The scale of the mortgage debt in Ireland is absolutely enormous.

Duffy notes that there was a huge increase in the level of residential mortgage debt outstanding from €14 billion in December 1996 to nearly €148 billion in December 2008.

On the assumption that interest rates in the EU will rise as an economic recovery takes hold, the cost to borrowers of repaying that €148 billion in mortgage debt is set to increase from its current historic lows. The question is whether borrowers will be able to afford those higher repayments given that the outlook for the domestic economy still looks relatively bleak. Derek Brawn, a former economist and banker, reckons that consumers will be paying almost €500 a month more on a standard €300,000 mortgage in three years’ time. Brawn based his prediction on the assumption that mortgage holders will be paying almost 6 per cent on a standard variable mortgage by 2012.

That’s because the money markets are expecting the European Central Bank (ECB) to begin raising interest rates by July next year, rising 3 per cent by March 2012. Brawn reckons Irish banks will also widen the margins they charge over the ECB rate to the higher levels they enjoyed before the boom, a process that already began when Permanent TSB pushed up rates by 0.50 per cent even though the ECB held rates unchanged at their current historic lows.

What does it mean, however, for the average Joe/Josephine Soap? ‘‘It means 6 per cent home loan rates in 2012 as opposed to the average 3.25 per cent today. A typical mortgagee with a €300,000 25-year loan at 3.25 per cent APR is paying €1,462 per month. That figure will be €470 per month higher in three years’ time’’ Brawn said. ‘‘This will be on top of pay cuts, lower home values, massive emigration, persistently higher unemployment levels and rising home foreclosures,” he predicted. The calculations are based on standard variable mortgages and do not apply to tracker mortgages which consumers may have bought at favourable rates during the boom years.

Brawn, a former economist with Savills Hamilton Osborne King and a former executive with investment banks UBS and Morgan Stanley, predicted that there ‘‘will be less lending and less credit availability going forward, especially compared to before. Plus banks will be lending to fewer people and charging more.” The question is whether those higher interest rates will represent too great a burden for borrowers to shoulder and what will happen if they default in large numbers? Will the government take measures to keep defaulters in their homes at the taxpayers’ expense?

Or will it stand idly by as the banks, which have been bailed out at taxpayers’ expense, repossess those homes and throw the defaulting borrowers out on the streets? kathleenbarrington.blogspot.com

The unthinking classes have a lot to lose if land reform fails again in Britain,  as they are the fall guys for the big landowners and property speculators.  It is not without fostering damaging myths and media management that the landed gentry, the descendants of the Norman invaders, still own more than 80% of the land in Britain.  Bad as we are in Ireland, we have a far more democratic spread of land and property ownership than our nearest neighbour.

Below is a perfect example of UK property owner turkeys demanding that the traditional Christmas dinner continues.  Hat-tip to Dave Wetzel for this story.

LAND TAX ‘AN ATTACK ON MIDDLE CLASSES’

Friday August 7,2009
By Sarah O’Grady

Daily Express

A PLAN to scrap council tax in favour of a land levy was condemned last night as penalising hard-working middle-class families.

The Land Value Tax was proposed by Compass, a Left-wing think tank close to Gordon Brown’s inner circle.

It would raise even more than the £25.6billion a year currently taken by local authorities through council tax and would hit hardest those who have worked their way up the property ladder.

Owners of family homes on decent-size plots with a garden, a drive or a garage would be hit harder than those who live in smaller properties. And if the house is near good schools or public transport links, the land would be taxed even more.

Tory housing spokesman Grant Shapps described the idea as ­thoroughly unappealing.

“The Prime Minister’s favourite think-tank has come up with an idea which will disproportionately hit hard-pressed families who are aspirational and doing their best to get on,” he said.

“Why should they be penalised because they need a house with three or four bedrooms, or a garden or a driveway or a garage, all of which needs space? Annual re-assessments of the tax owed will worry cash-strapped mortgage payers. The plan is another attack on Middle England which this discredited Government is becoming known for.”

The report’s author Toby Lloyd said: “Social justice demands that the gains in land value be shared more equitably with the community than at present, and a tax system that could stabilise the housing market and reduce the chances of booms and busts is in everyone’s interest.

“With an annual Land Value Tax, all land would be taxed on the unimproved site value, which would be revalued for tax purposes annually. It’s important to be clear here – we are not talking about a tax on property values.

Real interest rates in Ireland, 1975-2009

Sometimes, it’s easy to forget – when you see interest rates of just 2% or so on your savings that the real return on savings can be quite high. Even with zero interest rates – as people often have in their current accounts, it may actually be the case that there’s “never been a better time to save”! Earlier this week the latest CPI figures were released, showing an annual fall in prices of almost 5%, as discussed by Karl Whelan on the Irish Economy blog. Link to article

Henry George’s big idea

The land value tax, an increased tax rate on land and a reduced tax rate on buildings and improvements, has been tried in the U.S. primarily in Pennsylvania, and in some cases has been abolished just as quickly as it was instituted. Henry George’s great idea—that taxing land and not buildings would encourage urban development and curtail speculation—seems to have had a checkered history in practice. A new book, Land Value Taxation: Theory, Evidence, and Practice, edited by Lincoln Institute visiting fellows Richard F. Dye and Richard W. England, sheds more light on this distinctive approach to property tax reform.
The book is a comprehensive review of theory and published evidence on the land value tax and explores the results of its implementation in the U.S., primarily in Hawaii and Pennsylvania, and abroad in Australia, New Zealand, Jamaica, South Africa, Estonia, and elsewhere. “There has long been a need for a careful assessment of the statistical evidence on land value taxation,” said Gregory K. Ingram, president of the Lincoln Institute of Land Policy, a think tank in Cambridge, Mass., whose founder, John C. Lincoln, was inspired by the writings of the 19th century philosopher Henry George, an early proponent of land value taxation. “We wanted to learn why a form of taxation regarded as highly efficient by economists is often tried but then discarded, and whether it has achieved desired policy goals.”
As an alternative to the property tax, a land value tax increases the tax rate on land and decreases or eliminates the tax rate on buildings. A tax on land is often claimed to be very efficient and produce few unintended economic costs, to increase the density of development, to reduce speculation in land, and to speed development generally. The authors conclude that theory supports the first two claims and indicates that a land tax will lower gain from speculation though not eliminate it. Land Value Taxation: Theory, Evidence, and Practice suggests that a land value tax does not alter the timing of development.
In addition, the authors found that the implementation and political context for the land value tax has been challenging, often due to problems in assessment and issues that arise concerning fairness. In Pennsylvania, the land value tax is in place in 14 municipalities, but was tried and discontinued in 7 others. Harrisburg, a distressed city in the 1980s, initiated the land value tax as a continuing part of its economic development program. In Pittsburgh, which began a land value tax in 1913, there was evidence of its favorable impact on building activity, but the tax became a scapegoat for poor assessment and rate setting practices, and Pittsburgh reverted to a traditional property tax in 2001. In Hawaii, the land value tax was blamed for overdevelopment in locations such as Waikiki, where singer Joni Mitchell was inspired to write the lyrics “They paved paradise, and put up a parking lot.” The land value tax was abolished there in the mid-1970s.
In many cases relatively mild versions of the land tax have been implemented—often a modestly higher tax on land than on buildings—and so produced only small increases in development density, for example, that are difficult to measure. To be politically and economically successful, the authors argue, a land value tax must be accompanied by a sophisticated assessment system, frequent re-assessments, a nimble rate-setting process, effective land use planning, and ongoing public education.
Land Value Taxation: Theory, Evidence, and Practice provides guidance for additional empirical work by identifying areas where existing studies are weak or contradictory, and informs new attempts to implement land value taxation. It settles some debates about land value taxation and initiates new ones, including issues of fairness and equity in land taxation, winners and losers when a land value tax is implemented, and what political coalitions are likely to form in support of and in opposition to the land value tax.

Crisis of Credit

Paul Grignon’s excellent Canadian video, “Money As Debt.” video.google.com/videoplay?docid=-9050474362583451279.

My only gripe is the unnecessary comment at the very end that hints at conspiracy. No conspiracy is necessary to maintain the system.  Cognitive dissonance or the propensity to believe  in that which benefits your interest is entirely sufficient to blind otherwise intelligent people to manifest reality.

A powerful cause of dissonance is when an idea conflicts with a fundamental element of the self-concept, such as “I am a good person” or “I made the right decision.” …Dissonance can also lead to confirmation bias, the denial of disconfirming evidence, and other ego defense mechanisms. (http://en.wikipedia.org/wiki/Cognitive_dissonance)

We see the same self deception in the operation of land market which works hand in hand with money creation to perpetuate the unequal distribution of wealth and our undeniably unsustainable consumption and production.

Internet activist John Gilmore famously said, “The Internet interprets censorship as damage and routes around it.” A key event of the Internet age was the invention of Napster, the direct online music-sharing program that helped erode the business model of the global music industry. This capability of the Internet to route around middlemen is becoming more apparent. A reader of the Financial Times in December won £10,000 for identifying peer-to-peer lending through the Internet as the “next big investment idea.”

How such a directly connected financial system could work is a question that has interested me for almost a decade.

At a recent conference in Tehran on the current financial crisis, one of my fellow speakers observed that “it is not possible to solve 21st century problems with 20th century solutions.” I agree. The emergent partnership-based enterprise model, however, has evolved in response to the challenges of this direct Internet connectivity.

Finance consists of three things: credit, which facilitates trade and enables the creation of productive assets; investment, which consists of financial claims over productive assets such as secured debt (e.g., mortgage loans); and equity, which is an ownership interest in a corporation, and typically exists in the form of shares.

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.

Direct Credit

Trade sellers have extended credit to trade buyers for thousands of years. As trade has developed nationally, regionally, and globally, one of the key enabling factors has been credit intermediation by banks. This intermediation protects sellers by taking on the credit risk of buyers and enables trade to flow by providing liquidity to sellers.

It is possible to dispense with a credit intermediary and provide such a framework of trust through the use of an agreement—a guarantee society—whereby sellers and buyers collectively provide a mutual guarantee. This mutual guarantee may then be supported by provisions made by both seller and buyer into a default fund in the hands of a neutral custodian.

A service provider could then set guarantee limits, operate the accounting system, and deal with defaults in return for a fee. The crucial advantage for banks of such a guarantee-society credit-enterprise model is that they would no longer have to put capital at risk by creating credit based upon it.

Direct Investment

When we distinguish the public sector from the private sector, we are actually distinguishing between enterprises and assets that are owned by the state and those which are owned by that specific enterprise model known as the joint stock limited liability corporation.

In recent years, media attention has focused on developments and events in the field of credit. The emergence of new generations of alternative investment vehicles—such as income trusts, real estate investment trusts, exchange traded funds, and hedge funds constituted as limited partnerships—has passed relatively unnoticed.

In particular, there has been an explosion in the United States of the use of the simple and flexible new partnership-based Limited Liability Company. In Britain and elsewhere, an even simpler form—the Limited Liability Partnership—is emerging at a phenomenal rate for purposes never intended by legislation introduced with the intention of limiting the liability of partners in professional partnerships.

Such partnership-based entities may be used as framework agreements—not organizations—which bring together investors with users of investment in a capital partnership. In this way, it is possible to create new revenue- and production-sharing mechanisms for direct investment in productive assets of all types, and particularly in real property and in energy assets through what I call “unitization.”

Unitization

Let’s consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.

For the “co-owner” occupier, this is a new form of rent-to-buy, since any amount paid in excess of rental will buy units. For the “co-owner” investor, units provide a reasonable, index-linked, secure revenue stream, ideal for risk-averse long-term investors such as pension funds. For banks, this is an optimal form of refinancing through a “Debt/Equity Swap.”

Similarly, we may finance a wind turbine simply by creating units redeemable in, say, 10 kilowatt hours of energy and selling these to investors. In the United Kingdom, the sale of between 30 and 40 percent of production finances the turbine, and with a few percent of production to a manager, the balance is pure surplus.

Direct peer-to-peer investment gives rise to shares, but not as we know them. Once again, we see a role for banks as service providers, appraising investments, advising investors, and providing liquidity—all classic investment banking roles. As with direct peer-to-peer credit there is again no need for banks to risk capital by creating credit based upon it.

The enabling factor for a new generation of peer-to-peer finance is a new generation of networked partnership-based framework agreements and entities. The work of visionaries like David Johnson of New York Law School and Oliver Goodenough at the Vermont Law School in creating the new Vermont Virtual LLC is a major advance in this direction.

Outcomes

A generic clearing-union network of direct financing will enable a simple but radical new approach to global economies. It could enable systemic fiscal reform based upon taxation of privilege rather than earned income, and it also offers new solutions for financing public assets. Most exciting of all, it enables a new networked generation of global markets, and even the potential for a “New Settlement”—a Bretton Woods II—establishing a new global architecture for world trade.

Chris Cook was formerly director of the International Petroleum Exchange, and is now a strategic market consultant, commentator, and enterprise architect. He is currently developing new partnership-based enterprise models and financial products based upon their application to Internet market networks.

This article is licensed under a Creative Commons License.
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1st published February 2nd

…..So here it is – to obtain the additional revenue our economy needs to make up for its lack of purchasing power, and upon which the economy is completely reliant, the government sells IOUs which increase in value with time. And when the time comes for them to be cashed, the government sells even more IOUs and uses this money to pay off the old ones. The government operates in an absurd system of debt-stocks which constitute a meaningless and utterly un-repayable debt to the future. This provides the government with a small amount of money now on the condition that they repay a much larger sum in ten or twenty year’s time. The government then proceeds to flood the market with these meaningless promises to pay, which can only be redeemed by the issue of yet more promises. The government draws on money already created as a debt, and relied upon for future payments on insurance claims and the pensions of the elderly, and allows banks and other lending institutions to purchase their bonds, conceding to these private institutions the right and power to create additional money, which is then loaned to the government at interest. Meanwhile, we must all work harder and harder, and the economy must become ever more productive and efficient to try to compete with other nations operating under the same lunatic structures, whilst the national debt inflates like a balloon…. Link to full article

polly.toynbee@guardian.co.uk 24th February 09

New research has found that mortgage lending in the final quarter of last year was down 50% compared to the same time last year.  The figures also show that the number of new mortgages issued during the last three months of 2008 fell by one third compared to the period July to September. Overall new mortgage lending fell by 30% in 2008, compared to the previous year.  The research by the Irish Banking Federation and Pricewaterhouse Coopers shows that 18,706 new mortgages, worth €3.5 billion, were issued in the last quarter of 2008.

In total 110,000 new mortgages, worth €23 billion, were issued during the year, bringing the overall mortgage book in the country to €148 billion.

The share of the market taken by first time buyers increased during the period, and now stands at 21%. The overall loan size fell across all areas of the market.

Meanwhile, Halifax has announced new fixed mortgage rates for first-time home buyers, following similar moves by Bank of Ireland and AIB recently. Halifax is offering a new one-year fixed rate of 2.9% (APR 3.17%) and has lowered its two-year fixed rate to 2.9% (APR 3.14%). The rates are available from March 2.