IN 2021, HOME prices rose an average of 12.8% nationally over the year to November, according to the CSO. Within a year or two, prices should return to their Celtic tiger peak.
Meanwhile, the average rental cost is already 32% higher than its pre-Great Recession peak of 2008 and continues to rise rapidly due to supply shortages caused by complications in construction resulting from Covid , and longer-term issues related to systemic government failures. Politics.
Alleviating the plight of those thrown into homelessness and economic hardship by the vagaries of a failing housing sector is, and should always be, the primary motivation for those seeking to address the current housing crisis. The acute symptoms of a dysfunctional housing system have been well documented and formed the basis of this week’s Prime Time special on RTÉ, which looked at a generation locked in by unreachable house prices.
The issue of pensions
However, the current housing crisis also directly contributes to another systemic problem, which is expected to worsen over the next few years: the lack of pension coverage.
We are now witnessing more and more public discussion around the legal retirement age and few are those who claim that the public pension will be enough to live on as the population ages. When it comes to private pensions, less than half of people aged 20 to 34 have a personal or workplace pension, according to the 2020 Pension Coverage report compiled by the CSO.
Of those in this demographic without a pension, about a quarter say they cannot afford one; while this figure rises to a third among 35-44 year olds without a pension.
Affordability, especially for workers outside of occupations where occupational pensions are common, is the biggest barrier preventing people from saving for their future. The correlation between the low take-up of pensions among younger age groups and the housing crisis is a simple matter of economics.
A given person will receive a fixed amount of income during his or her working life. The more of that income that is spent on rent, mortgages, and mortgage interest payments, the less money they will have available for other expenses, such as a pension.
Indeed, the pioneering book Scarcity: Why Have Too Little Means So Much, by behavioral economist Eldar Shafir and psychologist Sendhil Mullainathan, shows that when an individual experiences immediate economic stress, humans are psychologically predisposed to borrow from our future to pay for the “now”. ‘.
So the need for people to pay increasingly exorbitant rents and try to save for a home means that many are simply unable to even consider starting a retirement.
According to a report on housing affordability in Ireland (published for the European Commission in 2020), between 1991 and 2006 the average age at which a person bought their first home remained relatively constant, around 27.
However, between 2006 and 2015, the average age rose to 35. In effect, this means that new homeowners spend about eight more years in rental accommodation before buying their first home.
To do some math under the beer, someone who rents at an average monthly cost of $600 for eight years before buying a house at age 35 will have spent an additional $57,600 compared to someone who buys a house at 27 years old. This figure rises to €86,400. if their monthly rent is €800 per month. Thus, in effect, the average new owner in 2021 will have spent approximately €55,000 to €85,000 more than a person in 2007 to arrive at the same position.
A generation in lockdown
However, the increased amount the typical first-time buyer spends on rent is only part of the problem. Although still below their Celtic Tiger highs, house prices have been rising steadily since 2012, with the national average standing at €288,000 in September 2021, according to the CSO – although significantly higher in cities .
This means that an increasing part of a lifetime’s income will be spent on paying a mortgage and, more importantly, interest on that mortgage, the rates of which are particularly expensive in Ireland.
Escalating property prices, combined with the Central Bank’s post-crash edict limiting bank lending to a maximum of 3.5 times one person’s salary, or a couple’s combined salary, has meant that an increasing number of people end up having to save for deposits closer to 20-30% of a home’s value, increasing the time they will typically have for their first stay in rented accommodation.
And that’s just to mention those who are able to finally afford a home. A growing proportion of young people in Ireland are confiding in the idea that they may never be able to afford housing, particularly those in cities looking to stay within the community in which they grew up. This is illustrated by an EU study which shows an increase in the proportion of tenants in the population from 22% to 31% from 2006 to 2016.
Housing and pension policy
And there are no signs of the housing affordability crisis easing, as last night’s highly anticipated televised debate between Housing Minister Darragh O’Brien and Sinn Féin’s Eoin Ó Broin did not did not inspire confidence in viewers.
Pre-existing supply issues, construction delays due to Covid and Real Estate Investment Trusts (REITs) increasing their presence in the Irish property market have pushed up rents and house prices, to 7% and 12.4% respectively, in 2021, according to Daft.ie and CSO.
Essentially, the housing crisis is forcing people to squander more of their lifetime income on rent, before spending an inordinately large sum (compared to EU averages) to buy a house. An obvious consequence of this is that cash-strapped tenants and new homeowners have less money to set aside for other expenses and to save for the future.
At its core, it is a problem experienced by individuals. Its effects are felt by those who are struggling or unable to pay rent; by people who feel that their attempts to save for their own future are futile as property prices rise beyond their reach. However, the decline in the proportion of people able to pay a pension poses a longer-term existential risk for the government and the state.
For many years, experts have been warning of an impending “pension time bomb” that will mainly affect so-called “developed nations”. The European Commission’s 2021 Aging Report predicts that demographic changes resulting from falling birth rates and continued improvements in medical care will lead to an increase in the proportion of the adult population of retirement age, relative to the proportion of the population of working age, from 35% to around 60% across the EU by 2070.
Currently, the Irish government spends around 11% of its annual budget, or €8.8 billion in 2021, on public pensions. Over the past four years, the nominal figure has increased by 400 to 500 million euros per year. Given the expected demographic shift towards an older population, the amount of money the state will have to spend each year on pensions will roughly double by 2070. All of this will happen in the shadow of tax revenue from income tax declining as the adult population shifts from having a majority of people of working age, to a majority of retirees.
The increase in pension expenditure is expected to exert strong pressure on public finances. As such, despite the committee’s recommendations on retirement age limits, the specter of the state pensions ticking time bomb will inevitably be raised again as a pretext for subsequent government attempts to further raise the retirement age.
Moreover, according to the CSO’s Pension Coverage 2020 report, some 58% of people who have no private or occupational pension say they expect to be entirely dependent on the public pension when they retire. Leaving them dependent on an income of around €13,000 a year – assuming it is indexed to inflation over the next few years. For anyone still paying off a mortgage, that would be unsustainable.
Automatic accession to the state pension
The latest iteration of this suggestion, from a document published by the government in 2018, suggests that any employee between the ages of 20 and 69, earning more than €20,000 a year, should be automatically enrolled in a national scheme in which the contribution the employee’s pension would be supplemented by their employer, and the State would provide an additional €1 for each €3 contributed.
However, the implementation date, originally scheduled for 2022, has been pushed back. And, due to a number of logistical difficulties in implementing such a large program and many previous false dawns, such as former Minister Joan Burton’s failed attempt to implement a ‘similar automatic enrollment in 2011, expectations are not high that this current plan be implemented in a timely manner.
While such a scheme, if adopted, would undoubtedly help address the impending deficit in pension coverage for an aging population, it is too myopic. Personal finances are complex, every euro saved or spent throughout life constitutes an opportunity cost.
For this government to ignore the fact that the crisis in the rental and housing markets is causing whole sections of people to spend ever larger sums of their income both on rent and on the reimbursement of interest on large mortgages, thus diminishing their ability to save for the future, is a fundamental oversight.
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Many Irish people fail to save for their future because current financial pressures, exacerbated by a decade of deeply ineffective Fine Gael housing policy, simply do not allow them to do so.
Lower house prices, lower rents, cheaper mortgage interest rates would ease some of the pressures on younger, low-income workers, creating financial leeway that could allow these people to consider saving for their future by starting a pension.
The reasons for addressing the housing crisis are the urgent moral imperatives to lift those most affected out of homelessness and above the poverty line. However, by not facilitating personal savings by curbing the excesses of a dysfunctional housing sector, this government is jeopardizing the economic future of thousands of people and, in a very real measure, the nation, through their inability persistent in dealing with this crisis.
Rory McNab is a journalist, editor and writer living in Dublin whose work focuses on politics, pop culture and satire.