from €70 per tenancy to €90 per tenancy). Given that a tenant also benefits from the PRTB I thought it would have made sense to have them pay whatever the increase was over the landlords existing bill but first I wanted to ask why it was happening, my email is below

From: Karl Deeter
Sent: 22 December 2010 14:30
To: Registrations
Subject: re: change in pricing

Dear Sirs,

Can you write back and let me know what additional service is being offered in return for the additional fee or is it merely a price increase because you have the ability to do so?
Sincerely,
karl
–
Karl Deeter QFA, (LIAM)dip
Operations Manager

The reply I got is below…..

——– Original Message ——–
Subject:     FW: change in pricing
Date:     Fri, 14 Jan 2011 08:29:12 +0000
From:     Registrations
To:     karl deeter

Dear Sir,

I refer to your e-mail below. This is the first increase in the registration fee since the PRTB was set-up in 2004.

The PRTB is self-financing and is dependent on registration fees for income as we no longer receive an Exchequer grant.

The PRTB receives in the region of €6 million in registration fees each year whereas the operating costs exceed €7 million and it cannot continue to operate at a loss.

The PRTB has taken a number of steps to reduce its operating costs:
·         The staff of the PRTB have had two pay cuts in the past year.
·         All major contracts have been re-tendered publicly.
·         All Adjudicators and Tribunal members are doing additional hearings for the same daily fee.

Yours Sincerely,

Robert Allen
Private Residential Tenancies Board
—————————————————-

‘Costing’ €7 million per annum has nothing to do with a landlord, that is an internal budgeting issue, but unlike a regular business where you could just decide ‘I won’t deal with them because I don’t like their price’, you can’t do that with the PRTB because apart from being mandatory, there are no substitutions.

This doesn’t resolve well with me because if we ran a business that cost more than it brought in then we’d cease operations or have to do whatever it took to bring the service in line with the costs, the PRTB doesn’t have that issue.

The real rub here is that they haven’t even bothered to look at their existence and who their two clients are versus who pays the bill. The two clients are tenants and landlords, but only the landlord has to stump up the cost - the tenant who pays nothing stands to benefit only. In fact, the landlord who doesn’t pay is crippled because in any dispute the PRTB will represent the tenant for free and won’t engage with the landlord due to their failure to pay the bill.

Let us suspend reality briefly to enter into this world of cost being an arbitrary concept. The ‘cost’ of the PRTB is €7m+ p.a. but they only take in €6m so that is a deficit of about 14%, alternatively you could say that they need about 16.66% more in order to break even (€6m+ 16.66% = €6.99m).

So why has the price increased by 28.5%? That will bring them from €6m to €7.7m - and this at a time when they have apparently cut costs, the €7m+ figure is historic and for that reason the benefit of a full years cost reduction will only come through in 2011. It just doesn’t stack up, it doesn’t make sense and the maths behind it are wrong.

This one sidedness is disappointing and only made worse by the fact that a toll has been erected on only one side of the bridge (always whichever side the landlord is on). This is how a tax is introduced then driven up - and in time I expect they will rise their price again because of their ‘costs’, if only state agencies could come and work in the real world where an inability to cut your coat according to your cloth actually means something.

We were delighted to be part of TV3’s ‘The Morning Show, with Sybil & Martin‘. We are fans of the show and enjoy the relaxed nature of the conversational commentary style they are so adept at. In this clip we spoke about the costs of finance and the potential removal of fixed rates, while Marian Finnegan (of SherryFitzgerald) covers housing, her background is in urban economics and she lectured at both NUIG and UL before moving to SherryFitzgerald. We hope you enjoy the clip.