Irish Household Indebtedness

Sarah Carey’s article in today’s Times raises a useful point. While figures for average levels of debt are available—and show a huge increase in debt-to-income ratios since the turn of the decade—this average ratio isn’t very useful for informing us about median debt burdens or, more importantly, about the fraction of households close to financial distress. Sarah is correct that, as of now, these statistics are not being collected in Ireland. Surveys are being used to provide estimates of these figures for Italy, Spain and the US and a survey of this type would be very useful here. I’d like to add a couple of observations about this issue.

Another aspect of this debate that tends not to be emphasised is that it can be misleading to just focus on statistics for debt without looking at the other side of the balance sheet, i.e. looking at household assets. The evidence shows that, while the boom period saw a substantial build-up in Irish household debt, it also saw an even bigger increase in assets. A recent Central Bank article by Mary Cussen, John Kelly and Gillian Phelan shows that household net worth (assets minus liabilities) rose from 640% of net disposable income in 2002 to a peak of 800% in 2006.

This substantial increase in the value of assets was, of course, mainly due to increases in the value of the Irish housing stock. However, it is worth noting that Irish households maintained moderate savings rates during this period and these savings also contributed to asset accumulation.

These two facts are interesting because they run counter to much of the popular mythology about the late Celtic Tiger period. TV programs such as the annual McWilliams trilogy or George Lee’s recent “How We Blew the Boom” usually feature a segment in which we are informed that reckless Irish consumers went on an unprecedented spending binge fuelled by cheap credit (commentary usually intoned over pictures of frenzied shoppers at Dundrum Town Centre on a Saturday afternoon.) According to these accounts, the current slump is just the inevitable hangover from this period of irresponsibility.

In fact, Irish households continued to save and despite the increased levels of debt, their net worth increased considerably. As a general rule, I think people need to be wary of commentators who warn that economic troubles are caused by greedy and feckless consumers. Most of the time, most of us are making the best decisions we can with the information available.

None of this is to say that all was perfect during the waning years of the Celtic Tiger. Much of the increase in net worth has now been eroded as house prices have fallen (the Central Bank article only captures the start of this process as it ends at 2007). And this gets us back to Sarah’s article.

The average figures for debt and asset levels likely hide enormous cross-sectional variations. Older people with houses purchased long ago saw huge increases in the valuation of their homes. Now they are seeing these “paper wealth” gains eroded but, by and large, they did not go on spending sprees during the boom and did not accumulate large debts. Younger people, however, ended up purchasing “assets” (houses to live in) at vastly over-valued prices and paid for them with debt that still has to paid off. So, the composition of recent changes in assets and debts likely differed substantially across demographic groups and it is the younger cohorts that are most likely to be in trouble now. But, to the best of my knowledge, we have very little data to put numbers on this story.

12 replies on “Irish Household Indebtedness”

Gerard’s survey is really interesting. SHARE collects good data on asset and wealth, which is not surprising given who put SHARE together. But Karl makes a great point about the type of survey needed, and what is great is how innovative the survey directors of these studies are around innovation of measurement of core concepts – consumption, assets, wealth. The recent work by Martin Browning, Olympia Bover and others points the way – all based on innovations using these datasets as labs. It must be sensible – even in current times – to propose to the CSO that such a survey is well worth doing in Ireland and it is one survey that lends itself to web based platforms.

Not sure I agree with the central point in this blog entry.

1) Ex post, whether there were any net savings going on during this period will depend on how far the property market still has to fall. It’s all well and good to be putting away €25, but if you are borrowing €100 at the same time to buy an asset nominally valued at €100, this only represents net savings if the €100 gets spent on an asset which loses less than 25% of its value.

2) Now let’s imagine the house falls in value to €50 (ie what it was really worth all along) In this case it is not the poor schmiel who overpaid for a semi-detatched palace in Hunters Wood who is guilty of the “conspicuous consumption” McWilliams and Lee are on about, but rather the person who sells him the land. However, that is a distributional detail – the aggregate effect is the same; namely that the economy borrowed €50 and only saved €25. That seller has real cash in his hand (hence a balance sheet in the black), but as soon as he starts spending it on imports, the Irish economy is plunged into net indebtedness.

3) The fact that our banks are illiquid and our sovereign bonds are being bought by foreigners (at a steep rebate) suggests to me that those nominal savings were illusory in the way described above. After all, if we had saved so much over this period, where is the money now?

4) A more likely story is that we borrowed foreign money on international markets to (over)pay for Irish land. The sellers of this land spent a too high proportion of the proceeds on imports (Zara dresses and Mercedes Benzes), and when the sands of property wealth blow away, core indebtedness is exposed.

5) In any case, I think it will be impossible to get a true sense of where the fault lines of the Celtic Tiger should be drawn (on issues as wide-ranging as bank solvency, fiscal balance, private indebtedness), until we know how far and how deep the property market will fall. Our fate is inextricably linked to the ever-crumbling housing market.

Quick response to Graham’s comment. When I say saving I am referring to the traditional national income account concept: Irish people did not spend all of their househould disposable income. Whether the savings were well invested is questionable but that there was saving is a fact.

Graham is on the money though. We both saved from income a-la-Karl and borrowed through the banks to acquire assets in Ireland and abroad now worth substantially less than we paid. Aside entirely from the deterioration in credit availability, the decline in net worth supports a smaller national balance sheet, and hence the inevitable de-leveraging evident in BOP turnaround and in the money and credit aggregates.

Taking Gerard’s slides am I right in reading that 47% of people in the survey have no debt at all or was that just a particular group. I get a little tired of the “we all borrowed, we all spent like crazy, we’re all doomed” etc. The fact is we didn’t all do this at all. I have no debt, my house is paid off. (By the way I’m the same age as Brian Lucey!). Some of us did see this coming.

I did invest in shares and did very nicely over a 10 year period and while they’re worth considerably less now than they were 2 years ago they are still worth more than the money I put in. If you invested in property 10/20 years ago (wish I had) you are still well up on the deal.

The question is how many people are there out there like me who have the capacity to take advantage of the recent slide in property and shares. Back to my hobby horse this economy will start to get going when asset values fall to a sensible level. But they are currently being propped up. When supply exceeds demand prices should fall but those holding the supply are not being forced (through receivership) to sell. There is money out there ready to invest (we don’t know how much) but not at these prices.

I would wager that there is a lot of debt concentrated in certain demographics, a stat I read by a property company before said that only 50% of properties in Dublin have a mortgage on them, this means 50% are mortgage free, so which half don’t have the debt?

The natural answer to me would be that debt is concentrated in the younger spectrum of the population. The same sectors that are being hit the hardest by job loss etc.

@Karl: “only 50% of properties in Dublin have a mortgage on them”. Is there any information on the proportion of properties owned by Dubliners that have mortgages on them? Debt on “first homes” (the ones people live in) may be concentrated amongst younger folk, but did older folk borrow, to any significant extent, to buy “second homes”, whether in Leitrim or in Liguria?

I know it’s only anecdotal but none of the grey haired brigade I know (including parents, relatives etc) went out and bought a second home anywhere. Only one of my peers of my generation (mid 40s) bought a second home but that was over 10 years ago so they’re alright. Perhaps because we lived through the 80s and early 90s (the interest rate on my mortgage went to 17% at one stage) we were more cautious. I know only one person older than me who mortgaged up to the hilt and will probably lose their home but I think that would have happened anyway.
My neighbours where we have lived over 20 years don’t own second homes (or they never told us). It would be interesting to get a serious study on this as it might help formulate policies for the future. Stats as we all know produce a non existent average citizen.

@Brian There is a large amount of people who ATM’d their homes to buy other assets (or just outright blew it on consumer goods!), but if there is 50% of properties with no mortgage on them then – as we don’t gather stats I can’t be concrete on this- you gather this: the majority of the 50% without mortgages are likely indigenous, likely aged 40-50+. There are Senior Mortgage products for people over 70 etc. but that is a very small portion of the market. Investors make up about 20% of the market on average.

The 50% that do have mortgages are concentrated in the younger age groups, if 20% of property was being bought by investors (how much is currently ‘owned outright’ by investors isn’t known) then of the 50% with mortgages 10% are investors and the other 40% is everybody else, first time buyers, owner occupiers, including recent arrivals- nationally about 20% of the population is foreign born and they were the biggest new sector of purchasing public in the last four years, in a way the hardest hit were the people who moved here. This doesn’t take into account social housing etc. so the 50% mortgage free side of the equation factors those properties in.

Most investors did leverage deposits (this is anecdotal from my experience in the industry – not hard fact) out of one home to buy another but generally this was whatever amount they needed to provide for deposit/stamp/kit out etc.

I think you’d need the co-operation of the IBF, IAVI and a few other places to start to get those stats in any meaningfully accurate form.

@Stuart I’d tend to agree with your take on things that the people in their mid 40’s were not all getting second homes individually, but the concentration of purchases amongst the group that did was impressive.

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