Monthly Archives: September 2013

Im thinking of voting to retain the Seanad

Its strange to find oneself on the same side of a political argument as Fianna Fail. That’s now where I find myself with regard to the referendum to abolish the Seanad.

As an exercise in sheer political cynicism this referendum is hard to beat. Conceived by all accounts in a rush of political blood to the head to fill an empty season it sees parties engaging in volte face after volt face, playing ducks and drakes with the constitution for momentary political gain.

Fianna Fail say no to abolition. Having been in power since approximately the Jurassic period, they have over the years stuffed the Seanad with more political dinosaurs than one would find in a box set of Jurassic park but they now profess a desire for reform.

Sinn Fein were in favour of reform but are now against. I think.

Labour were also in favour of reform as late as 2009 producing a good piece on how this could be achieved.

There are many many reasons to abolish the Seanad. Forget the money for a moment – a working democracy requires politicians who can live on the wage, and who are well supported in terms of administrative and other capacity. Nobody seems to know how much it costs nor how much abolition will save.

Most people dont know who is in the Seanad. Just the other day I heard that Susan O’Keeffe, a really excellent journalist whom I had noticed had gone off the media, was in fact a S enator. Who knew. There are many many senators who pass through the chamber without troubling the world as to their existence as to senators. One whom I will not mention I was certain of as having died these many years past.  But many others, notably the university senators, are active. They do their job as legislators in bringing legislation to the floor. It is the government that as a matter of routine votes it down even when agreeing with it. This last year we have seen the following acts brought

  • Business Undertakings (Disclosure of Overpayments) Bill 2012 Ronan Mullen
  • Employment Permits (Amendment) Bill 2012 [Seanad] Fergal Quinn
  • Financial Stability and Reform Bill 2013  – Sean Barrett
  • Food Provenance Bill 2013 – Fergal Quinn
  • Mortgage Credit (Loans and Bonds) Bill 2012 [Seanad] Sean Barrett
  • Protection of Children’s Health from Tobacco Smoke Bill 2012. John Crown
  • Public Health (Availability of Defibrillators) Bill 2013 Fergal Quinn
  • Reporting of Lobbying in Criminal Legal Cases Bill 2011 John Crown
  • Seanad Electoral Reform Bill 2013. John Crown
  • Seanad, Bill 2013 [Seanad] [PMB] – Katherine Zappone and Feargal Quinn
  • Upward Only Rent (Clauses and Reviews) Bill 2013 – Fergal Quinn

Then there are the bakers dozen that the Taoiseach de Jure can appoint. Three words suffice to show how this works – Senator Eoghan Harris. But then there is Katherine Zappone.

It’s a rotten borough – leaving aside the university senators (and successive governments of all hues have refused to implement the 40 y old constitutional amendment to allow all graduates to vote leaving that franchise even more stunted and still the most representative)  and the taoiseachs nominees, they are elected by panels of county coucillors and a hodgepodge of other bodies on “panels”.  See the bottom of the page for a list. A rotten borough however should not in and of itself preclude either the election of good people nor the abandonment of the idea of elections. Reform the electorate is an alternative to abolishing the election.

The main reason though, apart from the fact that abolishing it would concentrate even more power legally as well as factually in the hands of the cabinet (the Dail being as dead a letter as the Seanad when it comes to holding said cabinet to account) , the Government seem not to be convinced. They refuse to put forward the man who thought this up, An Taoiseach, to debate. This is either an arrogant belief that it doesnt merit debate, or a feeling that the grounds given are sufficiently weak that even Michael Martin might shred them.

So, i’m thinking of voting to retain – that way we can at least debate reform having told the government we don’t want to be bounced into this. If the system is irreformable, then fine. But lets try first.


  • Administrative Panel     7 seats
  • Agricultural Panel         11seats
  • Cultural and Educational Panel   5 seats
  • Industrial and Commercial Panel  9 seats
  •  Labour Panel  11 seats

List of nominating bodies

  • Administrative Panel
    • Association of Municipal Authorities of Ireland
    • Central Remedial Clinic
    • Enable Ireland Disability Services
    • General Council of County Councils
    • Irish Deaf Society
    • Irish Kidney Association
    • Irish Wheelchair Association
    • Multiple Sclerosis Society of Ireland
    • National Association for the Mentally Handicapped of Ireland
    • People with Disabilities in Ireland

Agricultural PanelAgricultural Science Association

  • Central Fisheries Board
  • Dairy Executives’ Association
  • Irish Co-Operative Organisation Society
  • Irish Grain and Feed Association
  • Irish Greyhound Owners and Breeders Federation
  • Irish Thoroughbred Breeders’ Association
  • Munster Agricultural Society Company Ltd
  • National Association of Regional Game Councils
  • National Executive of the Irish live Stock Trade
  • Royal Dublin Society (RDS)


  • Cultural and Educational Panel
    • Aontas Múinteoirí Éireann
    • Association of Secondary Teachers Ireland (ASTI)
    • Bantracht na Tuaithe
    • Comhairle na dTréidlia
    • Comhaltas Ceoltóirí Éireann
    • Comhar na Múinteoirí Gaeilge
    • Comhdháil Náisiúnta na Gaeilge
    • Cónaidhm Éireannach na Múinteoirí Ollscoile
    • Conradh na Gaeilge
    • Council of the Bar of Ireland
    • Cumann Gairm-Oideachais in Éirinn
    • Cumann Le Seandacht Átha Cliath
    • Cumann Leabharlann na hÉireann
    • Dental Council of Ireland
    • Drama League of Ireland
    • Gael-Linn Teoranta
    • Gaelscoileanna Teoranta
    • Institute of Community Health Nursing
    • Irish Dental Association
    • Irish Georgian Society
    • Irish National Teachers’ Organisation
    • Irish Playwrights’ and Screenwriters Guild
    • Law Society of Ireland
    • Medical Specialists Limited
    • National Youth Council of Ireland
    • Pharmaceutical Society of Ireland
    • Royal College of Surgeons in Ireland
    • Royal Irish Academy
  • Royal Irish Academy of Music
  • Royal Society of Antiquaries of Ireland
  • Údarás na Gaeltachta


  • Industrial and Commercial Panel
    • Association of Advertisers in Ireland
    • Chambers of Commerce of Ireland
    • Chartered Institute of Logistics & Transport in Ireland
    • Construction Industry Federation
    • Cumann Aturnaethe Paitinní agus Trádmharcanna
    • Electrical Industries Federation of Ireland
    • Institute of Advertising Practitioners in Ireland
    • Institute of Bankers in Ireland
    • Institute of Certified Public Accountants in Ireland
    • Institute of Chartered Accountants in Ireland
    • Institute of Industrial Engineers
    • Institute of Professional Auctioneers & Valuers
    • Institution of Engineers of Ireland
    • Insurance Institute of Ireland
    • Irish Architects’ Society
    • Irish Auctioneers and Valuers Institute
    • Irish Business and Employers Confederation
    • Irish Computer Society
    • Irish Country Houses and Restaurants Association
    • Irish Exporters Association
    • Irish Hardware & Building Materials Association
    • Irish Hotel and Catering Institute
    • Irish Hotels Federation
    • Irish Planning Institute
    • Irish Road Haulage Association
    • Irish Tourist Industry Federation
    • Licensed Vintners’ Association
    • Marketing Institute of Ireland
    • Marketing Society Limited
    • National Off-Licence Association
    • Restaurants Association of Ireland
    • Retail, Grocery, Dairy and Allied Trades Association (RGDATA)
    • Royal Institute of the Architects of Ireland
    • Society of the Irish Motor Industry
    • Vintners’ Federation of Ireland
    • Wholesale Produce Ireland


  • Labour Panel
    • Irish Conference of Professional and Service Associations
    • Irish Congress of Trade Unions

Irish Pension funds need to look beyond the obvious.

This is a version of a column published in the Irish Examiner 28 September 2013

Pensions are a time bomb that everybody knows is ticking away but few seem willing to defuse. Most politicians have over the years been happy to hope that when it does explode they will be long gone from the scene, and anyway maybe none of their constituents will be hurt. The recent proposals for mandatory provision are a good idea well grounded in best practice but are they enough?

Irish private pension funds have had a good year. This comes on the back of several horrible years. The year was good not just in terms of returns, 27% over the last four years or 6% per annum. It was also good in terms of inflows. This is important as the raid by the government on private pension assets has and had the potential to instill a lack of confidence. Yet we saw an inflow of 11%. Irish pension funds now stand at just over €80b.

This sounds a lot, but it is not really that much. Irish households have  on deposit in excess of €90b.  In a low interest rate environment where we are and will be for some time to come 80b will not yield much more than 4% pa. This amounts to,  gross of tax, about €6400 per person. This is not enough to live on. Thus pension funds need to either up the rate of return they will get or they need to increase the amount of money under management, or both .  The recent review of the Irish pension system by the OECD suggests that the private pension industry in Ireland, despite what many feel, is not overly expensive in terms of fees, measured internationally. What is problematic is that it is small. Smaller financial companies can find themselves at a disadvantage. While big is not always better, the efficiency of the pensions industry is probably best enhanced by it growing.

To get more returns is problematic. The strong 5-6% growth era of Ireland is over. We have not had that real growth since the mid 1990s and those conditions are not coming back. We have seen how problematic this can be when we chase that growth from credit pumping and / or property ponzi schemes. Thus pension funds that wish to increase growth in the longterm will need to consider thir asset allocation strategy very carefully.

If we examine Irish funds against European funds we find some significant differences.  Irish funds tend to have the highest allocation to equities and amongst the lowest to property. This is strange. Although we have been burned by the property crash commercial property should form a solid part of a pension fund. The nature of this asset class is that it is longterm. To some extent this underweighting is a reflection of the cycle we are in but Irish pension investors should consider if 2% is appropriate for the long term. Second, within this heavy equity allocation Irish pension funds are grossly overweight in holdings of domestic equity. They hold 32% of all assets in the form of Irish company shares. The market capitalization of Irish shares is approx. 0.2% of world shares. This overweighting in essence is a gigantic bet on the health of the Irish stock exchange.

Screen shot 2013-09-27 at 11.26.03

The domestic focus continues on the bond side, where only 5% of bond assets are non domestic government bonds. While Irish government bonds have performed very well over the last couple of years, falling yields being indicative of rising prices, pension fund investment is a longterm investment.

Screen shot 2013-09-27 at 11.27.27

It is in the area of alternative investments that we see what is for me the starkest difference. The UK has shown a consistent drift to greater allocation of investments in alternative (to stock and bonds) assets over the past decade, with now 11% of all assets allocated. For Ireland this is 3%. The UK is leading a field in which we are lagging. 24% of all plans in europe are planning to increase their exposure to alternative investment classes such as gold and private equity.

Alternative investments are not an asset class – they are a series of asset classes ranging from emerging market debt to copper futures. The main elements tend to be commercial property, hedge funds, commodities, and classes of debt. Looked at over the last decade or so, certain kinds of alternative investment classes have performed spectacularly well.  Amongst the top performers have been global infrastructure funds, commodities especially gold, and global private equity funds. Gold in particular has shown a remarkable sustained growth since 2000, even allowing for an element of froth. So also infrastructure, a trillion dollar market. And these are not especially volatile.

vol ret

Irish pension funds will get increased levels of assets as the governments mandatory policies come on stream. This is good, in the long term. But it will only show the full benefit if the domestic equity focus is scrapped and a much more imaginative asset allocation policy is put in place. Irish pension funds having weathered the worst of the crisis should now look outwards.

Punishing trade union members for being union members….

tolpuddA week is a long time in politics. A century is therefore much much longer. One of the great traditions of the many strands of the left was that the right to organize and to engage in collective action should be respected, both for individuals and groups. People have , literally, died for this right, three of them in the 1913 Lockout in Dublin.  There are parts of the world where union membership is a dangerous , costly business.

Ireland’s finances are in a mess. The decision of the Association of Secondary Teachers of Ireland to reject, in a democratic open vote, the Haddington Road Agreement will not make a jot of difference to this. The total savings of the agreement are calculated at €300m, which is a lot to thee and me but not a lot in the context of say the €100b we have poured into the banking mess.

Big-Jim-LarkinWe now have the strange situation where the Labour Party, the direct lineal descendent of the organizers of the 1913 lockout, are going to proceed to implement a policy whereby ASTI members will be financially penalized MERELY for being members of that union. Two teachers, doing exactly the same work, will now be treated differently by their employer just because they are members of different unions.  ASTI members will be locked out of any existing contractual incremental raises which non-ASTI members will be eligible to get ; Non-ASTI members will eventually get any pay cuts imposed restored, ASTI members will not ; There are other issues which amount to discrimination simply on the grounds of union membership. We don’t allow discrimination, overt calculated legally binding discrimination, on the grounds of race. Why on this?

Two questions emerge : First, what is the constitutional position of this discrimination? Second, how happy (as opposed to acquiescent) are members of the labour party with this?

swing_riots_lgI guess things have moved on. In 1913 James Nolan, Michael Byrne and  John Byrne died at the hands of officials on account of their membership of the ITGWU. Now they would just be fiscally punished. Conflating Pat King with Captain Swing may be rhythmical but its not logical. Punishing people for expressing their democratic views is unfair. From the political perspective this is the equivalent of the murder of the Duc D’Enghein – worse than a crime, it is a blunder. And its chilling – what is the next step? To impose extra taxation on people who reside in particular constituencies because they vote against the government? To cut the wages of those who are members of non-government political parties? Or those who are non-members? Fining people for not cheering when government ministers sweep by? Penalising union members just for being union members is rolling back 150 years of social democracy. That it is a so-disant social democratic party doing so shows how utterly corrupting is power.

Why you should get third level education…

Coz it pays off…

From the 2013 OECD Education at a Glance database, Indicator A7. Data are in those curious beasts, Purchasing Power Parity Dollars. These are dollars adjusted for relative purchasing power. Payoffs are divided between those that accrue to the recipient of the degree (private) and to the public at large.




Why do we hate teachers?

Schoolmaster-with-cane-be-006We seem to hate teachers, at least if one goes by some of the comments one sees. Teachers are pretty regularly called thugs, bullies, parasites, derided as lazy, seen as grossly self interested, motivated only by money (as opposed to the pure desire of those commenting to help the public and work pro bono), and castigated for little johnny not progressing fast enough.  With the news that ASTI (the main second level teachers union) has rejected the Haddington Road  Agreement, expect this vitriol to seep out of the media once more.

One of the more egregious but alas not uncommon type of comment comes from the commentator and financial advisor Eddie Hobbs, who tweeted saturday

“Next weeks common Q at school gates: Are you TUI or one of those spoiled ASTI muppets on €60 grand a head +pensions €1m, threatening my kid?”

This sparked a good few conversations on the twitter machine, with a few comments (in the high negative) from yrs trly. I had to head off mid stream to continue the shopping/mind the two year old/do Saturday things, but the conversation continued. Eddies crowning glory was to seem to suggest that the (female dominated, 65% of staff) ASTI decision to reject the haddington road agreement was down to PMT. Classy

@brianmlucey Sal 60k @NRD (ASTI TUI) +Pen accurate ref annuities. Not about performance, about affordability. Increase dose feminax


Its this kind of frankly odd mixture of loathing, name calling and incitement to class division that got me thinking : why do we hate teachers so?

Three things seem to be particular bugbears: salaries and pensions, inability to deal with underperforming teachers and holidays.

The first is of course subject to massive confusion. Even someone like Eddie, who’s job it is to deal in figures, seems unable to find out the average salary. And it’s hard. But for 2012 we had a 2011 spend of 1,180,m on second level teachers salaries this year, and 2,052 on primary. In 2011 we had 32489 primary teachers and 26185 second level. So it’s a salary level of 1180000/26185 or 45k average for second level and 2052000/32489 or 63k for primary teachers on average. This gives a total average salary of 3232000/58674 or 55k. Not bad but not 60k. There is more to this however, on which I will talk below.

The second issue is entirely correct. There is no reason, other than a combination of managerial sloth and union power, combined with a healthy dose of political cowardice over decades, why we have not gotten in place some system for inservice evaluation, with rewards and sanctions, for pretty much every aspect of the public sector. We still don’t.

The third is strange. Many seem to think that the purpose of schools is to act as free crèches for the kids. By all means lets cut down on holidays – but will it serve any educational purpose? If we look at the West German experiment it seems not to matter. Other research suggests similar. And again, there is more to this than meets the eye.

Surely the issue is : how are we doing? Data driven analysis or discussion is alien to Irish commentators it seems. In this field there is a wonderful resource : every year the OECD publish a report comparing a whole pile of metrics in education round the OECD. Its called “Education at a glance” and is well worth reading . It has lots of information on the structure, costs, benefits and so forth of all levels of education. Money values are reported in PPP$ which is to say US Dollars adjusted for relative purchasing power, reflecting that its cheaper to live in Portugal than Norway. Thus these are broadly comparable.

The 2013 edition is out but recently. Its instructive to look at the data on second level teachers.  In a lot of the metrics the data are split into Lower and Upper secondary. This is roughly up to the Junior Cert and then the senior cycle. Many states have separate junior and senior schools.


  • Irish education manages to graduate more of those who start education (89%) than the OECD/EU average 83/84
  • A second level education in Ireland pays off. For a man it has a lifetime present value of  $142k , for a woman $118. The oecd averages are $100 and $69
  • We spend more per student per annum at second level,  $11k than the OECD or EU average $9k. Looking at this in terms of GDP per capita the discrepancy is less : 28% v 26% for the OECD/EU
  • We spend less on (primary and secondary) education – 7.4% – as  proportion of total government expenditure than the  OECD or EU – 8.6% and 7.6%
  •   Total current spending including all wages (94% of all spending) is slightly higher than the OECD and EU averages (92%)
  • Salary costs per student per annum are $3800, compared to OECD average of 3400. In per capital terms its less of a discrepancy, 10.3% vs 10%
  • Irish teachers, compared to other tertiary educated workers, earn 82% of average salary. This is less than the EU or OECD average of 89%.
  • Irish teachers spend more time, net, teaching (735h) than the OECD or EU average ( 686h, 650h) .


So : we pay second level teachers a bit more, but we seem to get more out of them than our peers. Which makes the frank hatred evinced from some quarters hard to fathom. I personally believe it comes down to bad experiences. I had some truly horrendous teachers. But I had more ok and a couple of really good ones. Instead of arguing from simply the curdled reflection of our school days we might want to look at the data as they are now. And they show a decent system. Lets stop demonsing the people in it.







So ... think we should raise VAT?

Theres a report out that suggests that we could raise VAT, to get more tax, which would be nice. Or at least it would be if
a) all goods were price inelastic and demand for them didnt go through the floor
b) we werent already flatlining on sales and domestic demand.
But what do i know….

Most seems to focus on the zero rated and VAT exempt categories. Although there is no breakdown on the CSO database of these precise categories, the picture below covers most of these (but not 100% accurate – Books at 0% are lumped in with newspapers which are standard rated).



Leaving Certificate Economics 2012: problems

Kevin Denny points out here a major set of problems. There are technical problems with wrong or irrelevant answers ; there is an underlying problem with an outdated syllabus. One hopes that this dissection will receive the same treatment as that which was afforded the math exam when problems in it were brought to light. Somehow I doubt it.
Following the problems here and in Math, one wonders also : what other subjects have 44y old syllabi? More immediately, what other exams might, if gone through in detail, show up issues in interpretation or errors? Chemistry? History? Physics? The response from the State Exams Commission has been underwhelming to say the least. It seems to amount to “no problem here because we say there is none”. This isnt good enough. At the very least Kevin deserves to have his questions answered in full. The 3800 students who sat economics at higher level also deserve this.

Random thoughts of an editor on peer review


I have been a journal editor for over three years now, as in Editor in Chief. At present I am editor of two journals, and on the board of three others. I have reviewed for over 25 separate journals and done special issues as a guest editor for half a dozen. One of the most frustrating things about being a journal editor is dealing with the process of getting good reviews. First you have to get someone to agree, and then typically it’s a chase to get the review in. Some thoughts below and bear in mind that editors have probably committed every sin here and then some….

  1. It’s called peer review for a reason. You, putative reviewer, are the peer. If you don’t do it for them why should they do it for you?
  2. It’s good for you. This is one way to keep up with the literature. Don’t whine.
  3. Saying “i’m busy” is not a good excuse. The chances are really really high that the editor is much much busier than you.
  4. Saying “it’s not my area” is a slightly better excuse. But, it is not a good one when you have published a very closely related paper recently. And saying ‘I’m only one of the authors’ in response? That doesn’t cut it.
  5. Be open.  Unless it’s a review for the Journal of Incredible Specialization, specialists and generalists have a role to play. At least they do in social sciences, IMHO. If you are a finance professor specializing in say markov switching portfolio allocations, that’s great. But it doesn’t mean that you shouldn’t have an informed view on a paper on say the role of alternative investments in portfolios, or portfolio planning for sovereign wealth funds. Specialization is for ants. Editors, especially of general journals, will try to get specialized and more general reviewers
  6. Be honest. Don’t agree to do it then not do it. We all find ourselves having at times to back out of agreements. Its much better to say “sorry, I now find I cant” than to sit mum.
  7. Be timely. Try to do it on time. You can’t complain about how long it takes a paper to be deal with if you are sitting on reviews like a dragon on its hoard.
  8. Be meaningful. A review is more than a suggestion to revise or to reject or to accept. It should be meaningful. It should guide the author on what is good and what is not so good as you see it. If it’s short then it probably isn’t going to do that.
  9. Read the invite. Most journals now have in their email inviting you to review a link to accept and one to reject. Don’t respond with a long apology about how you would love to you cat has kittens and you have a paper yourself to do and anyhow  Prof von Juntz at Miskatonic would be better. Click. The. Link
  10. Be humble. Don’t use the review process to puff your own work. Its perfectly ok to suggest that your work be included as part of the paper if your work is relevant and missing. But ask .. if its missing is it really as good as you think? If it is and the paper misses it, what else is it missing…
  11. Don’t be cruel. If the paper is truly awful, suggest a reject but don’t engage in ad hominum remarks. Rejection should be positive.
  12. Be definite. Ok, its our role as editors to make the call but try not to sit on the fence. Tell us what you think in the cover letter.
  13. Be conscious of your role. Don’t get upset if the editor doesn’t take your advice. Its our call to determine, with you aid, what to do with the paper. You are part not the totality of the decision making process.
  14. Be scientific. Don’t fall back on filling the review with editorial and typographic issues. IF the paper is rife with errors, tell the editor and give examples. Concentrate on the added value of your scientific knowledge and not so much on missing commas etc. If as part of your revision you think that the paper should be professionally proof edited (as I sometimes do with my own) then say so.
  15. Be sensible. A caveat to this is that the paper is an act of communication. If it is so poorly constructed as to fail then tell me that also. Remember however that this is not Proust or even Lee Child. Its not about style but substance until the style gets in the way
  16. Ask the editor. If you are unsure about something then ask. Don’t stew – your wasting your time and worse that of the author.
  17. Be aware of that for which you are reviewing. Reviewing for a conference is not the same as for a journal. The aim of most conference organizers is to have decent work needing feedback presented. Therefore the bar in terms of completeness etc is lower. The material still needs to be scientifically good enough but this is a step on the way not the final stage.
  18. Thank the author if you learned anything, even if you are suggesting rejection.
  19. Be realistic about the process. You and the editor and the journal will make errors. Poor (in retrospect) papers will be accepted, good ones rejected. Therefore don’t beat yourself up if such is made, learn from it.
  20.  A review is a mini paper – structure it as a logical flow of argument. You can’t critique a paper for being a rambling mess if your review is one also.
  21. Don’t tell the author what you think the editor should do – reject etc. Tell the editor in a cover letter.
  22. Be helpful. Make suggestions to the authors as to how to overcome the shortcomings you identify

Someone needs to define affordability in mortgages

This is a version of a column which appeared in the Irish Examiner 14 September 2013

Since the appearance of the banks before the oireachtas committees last week we have seen a lot of discussion on the mortgage issue. Like the poor, speculation about mortgages will always be with us it seems.

A vexed element of the mortgage story is that we still know little about what the extent is of “wont pay” versus “cant pay”. This debate has been raging now for months and we still are no further along than we were at the start. The very term “strategic default” itself is fuzzy and incoherent. It implies a degree of deliberate decision making that is absent from all studies (outside Ireland) where the evidence is that the overwhelming determination of default is an emotional not a rational decision.


Underlying this and running through other issues related to debt is one common denominator- we have no definition of what is and what is not affordable. Take the discussions on the insolvency regimes. Anyone who has read the guidelines for what is and what is not acceptable expenditure will note a massively intrusive approach into peoples spending. While people who are in mortgage default or those who worse end up in insolvency clearly need some assistance with their spending habits, the bottom up approach imposes significant compliance costs and significant monitoring costs. Whose business it is , apart from those spending it, what money is spent on sticking plasters?


A much simpler approach could, if there was regulatory will, be imposed which harks back to the past. This is to determine what is an acceptable percentage of after tax salary to spend on the servicing of debt. Typically this was seen as being in the region of 35%. What is interesting is that in the United States the percentage of household income devoted to debt service has hovered around the 10-15% for decades. The closest we can get in this country from the quarterly financial accounts suggests that as an economy as a whole we are around the same rate. But in Ireland we have a situation where the household sector is, financially, fractured. First we have more households without than with a mortgage. While non mortgage households will have other debts they will of necessity have much lower percentages of disposable income taken by debt service than those that have mortgages. Second, within the mortgaged households we have those in arrears (some 18%) and those without. Again, we do not have up to date information on how financially stressed these two elements are. The proponents of massive strategic default (or fraud as they are seemingly reluctant to call it) would have one believe that there is little, and that the 18% are for a large part simply keeping up a (non housing related) lifestyle that they cannot afford. It is perhaps more likely that these are more financially stressed and that they devote a larger part of after tax income to debt repayment than those who are not in default.


So what about mortgage debt? It might be simpler for the incoming regulator to state that 35%, with wiggle room of 5% either way, would represent an acceptable level of repayment for a principal private residence . The difficulty is that in doing so we would probably cause a significant hole to appear in the banks balance sheets. A very large number of mortgages would be reclassified as non-repayable were we to do this. This would cause the banks to have to engage in real terms with the mortgage holders. And that would result in write-offs which would erode the capital of the banks. But they have already been granted capital to do this. In the last round of bank capitalization they were required to put aside nearly 10b for losses on mortgages alone. They have not written off this amount, and will not. The taxpayer however has a right to expect the funds injected to be used for the purposes stated and thus significant write-offs of debts as irrecoverable is inevitable.

Setting a public level of affordability would also allow us to get clarity on the extent of strategic default. If someone is paying 50% of aftertax income on a mortgage and still falling into default, it is doubtful if anyone would call that a strategic default. Unaffordable yes, strategic no. On the other hand, someone paying 20% who is in default might well be required to get engaged with the realities of life.

There are good economic reasons why we might want to keep opaque the details of settlements between banks and defaulters. Banks like all lenders need to be able to get as much as possible from loans and thus, unpalatable as it may be to some, they need to hold the upper hand in negotiations. But there is no reason why we should keep opaque the level of any non commercially sensitive data. In this context we could reasonably ask that the banks be required to return to the central bank and that they publish on a monthly basis the amount of repayments made on mortgages, broken as between interest and capital. Indeed this could usefully be further broken down by those in and those not in arrears.



Is there a bubble in the UK housing market?

Recently there has been an upsurge of concern about a house price bubble in the UK. New Governor Mark Carney has made soothing noises about the existence of one.

Recent developments in econometrics allow us a new test which might be able to shed some light on this; it also tantalizingly allows us the possibility of a ‘real time’ bubble dating model.

The tools are, to be technical for a moment, ‘Right Tailed Augmented Dickey Fuller’ tests. They are new, and still being refined and evolved. For some discussion of them and their use see the originating papers by Phillips et al (Phillips, P., S. Shi, and J. Yu, 2013. Testing for Multiple Bubbles 1: Historical episodes of exuberance and collapse in the S&P 500. ; Phillips, P., Y. Wu, Y., and J. Yu, 2011. Explosive behavior in the 1990s Nasdaq: When did exuberance escalate asset values? International Economic Review, 201, 201–226. ; Phillips, P. C. B. and J. Yu, 2011. Dating the timeline of financial bubbles during the subprime crisis. Quantitative Economics, 2, 455–491.)

See also work on the Colombian housing market ( Testing for Bubbles in Housing Markets: New Results Using a New Method JE Gomez-Gonzalez, J Ojeda-Joya, CR Guerra ) ; on the HongKong market (Yiu, Matthew S., Jun Yu, and Lu Jin. “Detecting bubbles in Hong Kong residential property market.” Journal of Asian Economics (2013)) ; on the German market (Chen, Xi and Funke, Michael, Renewed Momentum in the German Housing Market: Boom or Bubble? (June 27, 2013). CESifo Working Paper Series No. 4287)

These papers all give detailed discussions of the test. A program for eviews is available (see ) as is one for Matlab (see ).


To implement this one proceeds to run the tests and to extract the SupADF statistic series.

One then looks for the existence and the date of a bubble by looking at when and if the test statistics exceed their statistical critical value.

Below see two graphs. The first is the UK housing market, defined as the Nationwide All homes index. Overlaid is the Nationwide First Time Buyer Affordability index. The second is the test statistic which indicates a bubble starting in md 1999 and terminating in late 2008. While there is a slight uptick in the statistic for q2003 it is still well below its critical value and has been on a downward trend. This suggests, no more, that at present there is not a bubble; it does not suggest that vigilance is not needed.