The income distribution and the Irish mortgage market

How concentrated are mortgage originations among those on higher incomes? Has this pattern changed through expansion and contraction in the Irish housing market? Combining for the first time information on the incomes at origination of a large sample of Irish mortgage holders with survey information on the population income distribution in each year, my colleague Reamonn Lydon and I address these issues over the period 1994 to 2014 in an Economic Letter released recently by the Central Bank.

In the work we highlight that the income profile of borrowers entering the First Time Buyer, Mover-Purchaser (also referred to as Second and Subsequent Buyer), and Buy to Let markets is markedly different.

The first chart below shows the evolution of the share of new First Time Buyer mortgage originations going to each population quintile between 1994 and 2014 (income distribution data were not available to us for 2015 at the time of carrying out the work). A number of patterns are evident:

• The share of those in the top income quintile fell from over 40 per cent in 1994 to around 12 per cent by 2008.
• The share of those in the middle income quintile rose from 15 per cent to over 40 per cent over the same period.
• There has been a slight reversal of this pattern since the financial crisis; however, the share of originations going to the middle quintile is still well ahead of the top quintile.
• Those in the bottom 40 per cent of population incomes have generally accounted for less than ten per cent of mortgage originations in a given year.

Next we examine the Mover-Purchaser or SSB market, and find that:

• There was a similar convergence in the market shares of the 5th and 3rd quintiles over the Celtic Tiger period.
• The reallocation towards the top income quintile in this market has been much sharper since 2008, with the market share standing at above 60 per cent for 2014.

The findings suggest that the crisis has been associated with some significant structural shifts in mortgage market participation. In the case of the SSB market, it is possible that the role of negative equity in impeding mover-purchases has been much more prevalent in recent years outside of the top quintile of the population income distribution. In the case of First Time Buyers, where the changes have been relatively less pronounced, the shifting age profile, where borrowers are entering the market later in life, may also explain the shift towards higher-income purchasers. Our research does not attempt to definitively quantify the role of supply side (such as bank lending policies) and demand side factors in explaining these changing patterns.

Other related research was also released in the Bank’s recent Quarterly Bulletin: The balancing act: household indebtedness over the lifecycle, by Apostolos Fasianos, Reamonn Lydon and Tara McIndoe-Calder. Finally, another related piece came out as a Research Technical Paper on the Great Irish (De)Leveraging by Reamonn Lydon and Tara McIndoe-Calder.