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More on the ‘Middle Class’… February 10, 2012

Posted by WorldbyStorm in Irish Politics, The Left.
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I’d want to echo a point made by Crocodile in comments about on the subject of the Irish Times ‘Middle Class’ report. That is the fact that this was the first public article the editor had added his own imprimatur to by way of an introduction and photograph. No such luck for those struggling on low or no incomes.

It’s also worth reflecting on the tenor of the article – at least as regards some contributions, the sense that as the perks of middle class life – and again that very term ‘middle class’ is so diffuse and so lacking in utility as a descriptor as to be almost without worth, though my sense of it was that it meant in the somewhat better off strata within that self-defined group – are stripped away there’s a remarkable animus directed at those who are perceived as having something, even if in comparison to the fee charging schools and the skiing holidays they have much less. Consider the following from the original article.

“I think of middle class as two incomes, two cars, two holidays a year, where you live,” says Cathal, who is the son of a low-paid civil servant, born in a working-class area and now living in leafy suburbia.

“It’s someone who saved and got their own mortgage, someone who is self-sufficient, who doesn’t get handouts. It means a little bit more than just coping,” says Miriam, who is a preschool teacher.

What’s interesting is that in much of the rest of the article the complaint then is that they’re not coping as well. So are they now ‘just coping’ like those who they say they’re [implicitly] different to?

“They are people who are managing. You could have people who are middle-class who are in trouble now. But I don’t think that drops them out of the middle class . . . I suppose it is a mindset,” says Miriam’s husband, Ronan, who is an estate agent.

No. Because even if they become like these unstated others they’re not really like them because… well, that’s not stated very clearly.

Little of this chimes with the traditional definition of middle-class. Education, as opposed to lifestyle, was always the primary marker, according to the psychologist Maureen Gaffney. The distinguishing factor used to be faith in the future, says Gerard O’Neill of Amárach. That’s why the middle classes valued home ownership, saved for a rainy day, sent the children to college and invested in the future. The liberation of credit in the boom years changed a lot of that.

Astounding stuff. No word from Maureen Gaffney about the way education was a luxury for many facing lives where the immediate need to have an income however small trumped any longer term ambitions.Not a word about embedded privilege, wealth, social networks, or higher salaries from jobs which were kick started by those advantages which allowed ‘home ownership’, ‘savings’, ‘college education’ and ‘investment’. It’s this blindness to the reality that this self-ascribed ‘middle class’ didn’t suddenly spring to life fully formed that is most striking.

By contrast, there’s a salutary reminder of the realities of class structure and of life in a recession – where losing a couple of skiing holidays a year isn’t in the greater scheme of things that much of a sacrifice – offered by a piece in the Irish Times which notes that:

[A] report, followed an international budget standard to establish the cost of a minimum standard of living for Irish families.

And discovered:

Low-income families and those who are unemployed do not have enough money to achieve a basic standard of living, according to a report due to be published today.

The report was: funded by the Department of Social Protection and carried out by the Policy Institute at Trinity College in conjunction with the Vincentian Partnership for Social Justice,

The methodology was interesting too:

Representative focus groups were established made up of different household types across the country. They were asked what they needed for a basic standard of living. A distinction was made between needs and wants.
At the end of the process, 2,000 different items from an electric cooker to bread and milk were found to input into a basic standard of living.

Now, I have to stop right there and point to Dan O’Brien’s piece in the IT this week which complained about the report being funded by the Department in the following terms.

…should taxpayers’ money be given to Ibec to write a huge report on the regulation of business? No, because as sure as night follows day, the report would find that business is being throttled by too much red tape.

And even if that is true, does anyone believe Ibec would be objective on an issue about which it exists to lobby? Again the answer is no. The conclusion, therefore, is that Ibec should not be paid by the State to research its own direct interests.

And he continues:

Just as Ibec is a fine organisation, so too is the Vincentian Partnership for Social Justice (VPSJ), three of whose employees were co-authors of yesterday’s report on incomes needed for a decent standard of living. But just as the Department of Enterprise shouldn’t be subsidising Ibec research, the Department of Social Protection has no business giving VPSJ taxpayers’ money to do its research.

To my mind this is a perfect reflection of how societal values have been skewed.

Ibec has top table representation both overt and covert in the direction of this state. The voices like VPSJ are effectively marginalised in the contemporary period. Their input is peripheral to the generation of social and economic policy in societies where business is put first on a continuing basis and this is before we even consider the resources that VPSJ can marshall as distinct from Ibec.

Even were that not enough to suggest that in this instance their contribution should be given an hearing there’s more. O’Brien continues:

Another eyebrow-raising aspect of the report was the publisher – the Policy Institute in Trinity College. Impartiality and objectivity are hallmarks of academic research. Publishing the views of a lobbyist blurs the line, thereby undermining TCD’s credibility.

It is right in a free society that vested interests and lobby groups have every opportunity to put their case. In a society with such a small marketplace for ideas, the research and opinions of advocates can play a role in stimulating debate. But they should always be taken with a pinch of salt. Yesterday’s report should too.

This seems to me to be a deliberate blurring of the facts on his part. Why should not the PITC publish research in social policy? The fact it was VPSJ that conducted the research is irrelevant – indeed it’s irrelevant if it is a ‘lobby’ group that does research as long as it is methodologically appropriate for the area it engages, in which case it is legitimate to publish it [I could even argue it’s a freedom of speech issue of a sort].

O’Brien et al are entirely happy to quote ESRI research which is also paid from the public purse and which can be regarded as following certain lines in certain instances.

And consulting the PITC and the event to launch the report [which by the way is part and parcel of the PITC’s series of publications in its “Studies in Public Policy” series one will find that far from a bunch of lobbyists with no academic credentials that the research is presented by qualified researchers and is part of a broader range of research in the field.

If it were a case that the VPSJ were operating singly and alone, working outside of accepted methodological approaches in the field then that would be one thing [and let’s be clear, IBEC which releases polling data, whose the validity of which is highly suspect given that they are based on write in responses, has never once been criticised previously by O’Brien, as a perusal of the IT archives will demonstrate]. But it is evident that VPSJ is operating according to best practice and that those in the field of social studies accept that.

So why O’Brien should seek to minimise it is a question only he himself can answer.

But he also finds fault with the very concept at the heart of the report:

Funding issues aside, there is plenty to quibble about in the tome. The four authors begin their 182-page report with a lament: “unfortunately, to date there has been limited commitment in Ireland to establish social consensus as to what constitutes adequate income and resources”.

This is an extraordinary statement in a number of respects. First, people are different in their needs, wants and opinions. There will never be consensus on what constitutes adequate income and resources.

That’s true in the specific, but he conveniently ignores the fact that the state itself, and not just here, makes an effort itself to determine through the use of the Consumer Price Index what the changes for goods and services are. And through the use of both price data and weighting data CPI’s explicitly attempt to determine cost of living indexes which are precisely about as the US Dept. of Labor Statistics puts it: ‘measur[ing] changes over time in the amount that consumers need to spend to reach a certain utility level or standard of living’. In other words far from this being some sort of lese-majesté on the part of the researchers – thumbing their noses at the economic great and good, they’re simply attempting to refine methodologies that are already well-established.

Which makes his follow on point illogical:

Third, the notion of adequacy changes. What was adequate in the past is not likely to be adequate today. There is no acknowledgment of this in the report.

Obviously research conducted in 2011 is going to have some traction in 2012 so it is hard to understand why he thinks this is a compelling critique.

Finally, because societies themselves change over time, so too do the kinds of consensus they arrive at with regard to adequacy (and a thousand other societal questions). That is one reason why democracies hold regular elections. Political parties put forward policies about the amounts of welfare payments and minimum wages – the focus of this report – and people express a preference. Such issues are the meat and potatoes of political contestation and should remain open to debate, not be shut down.

But if that’s correct then he seems implicitly to be suggesting that current CPI methodologies, or indeed research, are irrelevant – policy would be determined in complete vacuum with no reference to research. It’s all ‘preference’. That may be true of his world but out here many of us can determine costs of living and make a stab at what represents a sustainable income in relation to them. The report takes that a step or two further. It is, like all research, open to question but to ignore it or damn it entirely is intellectually pointless.

What’s odd though, and points to the Janus-like approach of the Irish Times, is the fact that the editorial in the edition O’Brien writes in actually lauds the report:

The definition of poverty can change over time, depending on economic circumstances and lifestyle expectations. It is an inability to attain a decent or adequate standard of living. Poverty is not based solely on income but on social participation and an ability to engage constructively with service providers.

Here in Ireland, there is cause for shame because of the skewed nature of society. Difficult political decisions will be required to alter that. This report and the minimum standards of living it sets down suggest a way forward.

Anyhow, all this is very interesting, but what of the report’s findings?

The report found that in a household with two adults and two children with both adults working, the minimum expenditure needed to achieve a basic standard of living was around €540 a week. The figure would be higher if the children were in secondary school.

And it noted that:

This figure was then compared with the income of that household. The report found that those with low incomes or who were unemployed found it impossible to reach the €540 figure and were cutting back on basics to make ends meet.

Put aside all complaints about ‘lobbyists’ and methodologies. The stark fact is that that €540 is not a very high figure if one runs it through to see what the basic wage that is required to give that as after tax income. A rough calculation suggests it is higher than €30,000 per annum gross. Minimum wage is set at €8.65 and if one works a 40 hour week at that the total gross is €346 and an annual gross of €17,992. Clearly that’s a long way short of of €540 [albeit other supports may be applicable].

The maximum rate of Jobseekers Allowance – and in an economy with 14 per cent plus unemployment there’s a clear problem with the first part of that name – is €188, albeit with increases for qualified adults and children [which cumulatively would bring it lower than minimum wage for one]. But again, a long long way short of €540.

The article notes:

“We hope this report will feed into many areas. When and if we’re making further cuts we need to be conscious of the fact there are households struggling already and further cuts will make that struggle even more complicated,” he told RTÉ radio this morning.
“We need to look at how we provide public services to low income households and perhaps assist individuals in low paid work. The report will also have implications for households in debt. The courts are currently trying to work out how much you need to have a basic standard of living. How much you should be left over with.”

This seems to me to paint a picture that is very different from the thrust of the Irish Times ‘report’.
Indeed it points up significant problems with that:

“The sense that the boom was accompanied by sharp inequality across the board is not reflected in the statistics,” says Prof Brian Nolan of the school of applied social science at University College Dublin. “Whereas in the US the rich got richer and the rest stood still, here the whole engine moved ahead.” The most reliable figures stop in 2009, so there is no detailed statistical picture of the human fallout of the past few years. But Nolan is sure about which groups have been least affected by the recession in terms of income, if not wealth.
They include people whose main income, such as a pension, is already from social welfare, he says. Apart from the loss of the Christmas bonus, for example, their core income has not fallen, so the second and third deciles (those immediately above the bottom 10 per cent) have been the “most protected” among the social-welfare groups.

Terrence McDonough of the School of Business and Economics in NUIG makes the following blindingly obvious point in a letter to the IT following up on the article:

I was disappointed to see Prof Brian O’Nolan asserting that inequality didn’t increase during the Celtic Tiger period (Weekend Review, February 4th). This was compounded when Prof O’Nolan’s view was repeated by your economics editor Dan O’Brien. Prof O’Nolan is correct to observe that low incomes in Ireland rose during the Celtic Tiger in contrast to the stagnation of lower incomes in the United States. In fact, over the long period from 1987 to 2007 incomes at all levels roughly doubled. But this does not mean inequality didn’t increase.
A simple numerical example can illustrate. Suppose the top income is €100 a week and the bottom income is €10. All incomes double. The top income is now €200 and the bottom income is €20. Measures of inequality common among economists such as dividing the top income by the bottom income or the more sophisticated gini coefficient show no change in inequality in this circumstance. But the distance between the bottom and the top has doubled from €90 to €180.
In this instance, the popular intuition that inequality rose is correct, and the experts are wrong.


But it’s not so much Nolan’s words which in the context of one – rather basic – metric may be accurate but simply aren’t complex enough to illuminate the situation, but the editorialising which comes after them, as if ‘income’ can be detached from ‘wealth’. The writer of the IT piece may have no sense of what the removal of the Christmas bonus was in the life of someone on welfare, or how what mathematically is ‘only’ a 2 per cent of a reduction in income can be a serious blow to finances where ‘core income’ is so low, but those who experience that are fully aware of what that means.

But what of the editors view of these matters? In that accompanying piece from him with the original article he wrote:

The series looks at the lives of middle-earners and how their fate and that of the State are inextricably linked. It includes personal accounts of the recession’s stark effects, and features some of the tens of thousands of Irish people who face almost impossible levels of negative equity or stubbornly high debt. This economic hardship is compounded by increases in the cost of, most notably, energy, health, education and insurance.

The social impact is no less significant. Individuals and families have been forced into a revision of values and dramatic changes in how they spend money, look after their health, educate their families and use their leisure time.

These accounts from Saturday do not – in the main, amount to the sort of challenges faced by those on low or no incomes. Which isn’t to say that for those who have lost jobs, or who face impossible mortgage repayments those challenges aren’t effectively the same challenges as those on low or no incomes. But for the majority even still losing some disposable income is not equivalent. Indeed seeing some ‘choices’ − as with regards to private education, something most in this state cannot afford, removed from them is not equivalent.

Moreover the Irish Times has not been obvious as a voice arguing against ‘increased costs’ in energy health etc. Quite the opposite. It’s approach across the last decade and more has been increasingly meretricious – no serious critique of the neo-liberalisation of the society, an actual involvement in certain areas, such as property, which massively exacerbated our current problems and so on.

And again, the piece in the Irish TImes on this latest report point to just how tough life is at low/no income level. For those in that bracket there’s nothing like the following from Saturday’s article: “Is there a certain sheepishness about reckless spending in the boom – such as Donal’s friends who went to Bulgaria, couldn’t get a late pint and bought the pub?” or “Your pension, shares, housing values are gone”… er… ‘shares’? or ““All the impulse buying is gone. You wouldn’t even think about the odd weekend away. Sometimes I think a lot of the fun about working is gone, like the little treats you might have found in town”.

But we probably won’t be reading a three page special report on lives where those sort of ‘impulse buys’ don’t figure at all, and never have, in the IT any time soon.

Apologies for the length and odd structure of this post.

Comments»

1. Padraig Yeates - February 10, 2012

It’s called comparative deprivation

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WorldbyStorm - February 10, 2012

It is indeed. But it’s telling isn’t it how averse O’Brien is to any effort to work through that in a methodological way?

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2. Jim Monaghan - February 10, 2012

And inequality is increasing. I think we are following the American model where things have got extreme. One example of this is where the senior Civil Servants had their bonuses recognised as salary and were thus exempted from bearing some of the cuts. Since that famous proposition in California income disparity has increased. And dare I say it, the real result of the anti tax marches here was the same. The trend is towards flat or flattish rate taxes. Household and septic tank taxes are just an example.
We need a higher or a few higher rates of income tax.

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alastair - February 10, 2012

Septic tank ‘tax’ is a one-off payment of €5 (or €50 if you put it off), and the household charge is going to be a banded arrangement. Not much of a trend evident on the back of those.

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3. gfmurphy101 - February 10, 2012

Excellent analysis! I was thinking about the recent coverage in the IT myself particularly Dan O Briens attempt to dismiss the issues raised in the report by taking a “shoot the messenger” approach!
http://gfmurphy101.wordpress.com/2012/02/08/lets-all-just-shoot-the-messenger-so-dan/
and of course the whole [manufactured] “squeezed middle” debate!
http://gfmurphy101.wordpress.com/2012/02/04/is-the-irish-times-agenda-to-help-blame-the-blameless/
Your piece adds new dimensions, probably nails it on the head and exposes the “journalism” at the IT for the “propaganda” that it really is!

However I am also thinking about the more dangerous hidden aspects to all this coverage, is it just laying the groundwork for something bigger?? If the Irish economy does not hit its growth forecasts next year, then there is every likelyhood that on top of the cuts /tax hikes already agreed (under troika programme) there is the distinct possibility of furthur savage cuts. [your thoughts?]

The IT seems to be pushing an agenda similar to the well used “deserving v undeserving poor” tactic! As you can see from the original IT article by Kathy Sheridan, its the [ suffering but blameless/once very hard working middle] vis a vis the [suffering but not entirely blameless/never worked welfare “people”] As my own article indicates very dangerous development for society, this kind of stuff coming from the IT [Thoughts on this people?]

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WorldbyStorm - February 10, 2012

GF, ta, I think that’s quite a plausible theory, particularly given the tenor of many of the comments in the piece. It’s of a piece with means-testing, the supposed fairness of flat[tish] taxation and so on. I think in that respect t is a development that has intrinsic problems to it.

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4. Richard - February 10, 2012

Here’s another piece, by me, on the ‘squeezed middle’ phenomenon

http://knaves.posterous.com/squeeze-my-middle-till-the-juice-runs-down-my

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5. CMK - February 10, 2012

An exceptional synopsis of the ‘squeezed middle’ mania that has gripped the IT this week.

One thing that immediately strikes me about the very term ‘squeezed middle’ relates to the issue of the median wage. In Ireland that’s ca. 27,000 per annum. Another is when I look at an income and taxation report the IT produced itself in March 2009 81% of the income earners covered earned less than 40,000 per annum. That was in March 2009, nearly three full years ago, it’s highly likely the numbers earning 40,000 or less have increased substantially. Anyone in that income range (27,000 to 40,000) was extraordinarily unlikely to be taking two skiing holidays a year even at the height of the boom nor were they likely to be paying private school fees or building up substantial savings or property portfolios or buying pubs in Bulgaria. The third point relates to the Vincentian report and its finding that a family of four need at 540 per week (28,080 per annum) to achieve a basic standard of living. Families with three, four or more children on those kinds of earnings are presumably falling below a basic standard of living.

If the IT were actually to take a more robust, but a less ideologically blinkered and self-pitying analysis, they’d premise their analysis on someone earing right at the median i.e. ca. 27,000 and within a range with an upper limit of 40,000 per year. Those who are actually the ‘middle income earners’. I don’t, however, think that income group is the cohort the IT’s advertisers are aiming for, nor are they the kind of people IT writers fraternise with or have much time for.

So, what the ‘squeezed middle’ means, in effect, the top decile of the income distribution, that is those earning 50,000 and above. Their own March 2009 incomes and taxation report gives a percentage of those earning 50,000 or above at 11.6%. Somehow I don’t think that the ‘Squeezed Top Income Decile!!!’ would resonante quite as much even though the top decile is who the IT are referring to when they use the term ‘the squeezed middle’. The IT know’s its base and are trying to provide ‘chicken soup for the soup’ as they work to ensure that austerity impacts as little as possible on the top 10%. For the other 90% the IT could care less. Ideology in motion.

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alastair - February 10, 2012

There’s some fudging of personal and household incomes at play here. A two-income household, within the 24-40 grand salary band might well send a kid to a private school, take the odd ski holiday, or even buy the IT!

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ejh - February 10, 2012

A two-income household, within the 24-40 grand salary band might well send a kid to a private school

It’d be interesting to see what proportion of people in that category actually do this.

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ivorthorne - February 10, 2012

Do you know what the percentage of people in this country who send their children to private school is? Care to guess?

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WorldbyStorm - February 10, 2012

2 kids. 2 adults.

5k plus for school fees per year. 500 per adult half board for a skiing holiday in France. Say a round 2k or more.

Two salaries of 24 aren’t going to do that not with other expenses for education, feeding two kids, etc, etc.

Two salaries of 40 k might just do it, but I wonder if they’ll do it all ie ski holidays/private schools/etc.

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WorldbyStorm - February 10, 2012

In any case Ivor’s point is the crucial one. What percentage send their kids to private schools. If that’s part of the definition of the squeezed middle, as O’Neill from Amarach suggested it was in the original article then there’s a clear problem from the off.

The answer can be found here…

https://cedarlounge.wordpress.com/2012/02/04/riddle-me-this-the-squeezed-middle-earners/

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Conor McCabe - February 10, 2012

There are c.26,000 pupils in the State’s 54 private second-level schools. About half of those schools are in Dublin

There are c.356,000 second-level students in the state, and 729 second-level schools

That’s just over 7 per cent of students in fee-paying schools, with fee-paying schools themselves making up about 7 per cent of all second-level schools.

Those schools cost the State c.100 million euro a year in wages – a situation completely out of step with most of the world.

Normally, fee-paying schools, well, they fund themselves. It’s kinda the way fee-paying schools operate – the clue’s in the name and all that.

But that’s the Irish middle-class for you. They can’t even make that business model work for them.

what a fucking useless shower of c****s

Once their private sector “entrepreneurial skills” are shown up for the joke that they are, invariably they rush into either the public sector or government contract sector – both of which exist as the Irish middle class’ own particular brand of social welfare.

Bunch of pampered ponces.

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Garibaldy - February 10, 2012

+1 to Conor on pointing out that the private school emperor has no clothes.

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alastair - February 11, 2012

It’s worth stating out that the IT don’t touch on private schooling at all in these articles, and that my point was that a notional couple within the middle band could indeed choose to send their kid to a private school. Never mind the national percentages or two kid families – it’s the nonsense of the articles being directed at the top 10% that I’m highlighting.

Did those who attended private schools here come from the top 10% income earners or further down the income scale?

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alastair - February 11, 2012

“What percentage send their kids to private schools. If that’s part of the definition of the squeezed middle, as O’Neill from Amarach suggested it was in the original article then there’s a clear problem from the off.”

Thing is that he didn’t suggest this. Here’s what he did write:

The distinguishing factor used to be faith in the future, says Gerard O’Neill of Amárach. That’s why the middle classes valued home ownership, saved for a rainy day, sent the children to college and invested in the future.

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WorldbyStorm - February 13, 2012

EDIT

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WorldbyStorm - February 14, 2012

Perhaps worth taking another look at the original IT article. O’Neill says about half way down the following: http://www.irishtimes.com/newspaper/weekend/2012/0204/1224311242025.html?via=mr

O’Neill identifies middle-aged people as the most squeezed group. The younger ones, not yet trapped, can head for the exit, he says. But even in the best of times, the level of happiness by age reaches its lowest ebb in the early 40s, an indicator of inevitable life-stage pressures.

“People in their 40s and early 50s are at the peak of their spending pressures,” says O’Neill. “A lot would have children in private schools and at the same time are suddenly noticing their parents growing older and having issues . . . You’re kind of trapped. It’s a crisis of obligation, both as a parent and as an adult child looking after your own parents.”

So clearly he does regard part of the definition of ‘middle class’, or if you prefer the characterisation, as involving private schooling and he believes that ‘a lot’ of middle class people have their children in private schools. But the whole point of the discussion here has been to suggest that private schooling is something only a small minority – 7 per cent of the overall cohort of school children are sent there – can afford/avail of and is not representative of the ‘middle’ even as articulated by the IT article.

There’s also a report by Sean Flynn, their education correspondent on the same issue from the same series with additional stuff from Dan O’Brien which explicitly references private education.
http://www.irishtimes.com/newspaper/ireland/2012/0208/1224311460422.html

So clearly the IT believes it to be an aspect as they say of the middle class squeeze for ‘some parents’. Flynn notes that “The middle classes will soon be paying more money for a great deal less in education” and “Despite the widespread availability of excellent “free” second-level education, more than 26,000 pupils are enrolled in the State’s 56 fee-paying schools – at a cost of more than €120 million to their parents and guardians.” And O’Brien notes with remarkable astuteness…

From the turn of the century to 2008, the numbers enrolled in private schools in the State rose by just 1,300. Most of this increase took place up to 2003, before the most frenzied period of the boom/bubble took hold. If demand for private education grew far more slowly than incomes at that time, a fall in enrolments in the two years to the start of the 2010 school year suggests that private education has become unaffordable for some.

While of course it is unaffordable for many many more in the society from the off. Which is of course part of the very problem with it and also part of its essence.

Re your other question which I think is a good one, as I’ve said many times before here I went to a private school for one year in part as part of a Jesuit exchange experiment to see how someone repeating a leaving could integrate after being in a state school for their original five years [edit – the experiment failed, I got on okay with the people there but made no lasting friendships or connection with the place – hardly surprising given teh cultural change from Greendale in Kilbarrack and the basic fact I’d already got a peer group with connections stretching back 14 years to national school and also I think probably pretty much inevitable given only a year in it]. I have no idea how others who comment here fall on that spectrum if they’ve been to private schools at all. I will say though that the generality of those in the private school I was in were distinctly upper middle class. To take an example of the demographic from the areas I knew well and came from there were none from Kilbarrack, one from Raheny Foxfield and then me. A fair few from Clontarf but many from Howth/Sutton, etc. Granted that’s a rough metric, not everyone from any of those areas is born with silver sppons in their mouths by any means, but they most definitely were reaching up into that 10 per cent. So it’s not that no one from outside the 10 per cent goes/went to private school, but most, as in a majority, of the 10 per cent go/went. Also worth echoing the point Conor makes earlier, that the concentration in Dublin skews the profile as well. Sure, Dublin is more populous, but it also means that the upper middle classes in Dublin get a better shake of the stick. So to speak. The bottom line being that private schooling is indeed a fairly elite pursuit in this society even still and not many in average or even somewhat above average income brackets avail of it – or often can avail of it.

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ghandi - February 14, 2012

Not sure where this will end up on the list, but its in response to wbs, I think your slightly undervaluing your home, my street was up around €450k at the height, and is now down around €200 or less, any that have been sold recently needed major work and were going for around €70k to €90k , quite frightening for those that bought at the peak, I bought long before but am stuck with a re-mortgage. I do appreciate that my residency on the street would increase the value no?

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gfmurphy101 - February 10, 2012

Excellent …… Blows their “squeezed middle” thesis away! Did you post it as a comment on the IT !!

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CMK - February 10, 2012

No, I haven’t and I won’t. My blood is boiling reading this shite (the IT not the CLR) and I’m developing a passionate loathing for the IT that is probably not healthy.

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Conor McCabe - February 10, 2012

+ 1 to everything CMK said. completely spot on.

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Garibaldy - February 10, 2012

Conor,

Don’t know if you saw this from EamonnCork earlier, but you are probably the best man to answer his question

https://cedarlounge.wordpress.com/2012/02/09/what-you-want-to-say-open-thread-9th-february-2012/#comment-114172

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CMK - February 11, 2012

Cheers!

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6. CMK - February 10, 2012

Agreed, there probably is some double counting and fudging of incomes but I think it’s a more robust analysis than the IT’s entire series – I think your observations don’t . I’m Joe Bloggs not being paid to write this; the IT is a reasonably well-financed organisation and its journos are being paid to write this stuff. But my point stands: if you want to do a genuine series about ‘the squeezed middle’ you’d start much further down the income ladder than the IT do. If, on the other hand, you want to minister to the self-pity of the well-to-do and privilege (absolutely and relatively) and bolster their prejudices about those on social welfare, you’d produce something like the IT’s series of articles.

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alastair - February 10, 2012

My point is that there’s kneejerkery from all angles here. The IT middle classes (mortgage, holliers, broadsheet reading, VHI, rugby fancying, etc) are clearly not solely the 10% top earners in this country. Most of them are definitely not anywhere near the top 10% – so why pretend that this is the case? I’ve not done any ski trips myself, but I can assure you that that it never required a combined household income of 80 grand upwards to fund such extravagances.

You’re accusing the IT of talking to/about a sector of society that you’ve defined on a pretty shaky premis.The articles might well still be unmitigated shite, but not for the reason you suggest – they are talking much further down the income ladder than you imply.

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CMK - February 10, 2012

Have you read these articles in the IT? Here’s one where two of the examples are of a) a public servant earning 50k per year (comfortably inside the top income decile) and b) a woman who bought a three hundred year old house in County Wicklow that was valued at 1.6 million at the height of the ‘boom’ and, on the back of that, this woman and her husband two apartments in Portugal.

http://www.irishtimes.com/newspaper/ireland/2012/0207/1224311394645.html

But that’s not really the point. My central point, which you’ve not addressed at all is that this whole IT series is conceptually flawed, deeply flawed.

I’ll repeat: if one is genuinely interested in ‘middle income earners’ one goes to the income distribution data, takes into account data on median incomes, average incomes etc, and then analyses the experiences of those in the, to be wide ranging, third to eight income decile. In Ireland that means people on very modest incomes with a preponderance of incomes between the range of the median income ca. 27,000 and the average industrial wage ca 35,000. THEY’RE THE MIDDLE INCOME EARNERS!! Sorry for shouting! If the term ‘middle’ has any meaning that’s where the focus should be.

Kevin O’Sullivan in his piece explicitly states: ‘The series looks at the lives of middle-earners and how their fate and that of the State are inextricably linked.’

http://www.irishtimes.com/newspaper/weekend/2012/0204
/1224311257556.html

He doesn’t define ‘middle earners’ and any rational definition of middle earners must reference the statistical data. And that data will pitch the whole debate way down the income and social ladder. All of these people writing this crap in the IT are university graduates, they should be able to construct a decent argument and that argument should, I repeat, make reference to the hard statistical data on income distribution in this state. That it doesn’t renders the whole thing an exercise in propaganda.

The thing feeds on the neo-liberal myth that ‘we are all middle class’ something which is definitively not the case when it comes to income. It allow implicitly peddles a sort Randian delusion that the John Galt ‘middle classes’ are out on their own with no welfare state to catch them if they fall, while the working class and unemployed are effectively insulated from the recession by said welfare state. This in turn powers the whole notion, which O’Sullivan implicitly argues, that the middle classes and their fate is THE vital concern of the state.

There’s more to say on this.

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WorldbyStorm - February 10, 2012

Excellent precis CMK.

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alastair - February 11, 2012

Sorry I’m just not buying your straw man. I’ve read the articles, aright and they’re firmly bedded in the central band of income. Let’s take the two examples you highlight as demonstrating the high-income nature of the pieces:

> 1. a public servant earning 50k per year (comfortably inside the top income decile)

Well, two grand above the central band isn’t THAT comfortable, and her husband had a warehouse job, so we can only presume that their combined household income was pretty likely to be within the middle band.

> b) a woman who bought a three hundred year old house in County Wicklow that was valued at 1.6 million at the height of the ‘boom’ and, on the back of that, this woman and her husband two apartments in Portugal.

What here suggests she had a high income? The article makes clear that it was a struggle to buy the house initially. A house valued at 1.6 million at peak isn’t particularly impressive as a measure of wealth tbh. What was your gaff valued at at peak, and how does that serve as an indicator of your income? Ill advised property investments on the back of the equity in your bubble house is equally nothing to do with your income.

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WorldbyStorm - February 11, 2012

What here suggests she had a high income? The article makes clear that it was a struggle to buy the house initially. A house valued at 1.6 million at peak isn’t particularly impressive as a measure of wealth tbh.

Very droll. Tell us another one.

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alastair - February 11, 2012

Nothing droll about it – what was your house worth at peak? How did that valuation reflect the reality of your income?

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WorldbyStorm - February 11, 2012

In all honesty I know only one person who had a house valued anywhere near 1 m. Everyone else I know including those who bought perhaps unwisely had houses worth less than 500k at the height. The house I live in? Considerably less than that again, less than half at the height.

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alastair - February 11, 2012

So – it would be fair to say as an owner of a three quarters of a million euro house, your income must have been pretty comfortable then?

That’s the nonsense of trying to pass the articles off as relating only to the top 10-11 percentile. This particular house was bought, at a struggle, at a time when silly-season mortgages were available to many who were not in a position to afford them. We don’t have anything here to tell us this woman was above that central band of actual income.

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alastair - February 11, 2012

Sorry – thought you were talking half of the value this woman’s house. I think you’re too modest with your valuation. Our gaff went up to near 700 grand at peak – about ten times what we paid for it, and well well beyond affordability on our income. The five years leading up to 2007 accounted for most of that bubble, as was the case with everyone else. It’s perfectly feasible that this woman’s house could have been bought for a mortgage of €100 grand or so at a time when mortgages were being practically given away without security.

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Paddy M - February 11, 2012

So – it would be fair to say as an owner of a three quarters of a million euro house, your income must have been pretty comfortable then?

My reading of WbS’s comment was that “less than half of that again” refers to “less than €500K”.

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WorldbyStorm - February 11, 2012

“So – it would be fair to say as an owner of a three quarters of a million euro house, your income must have been pretty comfortable then?”

My house was nowhere near 3/4 m. It was got on shared ownership in 99. If it hit 250k I’d be hugely surprised. TBH I’ve no inclination to move, I’ll prbably be carried out so I wasn’t one to go looking for ‘potential’ prices. But just thinking of the block around nothing went for much over 200k if that at the boom.

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CMK - February 11, 2012

Alaistair, re: the house valued at 1.6million example. It’s most definitely not a straw man example. If that woman bought this house in 2002 for half of it’s peak value (800,000) that was several years before the silly season for mortgage lending was at its height and the banks were still using formulae such s 3.5 times first income + 1.5 times second income and no matter what way you look at it that woman and her husband, in 2002, would bought have to be on six figures to get a mortgage for ca. 800,000.

I also notice that you’ve left nearly a dozen comments on this thread and you still have addressed my central point that if you’re concerned about middle income earners in Ireland you’d start with those at or around the median wage (which is substantially less than the average industrial wage) and work from there. That’s not at all a shaky premise, but rather where any honest exploration of this question would begin. If you’re looking to explore how the top earners are being squeezed you’d go the IT route but take the precaution, for ideological and propaganda purposes, of deliberately ‘middle’ and ‘top’ income earners.

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Alastair - February 11, 2012

The house wouldn’t have been valued at 800 grand in 2002, mortgages were obtained on a loose equity basis in the early 2000’s (as one who struggled to get one a couple of years earlier, I was an interested observer of the change of culture), and you don’t factor in the probability that this couple were ‘trading up’ and had the proceeds of the sale of their previous home. If the remaining mortgage is 900 grand ten years on, and they remortgaged to buy properties abroad (on an equity of a 1.7 million property), they clearly didn’t get an initial mortgage anywhere near 800 grand. Property in Wicklow was particularly bubble-prone in the period 2000-2007 because rural new builds were restricted to Wicklow residents alone.

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WorldbyStorm - February 11, 2012

I’m in no sense being critical, but I think for the vast majority of people I know that would be a stratospheric amount of money, as 800k was in say 2002/4. These are huge sums, trading up or not. They really are.

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Alastair - February 11, 2012

My point is that there was probably nothing like 800 grand involved. Not sure how else to state this.

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WorldbyStorm - February 11, 2012

Is it feasible that the woman spent 100k. Hmmm… Maybe, but it would be a very unusual outlier I suspect.

But mapping that to the generality, I’m a bit dubious. I suspect to have a house valued 1.5m you’d need to have had a fairly solid trading up history and one based on a higher than average house value for the previous property. Which would suggest that again, bar a minority of outliers those in the situation, most would be significantly higher than average income earners.

Re the 1m house, that was a house in a specific position purchased in the 1970s which accrued a nominal value due to that position. Of course it isn’t worth that today. But that’s a different issue again. The location was seemingly high enough value so the nominal price rose ast he market rose.

No worries at all re house price, but trust me I’m not being in the slightest bit modest about the value of the house. No house on the four sides that comprise the block we’re in went for anything like 400k.

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alastair - February 12, 2012

Seems the Wickow house was bought for €100 grand after all:
http://www.independent.ie/national-news/500000-deal-struck-as-house-is-youtube-hit-2624442.html

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WorldbyStorm - February 13, 2012

Fair point, though it doesn’t take away from the thought that it would in the general be unusual.

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7. rmtoh - February 10, 2012

‘a public servant earning 50k per year (comfortably inside the top income decile)’

50k puts you inside the top income decile?

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CMK - February 11, 2012

If you go by the IT own figures based on a report they did in March 2009 which I can’t for the life of me find a link to, despite extensive searching. I have it on a screenshot I saved at the time and I don’t know if or how I can upload it. I think 50 K, on reflection however, would probably come under the second from top income decile in a more methodologically rigorous study (something obviously beyond the abilities of IT journalists), but still a long way from the ‘middle’ in an Irish context.

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Michael Carley - February 11, 2012

Social Justice Ireland’s figures, using the link to Income distribution and poverty in Ireland here:

http://www.socialjustice.ie/book/export/html/26

give 50000 as the 7th decile for household disposable income.

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CMK - February 11, 2012

Yes, I saw that. But that’s for combined household disposable income – do they take into account credit as income? The IT report I referencing was for individual tax payers and was based on either Revenue or CSO figures and referenced the tax paid by each decile and the gross income of individuals in each decile. On that report 50K was where the top income decile began. And there were the IT’s own figures.

OK the 7th income decile is pushing into ‘squeezed middle territory’ but I’d argued that the ‘middle’ in the ‘squeezed middle’ are the fifth and sixth deciles. But while a household might have a combined disposable income of 50,361 (using SJI figures) that household could be sustaining one single adult/couple with no dependents or a family of four or five. So, what 50 K gets the former, in terms of skiiing holidays etc, it probably won’t get the latter. And, importantly, the SJI figures are from 2009; as you know a lot has happened since then. I would say, even within the schema adopted by SJI in its report, that a 50K household disposable income is well within the 8th or 9th decile now.

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Donagh - February 15, 2012
CMK - February 15, 2012

Cheers, Donagh. I actually read it last night. I wish I had read it before plunging in here.

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8. Oireachtas Retort - February 10, 2012

Girlfriend did a year in the local VEC a while back and one of the teachers was peddling the no class in Ireland thing. No amount of basic examples would change her mind. Two days it went on until the girlfriend asks if there were such thing class what would the teacher consider herself.

She barely had the question out of her mouth when she responds. “oh middle class, but not the money just the values”

Girlfriend never finished that course for some reason

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WorldbyStorm - February 10, 2012

Very telling.

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EamonnCork - February 12, 2012

This ‘Values’ thing is quite fascinating. A rough translation of the Times position might be, ‘A middle class person is someone whose worldview is encapsulated in the Irish Times magazine on Saturday.’ Or maybe Flaubert had it right when he said that a bourgeois was someone whose first question when you mentioned someone’s name was how much money they made. Because the striking thing about the ‘values’ being trumpeted in these pieces is that they are almost solely material and acquisitive. Even the private schooling side of things seems to be done less for the sake of education than for the sake of showing that you’re the kind of person who has the dosh to put their kids through private schooling.
It’s all a bit reminiscent of those letters to the editor whenever the subsidy to private education is questioned which imply that anyone who has their kids educated in the state sector does it because they’ve spent the money which might have gone on school fees on drink and betting.
Whinging, particularly about those who’re worse off than you, would also seem to be a core value. Luis Bunuel would have cherished this series as a confirmation of all his worst prejudices against the middle class.

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9. bartholomew - February 11, 2012

‘All of these people writing this crap in the IT are university graduates, they should be able to construct a decent argument.’

Absolutely. Just to add to CMK’s critique:

Take the overall introduction to the series, written by the new editor (link in CMK’s post). The second paragraph has three sentences, all referring to the ‘squeezed middle’.

(a) ‘The term was chosen by the compilers of the Oxford English Dictionary as the phrase that best summed up 2011.’
Not so. It was chosen as the best new word or phrase of 2011, not necessarily the most typical. One of the close runners-up was ‘bunga-bunga’, which doesn’t really sum up 2011, at least in this part of the world, (but which might have made for a much better series).

(b) ‘Most people instinctively know what it is.’
Naturally. It’s self-evident. Common sense. For ‘most people’.

(c) ‘The description is not the product of a class-based view of the world but has become reality for a large majority within almost every member state of the EU.’
What exactly does ‘but’ mean in that sentence?

So the interpretation of economic and social phenomena is based on (misinterpretation of) the OED, common sense and false antinomies. Not a statistic in sight.

And the equation with the other member states of the EU is disingenuous. The people in the IT series are having to leave private schools and curtail their ski holidays. In Athens, there’s been a huge rise in the number of homeless and the Orthodox church is feeding a quarter of a million people.

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WorldbyStorm - February 13, 2012

I think your last paragraph is spot on. I find the concentration on the middle class irritating in the extreme for its localism.

Though what’s also fascinating is how much of the public sector is implicitly excluded from this when necessary or not as expedient. In the IT piece there’s a tilt towards the prviate sector but with some public sector types thrown into the mix. Ironically, given the supposed concentration on education how could it be otherwise?

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10. Dr. X - February 11, 2012

If there’s no class system in Ireland, then why do market research companies classify respondents to their surveys using criteria based on wealth and occupational status? (AB, C1, C2, D and E).

A few years back some sociology students at a Dublin university wrote in their exams that “theories of social class don’t apply in Ireland, because we have no class system”. The stupid sods were all docked a grade. That’s the kind of thing that makes it all worthwhile.

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11. CL - February 11, 2012

There will be a class-based society so long as most people have to work for a living, and others live from property ownership which allows them to appropriate value produced by others.

Half of all home owners in negative equity… a life-time of debt peonage…a government insisting on transferring billions to finance capitalists who gambled and lost…a recipe for unending economic stagnation.

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12. alastair - February 13, 2012

“Half of all home owners in negative equity”

Not really. There’s about 800,000 mortgages at play in the state, out of a total housing stock of around 1.5 million homes – 77% of which are owner-occupied (1.15 million). The latest figures on negative equity suggest that 34% of owner-occupiers with current mortgages with Irish lenders (that account for 600,000 mortgages) are effected, and 10% of them are in arrears. That would mean that ballpark 20% (applying some rounding up for those 200,000 with mortgages from foreign banks) of Irish home owners are in negative equity.

Of those, there would be very few facing “a life-time of debt peonage”.

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WorldbyStorm - February 13, 2012

Very interesting points.

In the Independent business pages last week it was suggested

“As a result, more than 146,000 mortgages are now either in arrears or have been restructured. That’s almost one in five of the 773,000 private residential mortgages in the country.”

But then they almost directly continue:

“Approximately 145,400 mortgages, or 31 per cent of the 773,420 mortgages with an estimated worth of €41bn, were in negative equity at the end of 2010.
Alarmingly, as a result of the deepening European crisis and the stagnant Irish economy, by the end of 2011, that percentage had risen to 47.5 per cent — almost half of all mortgages.”

Those are obviously two different and distinct states to be in, arrears or negative equity, although some/many are in both.

By the way that last figure [of 47.5 %] comes from the Central Bank’s own analysis “Stylised Facts, Negative Equity and Arrears” research from 2011.

They said that ‘Our findings suggest that approximately 31 per cent of mortgaged properties, representing over 47 per cent of the mortgage books’ outstanding loan balances were in negative equity at the end of 2010.
Of the mortgaged properties in negative equity, 8 per cent had also accrued more than three months worth of arrears on their mortgage loans.’

In any case the basic problem remains that prices/values continue to dip lower while the capability for people to pay diminishes and for some the ability to move is curtailed completely.

I think the most persuasive thoughts on this were the following…

“Emer Lang of Davy noted: ‘It was difficult to call a peak for mortgage arrears, but said it would lag any upturn in the economy and the peak in unemployment. She said Davy forecasts predicted a contraction in GNP this year, with unemployment stuck above 14 per cent, so neither condition for a decline in arrears was likely to be met’.”

Gloomy but accurate.

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alastair - February 14, 2012

The Dermot O’Leary formula for boosting negative equity figures is pretty bizarre btw – take the most expensive properties, with massive depreciation, and artificially transcribe that depreciation to regular properties with different circumstances? Lies, damned lies, and statistics.

The actual figures at play show that we’re nowhere near half the owner-occupied properties being in negative equity, let alone a majority.

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WorldbyStorm - February 14, 2012

re O’Leary, agree, the situation is bad enough as it is without having to resort to further efforts to make it seem worse.

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CL - February 13, 2012

‘Approximately 145,400 mortgages, or 31 per cent of the 773,420 mortgages with an estimated worth of €41bn, were in negative equity at the end of 2010.
Alarmingly, as a result of the deepening European crisis and the stagnant Irish economy, by the end of 2011, that percentage had risen to 47.5 per cent — almost half of all mortgages.
However, one leading economist has suggested by calculating the percentage by cash values rather than volume (as done in the Central Bank figures) the picture is far more disturbing.
Dermot O’Leary, chief economist with Goodbody Stockbrokers has said by using this method and the Central Bank figures the percentage of mortgages in negative equity is between 60 and 65 per cent — almost two-thirds.’
http://www.independent.ie/opinion/analysis/daniel-mcconnell-twothirds-of-mortgages-by-value-now-in-negative-equity-3016985.html
This collapse of the housing market is having a severe effect on aggregate demand which is further aggravated by mass unemployment and govt. attempts at austerity.
A form of serfdom has emerged with a comprador govt. enforcing mass transfer of wealth to international capital.

‘We want less subjugation to a system of mere value absorption and more respect for the laborious process of value creation – this demand does not come from Occupy Wall Street, but from the management boards of German industrial companies.’
http://www.guardian.co.uk/commentisfree/2012/feb/08/solution-to-eurozone-crisis-economy-stupid

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alastair - February 14, 2012

The Central Bank released a subsequent report later in 2011, and it’s from there that I take my figures (except for total housing stock, which is from the last CSO figures):
http://www.centralbank.ie/press-area/press-releases%5CPages%5CCentralBankPublishesNewResearchonMortgageArrearsandNegativeEquity.aspx

It’s also worth pointing out that “Stylised Facts, Negative Equity and Arrears” doesn’t claim a rate of 47.5% at all, despite the Indo claiming such. If you look at the report, it says that 31% of mortgaged properties are in neg equity, or 47.5% of the value of outstanding loans. Very different thing altogether

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WorldbyStorm - February 14, 2012

Great report and as you say the actual rate of negative equity is somewhere above 31 per cent plus but probably considerably less than 50. Some interesting stuff in it too.

It is therefore necessary to examine the decom- position of Groups 3 and 4 by both days past due and equity stake (Table 5). Panel 1 gives the distri- bution of the number of loans in arrears; it shows that there are more borrowers in arrears with positive equity than in negative equity. A possible explanation for this is that banks may have offered debt for equity swaps on arrears where positive eq- uity exists, but have not capitalised those arrears.
The high number of borrowers in arrears who have positive equity again suggests that negative equity is not the sole determinant of borrower distress.

Here’s an interesting straw in the wind, still taking into a/c the point that we’re nowhere near 50 per cent negative equity.

What it also notes is that: The analysis also shows that 50 per cent of mortgages in the combined loan book were issued
during 2005 and 2008, inclusive; as such it is not surprising that 51 per cent
of these properties are now in negative equity.

Here’s another interesting stat.

“While the year of origination is informative it is necessary to determine the value of outstanding debt borrowers are liable for. Table 3 gives the number of properties by total outstanding bal- ances. It shows that in December 2010, the ma- jority of borrowers had an outstanding balance of less than €200,000, with 97 per cent of PDH mortgages below €500,000. Of the 8,051 (3 per cent) properties with outstanding balances over €500,000, only 962 have outstanding balances
over €1 million. Within this high value category very few borrowers (just 625 properties) are also in
arrears of more than 90 days.”

Finally here’s an oddity from Bloomberg. I wonder what set of figures they’re working from …

“Moody’s said the proposals are credit negative for Irish residential mortgage backed securities and the details of insolvency laws used to identify borrowers “truly unable to pay their debts” together with banks’ responses “will determine the impact of our expected loss assumptions.”
The government proposed cutting the term of automatic discharge from bankruptcy to three years from 12 years and it plans to publish the final legislation by the end of April.
Moody’s said it expects home prices to fall 60 percent from their 2007 peak, pushing the total share of mortgages in negative equity to 75 percent.”

http://www.bloomberg.com/news/2012-02-08/moody-s-says-irish-personal-insolvency-draft-credit-negative-1-.html

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RosencrantzisDead - February 14, 2012

It should be noted here: the term of bankruptcy when the debt is mortgage debt is being reduced from 12 years to a maximum of seven years (84 months in the Heads of Bill). The three year headline term only applies to certain kinds of debt that fall below a certain threshold (€20,000 if I recall correctly).

The much feted reduction is not that great at all.

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13. alastair - February 14, 2012

>The analysis also shows that 50 per cent of mortgages in the combined loan book were issued during 2005 and 2008, inclusive; as such it is not surprising that 51 per cent of these properties are now in negative equity.

Not surprising at all – you’d expect higher to be honest – but 50% of the circa 800,000 mortgages is 400,000, and 51% of same is 200,000, which brings us back to 20% of actual home owners.

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WorldbyStorm - February 14, 2012

Surely. To be honest the more I think about it the more I think it’s mischievous of the Indo to try to introduce O’Leary’s definition.

That said presumably the impact of further numbers slipping into arrears in 2011 [the reports only dealt with arrears up to 2010 – though the latter dealt with equity in 2011] will mean that those numbers are somewhat higher when new figures are compiled.

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14. alastair - February 14, 2012

Agreed, but I’ve applied some generous (!) rounding up to the figures, so there’s a degree of pessimism factored in there already. There’s also the issue of those whose negative equity is an irrelevence – if you’re not moving, you don’t really care what the notional resale value might be, and those in negative equity at the tail end of their mortgage repayments – whose exposure to a ‘life-time of debt peonage’ is pretty minimal.

The business of mortgage payers who are not in negative equity, but in arrears is going to become a bigger issue I think. Our situation in our gaff is that there’s sod all chance of negative equity arising, but rather more opportunity for loss of income leading to repayment problems. I’d say there’s lots more vunerable in that regard.

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15. CL - February 14, 2012

‘There’s also the issue of those whose negative equity is an irrelevence – if you’re not moving, you don’t really care what the notional resale value might be,’ This is nonsense. The effect of negative equity is surely to reduce consumption expenditure thus contributing to the severe reduction in aggregate demand in the private sector.
‘If you look at the report, it says that 31% of mortgaged properties are in neg equity, or 47.5% of the value of outstanding loans.’-This indicates an enormous loss of wealth and an associated depletion of aggregate demand.

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16. alastair - February 14, 2012

>The effect of negative equity is surely to reduce consumption expenditure

Not necessarily. Many of those homes wouldn’t have been sold for the period of their negative equity regardless of their notional value . The downturn/recession reduces consumption expenditure regardless of negative equity or otherwise. Put it this way – every new car purchaser who borrows to buy accepts immediate negative equity on their purchase in good and bad times – does that reality impact on car sales? Not a bit – it’s the underlying economy that does. Likewise the fall in property values (for all stock – not just negative equity properties) stymies property sales, because any potential buyers who can afford to wait play the buy-at-the bottom game.

>This indicates an enormous loss of wealth and an associated depletion of aggregate

Isn’t that what the bursting of a bubble economy is? The problem isn’t negative equity – it’s the initial bloated valuations.

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WorldbyStorm - February 14, 2012

I think there’s something in that. As you say, negative equity is a problem a) if one seeks to move house, and/or b) if is unable to meet repayments and is unable to sell a property. If neither of these situations are extant then it’s not a problem.

Not that I’m saying there aren’t people facing a) or b).

It will be very interesting to see where and if we hit an actual baseline in all this in terms of property prices.

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CL - February 14, 2012

The connection between wealth and consumption expenditure is well established in economics both theoretically and empirically and for this reason is generally accepted by economists regardless of ideological persuasion. Its really not that complicated; if people have less wealth, they spend less.
The collapse of the housing market, house prices down by 50% from peak and still falling, plus the huge proportion now in negative equity are having a massive macro-economic, depressing defect on aggregate demand. Add on the associated collapse of the building industry and the problem is further aggravated. Huge govt. deficits have proved inadequate to compensate for the fall in private demand.

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WorldbyStorm - February 14, 2012

There’s something in that too, but the point is is it a symptom or a cause. For example the report makes the point that positive equity, which is extant as well is as much a problem where repayments can’t be met.

Wouldn’t it be more accurate to point to the essential problem, at least from the perspective of what is laughably termed the ‘homeowner’ as being the ability or not to pay? If that is covered then unless they seek to leave a house then whether equity is positive or negative is largely an irrelevence.

Of course in the macroeconomic sphere there are all the effects you point to, but isn’t that a slightly different aspect to the overall debate… ie the central problem from those who own homes is that ability to pay.

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CL - February 14, 2012

Certainly for people trying to keep a roof over their heads ability to pay is all important, even if they have to pay off, say, 30% of the loan before they own any part of the home.
During the boom years, people using the equity in their homes as an ATM, made the boom boomier. Now the reverse process is occurring as falling house prices and negative equity adversely affect expenditure. What is rational for each individual household is detrimental macro-economically, as depressed aggregate demand impacts employment. And the unemployment further depletes demand and so on….a sort of downward spiralling, feed back loop.
The amount being added to aggregate demand by the budget deficit is not enough to compensate for the decline in private consumption and investment demand. So the govt. looks to exports as the solution. But the amount added to aggregate demand by net exports is severely
attenuated by profit repatriation of the MNCs. All of which puts pressure on the amount of income available to mortgage holders to pay off their loan as the macro-economic debacle impacts individuals.

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WorldbyStorm - February 14, 2012

Absolutely. However I think that Alastair’s point is important.

I’m hugely suspicious of a sudden concentration on negative equity on the part of the Indo or any media, and this in no sense detracts from your point, because it seems to me to link straight back into some of the most pernicious aspcts of the bubble. And he’s right. The valuations were wildly over inflated, but no surprise if the Independent and others were trying to whip up the equity issue while simultaneously trying to pump prime a market which by rational analysis has further yet to fall.

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CL - February 14, 2012

Here’s a piece by Dean Baker which may be relevant. He’s talking about the U.S but the collapse of ‘bubble equity’ and its effects are common to both economies. Baker has some cred because he predicted the collapse of the U.S. housing bubble way back in 2002.
“Look to the further declines in the rest of this year to eliminate most or all of the remaining bubble equity.
The loss of this wealth will further dampen growth. This should drive home the fact that house prices, like the Nasdaq following the tech crash of 2000-2002, are not coming back. Homeowners will have to come to grips with this massive loss of wealth. While many commentators (no doubt, the surprised ones) complain that consumption is low, the reality is that consumption is still at an unusually high level relative to disposable income. ”
http://www.guardian.co.uk/commentisfree/cifamerica/2010/aug/31/subprimecrisis-usa-house-prices?INTCMP=SRCH
With house prices in Ireland still falling it seems that ‘bubble equity’ has some way to go before being eliminated, and ‘the loss of this wealth will further dampen growth’-regardless of whatever the correct figure is now for negative equity.
equity’ has not yet been eliminated

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WorldbyStorm - February 15, 2012

Can’t disagree with you there CL. There’s no two ways about it. The idea that growth will come from all this seems optimistic in the extreme.

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17. Benny Bourgeois - February 14, 2012
18. “Fighting for the Fortgotten Middle Class” « The Cedar Lounge Revolution - February 22, 2012

[…] a number of posts on the issue. “Riddle me this: The squeezed ‘middle earners’” and “More on the ‘Middle Class’…” Seems its a tried and trusted slogan.. From 1992 and  the US middle Classes weren’t […]

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