Guest post by David Horan (Central Bank of Ireland). Disclaimer: this blog post represents the author’s views and not those of the Central Bank of Ireland or the European System of Central Banks.
The Central Bank has published a Research Technical Paper on household wealth in Ireland: “Household wealth: what is it, who has it, and why it matters” (Horan, Lydon & McIndoe-Calder).
The paper uses data from the latest wave of the Household Finance and Consumption Survey (HFCS 2018) to track changes in the financial position of Irish households between 2013 (the last survey) and 2018. The CSO carries out the survey in Ireland. It is part of a wider cross-country project examining household wealth, income and consumption, coordinated by the ECB.
While carried out prior to the outbreak of COVID-19, the HFCS survey provides insights into issues relevant to the assessment of the economic impact of the pandemic on Irish households. For example, the data highlight the improved financial position and resilience of households prior to the COVID-19 crisis, than was the case leading into 2008. Moreover, these data highlight distributional considerations and differences between households that align with the asymmetrical effects the COVID-19 induced economic shock has had on households, including along age, employment sector and housing tenure status dimensions.
Key developments between 2013 and 2018
When comparing changes between 2013 and 2018, it is important to consider the economic context under which both surveys were conducted. In many respects, 2013 reflects the low point of the recession following the financial crisis; by 2018 the economic recovery was well underway. With this in mind, it may come as little surprise that the financial position of many households in Ireland improved considerably between waves.
We observe that household net wealth grew by over €76,000 for the median household – or by 74 per cent – to €179,200 between 2013 and 2018. House price growth and declining mortgage debt were the primary drivers of this development.
Net wealth increased across the entire wealth distribution, while inequality, as measured by the gini coefficient, fell between waves. Key to this was the decline in negative equity, which fell from 33 per cent of mortgaged households in 2013 to 4 per cent in 2018. Median gross household income surpassed its previous peak in 2007, reaching €47,700 in 2018. Combining household wealth and income, we find the two are closely linked and that relatively higher income households also tend to be wealthier households — although the relationship is not one-for-one.
Compared to 2013, households were more resilient in 2018, with debt to asset and debt to income ratios falling significantly between survey waves. These improvements are particularly pronounced for those between 30 and 49 years of age. The debt service burden – the cost of servicing debt repayments to (gross) income – has also fallen since 2013, primarily due to rising incomes. Net liquid assets – the sum of liquid assets less non-collateralised debt – are a commonly used financial buffer metric. The proportion of Irish households with net liquid assets increased to 72.6 per cent in 2018, while the median value of these financial resources increased from €2,000 to €3,000 2018.
To better understand the resilience of indebted households to negative shocks, Table 1 shows the proportion of households by debt-service bucket in 2018, where savings account for at least three mortgage payments. Over two thirds (67.8%) of lower debt service households – that is households with mortgage repayments less than 5% of their gross income – have savings at least three times that of their regular mortgage repayments. Looking at households with the highest debt service ratio (>40% of income), we find that 42% of these households have savings of at least three times that of their regular mortgage repayment.
Turning to household spending patterns, we find that the gross income share that households regularly spend on goods, services and housing varies substantially by income. The average household spends about 80 per cent of their income. Those in the bottom income quantile, on average, report spending more than their income on regular expenses. For the 13% of households that report having expenses greater than their income, typical strategies employed to bridge the gap include using savings, especially for middle income households; getting help from friends and family, especially for lower income households; and using credit cards and overdrafts.
In line with other data sources, homeownership rates have fallen while the share of those renting accommodation has risen. Over 60 per cent of recent owner-occupier home-buyers were under the age of 40 at time of purchase. Almost 30 per cent of recent buyers report receiving an inheritance or gift within three years of their house purchase with a median value of €25,000 (self-reported). The prevalence of inheritance was lower for older borrowers, however the amounts they received tended to be higher.
House price developments play a key role in changes in the net wealth position of Irish households. The ‘collateral channel’ argues that wealthier households have easier credit access. We do find that households are less credit constrained in 2018, which holds true for younger and older households, and for homeowners and renters. Although we cannot rule-out improvements on the supply-side as a driver of this development.
In the mid-2000s, housing equity was used by many households to fund both consumer spending (often on durables) and investment (often in more housing). This peaked in 2006/07, when the value of housing equity withdrawal for the household sector was equivalent to some 10 per cent of income. When house prices fell sharply, this had real effects on spending and investment. In the paper we show that, despite housing wealth in 2018 exceeding previous highs, the household sector as a whole continues to inject as opposed to withdraw equity. In 2018, injections were running at around 10 per cent of income (Figure 1). This reasons for relatively large ‘injections’ include the continued repayment of long-lived, large debts from the early-/mid-2000s, and a far lower level of top-up borrowing relative to the past.
The paper highlights several potential areas of future research using the HFCS data*. For example, we provide useful insights into how households can withstand unexpected income shocks and the financial resilience of households, which are particularly relevant in light of the COVID-19 crisis.
In many respects, we can see that households are better placed going into 2020 than they were leading into the last crisis in 2008. Given the healthier position of many household balance sheets in 2018. Our work indicates that, if house prices and/or incomes falls, we would not expect household debt to drag on spending in the same way it did going in to 2008. Incomes developments are therefore likely to be the primary determinant of consumer spending when the public health threat from COVID-19 recedes. Understanding the distribution of income shocks within the context of household wealth and income position will be important going forward.
(*) Datasets for research and analysis are available from both the CSO (the HFCS RMF) and the ECB. The ECB dataset also includes cross-country data for most countries.