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.