Household formation among young adults

A guest post from Reamonn Lydon and Apostolos Fasianos of the Irish Economic Analysis division here at the Bank.

The overall population increased by 4% between 2008 and 2016. At the same time, the number of young adults aged between 20 and 34 fell by a quarter– from 1.15 million to 860 thousand (see Table 1. See also the excellent study by Glynn, Kelly and MacEinrí (2015) on migration patterns for this group).

Table 1 CSO population estimates (Table PEA01)
 (`000s) 2008 2016 % change
Age <20 1209 1327.4 9.8%
20-24 373.6 226.8 -39.3%
25-34 777.8 633.6 -18.5%
35-44 662.2 733.2 10.7%
45-64 978.9 1127.2 15.1%
65+ 483.7 625.5 29.3%
4485.2 4673.7 4.2%

The large decline in the 20-34 population means that housing demand will be lower than the past.  However, there have also been significant changes in the household formation patterns of this group which are relevant when it comes to thinking about housing demand in the future.  As the figure below shows, just before the property crash just over 30% of young adults lived with parents, but by 2016 this had risen 37%.  Taking into account the population drop, this is around an additional 25,000 young adults versus the situation in 2006, and just under 320,000 in total living with parents in 2016.

F1Census data for 2016 is not yet available to calculate the latest figures, so we have drawn on the QNHS and Household Finance and Consumption Survey (HFCS, 2013) to try and complete the picture to 2016.  The HFCS is particularly useful as it allows us compare Ireland with other countries (Figure 2).  Ireland looks similar to both the EU and US (although the US data is for 18-34 year olds living with relatives, not just parents), but is somewhat higher than the UK. We know, however, that UK third level students are more likely than their Irish counterparts to live away from home.  Southern European countries, with relatively high rates of youth unemployment – such as Spain, Portugal and Italy tend to have a higher proportion of young adults living with their parents.


What do these figures mean for housing demand?

The answer depends on the extent to which you believe the shift towards more young adults living at home is a cyclical or a structural change. Certainly, there is a slow-moving cyclical part to it – the proportion rose as the employment prospects for this group worsened and young people stayed on in education (Conefrey, 2011).  The CSO also reported a sharp drop in the proportion of 19-24 year-olds in shared accommodation (i.e. renting), from 22 to 18% between 2006 and 2011.  So there may be a jump in demand in the short term, because not only do the delayed entrants want to enter the market after a (cyclical) delay, but those who are younger will now start forming households at a younger age.  There is already some evidence of this in the 2016 QNHS, which shows the percentage of 20-24 year olds living at home falling for the first time in almost 10 years, from 70 to 68%.

However, there might also be structural changes to consider. For example, if the easy credit of the bubble years meant that buyers got on the housing ladder at a younger age than previously, and this has since been reversed, then the ‘pent-up’ demand might not be so large.  We know that the average age of FTBs has risen in recent years, having fallen during the boom.  In this case, young adults could continue to form households at a rate similar to what we are now seeing.

In all likelihood, the shifts we have witnessed are a mix of cyclical and structural changes. However, how much is cyclical does matter. As Table 1 showed, there were just over 860,000 20-34 year-olds in 2016. Ignoring immigration flows which could increase the size of this age cohort further, each 1% fall in the proportion living at home means an additional 8,600 individuals looking to rent or buy. This is a large figure in the context of current estimates for annual housing demand, which range from 20,000 and 40,000 units.

Central Bank workshop on macroprudential policy

The Central Bank will host a workshop entitled “Evaluating the effectiveness of macroprudential policies” on Wednesday February 8th in the Institute of Banking in conjunction with the European Central Banking Network and the Centre for Economic Policy Research. A description of the event is outlined below.

Macroprudential policies to mitigate structural and cyclical systemic risk are now in operation in a number of countries.  Assessing the impact of these policies on the resilience of the financial sector and the wider economy is at the core of research and policy activities following the crisis.  Given the multi-faceted concept of financial stability that these policies are meant to contribute to and the still emerging theoretical framework, a number of analytical approaches have been advanced for policy evaluation and design.  The workshop will bring together the policy and academic communities to consider these evaluation approaches covering the use of macro models, time series techniques and the analysis of micro data. Of particular interest are those policies aimed at enhancing the resilience of banks, households and other sectors of the economy through building up structural capital buffers (e.g. G-SIB, O-SII, SRB) and enacting borrower-based measures (e.g. Loan-to-Value and Loan-to-Income limits).


08:45 Coffee and Registration

09:15 Session 1 Policy Panel – Chaired by Fabrizio Coricelli (Paris School of Economics and CEPR) with Vice-President Claudia M. Buch (Deutsche Bundesbank), Governor Boštjan Jazbec (Banka Slovenije), Governor Philip R. Lane (Central Bank of Ireland)

10:00 The use and effectiveness of macroprudential policies: New evidence – Eugenio Cerutti (International Monetary Fund)

10:50 Coffee

11:10 Inspecting the mechanism: Leverage and the Great Recession in the Eurozone – Philippe Martin (Science Po Paris and CEPR)

12:00 The impact of bank capital on economic activity – evidence from a mixed-cross-section GVAR model – Christoffer Kok (European Central Bank)

12:50 Lunch

14:00 Capital inflows – the good, the bad and the bubbly – Dennis Reinhardt (Bank of England)

14:50 The impact of macroprudential housing finance tools in Canada: 2005-2010 – Tom Roberts (Bank of Canada)

15:40 Coffee

16:00 Objective-setting and communication of macroprudential policies – Jochen Schanz (Bank for International Settlements)

16:50 Closing remarks – Governor Philip R. Lane (Central Bank of Ireland)

The workshop is hosted by the Central Bank of Ireland as part of a series of annual events organized by the European Central Banking Network (ECBN) in cooperation with CEPR.

To register for the event or for any queries, please email by Friday 3rd February 2017.

Venue: The Institute of Banking, Citi Building, IFSC, 1 North Wall Quay, Dublin 1, Ireland –

Central Bank presentations at the DEW

Four presentations from Central Bank economists were made at the recent Dublin Economics Workshop, reflecting a range of research activity on the commercial real estate, enterprise credit and interbank markets. Paper titles and a brief description below.

Eoin O’Brien and Maria Woods: “Applying a macroprudential risk analysis to Irish commercial  real estate prices”

Research focuses on Irish commercial real estate market and presents a range of indicators that can be used to assess the sustainability of prices and enhance the Central Bank of Ireland’s existing macroprudential risk assessments of this sector.  Developing analytical tools to identify real estate risks, among other areas, is a priority for policy makers focused on mitigating systemic risk.  To complement traditional statistical indicators of price misalignment such as the deviation of the price-to-rent ratio from its historical average, two reduced form models are specified drawing on the property literature and long-run Irish data (1985Q1 to 2013Q4) to approximate a fundamental price series.  Periods where actual prices deviate from this fundamental series can be identified over the sample.  Non-linear methods suggest that the relationship between price changes and estimated misalignments may vary over the property cycle.

James Carroll, Paul Mooney (Dept of Finance) and Conor O’Toole: “Irish SME Investment in Economic Recovery”. Link (p73).

An in-depth look at the types of SME engaging in investment during the economic recovery, along with the financing sources behind said investment. Key findings:

  • The share of SMEs investing has increased steadily since 2012, and currently about a third of SMEs are investing on a six-monthly basis.
  • Younger firms, controlling for other firm characteristics, invest more. Improvements in profitability and turnover are important drivers of investment.
  • SME investment responds to regional  economic conditions, as measured by the unemployment rate.
  • Smaller, younger, non-exporting firms, who are likely more reliant on local household spending, respond most to domestic conditions.
  • Investment is mainly financed through internal funds, and there is no evident increase in the external financing share since early 2013.

James Carroll and Fergal McCann: “Cross-country comparisons of SME borrowing costs”

This research provides a methodology to strip out borrower- and bank-related factors which may form part of the explanation for cross-country interest rate differentials. Using the case of UK and Irish lending by Irish-owned banks, the research suggests that, of a 240 basis point (bps) difference in raw average borrowing costs, about 100-150 bps is not explained by bank- and borrower-level characteristics and can therefore be attributed to market-level factors such as bank competition, collateral enforceability and the aggregate outlook for default probabilities. Earlier research from the two authors shows that across Europe, such aggregate factors are indeed associated with higher enterprise borrowing costs.

Paul Lyons and Terry O’Malley: “Monitoring Ireland’s payments system using Target II”

  • Research provides a description of Ireland’s component of the Eurosystem’s large value payment system (TARGET2-IE).
  • TARGET2-IE forms an important part of the Bank’s analytical toolkit in that it can be used to examine the degree of interconnectedness between banks in Ireland; to develop indicators for systemic risk monitoring; to map Ireland’s payment networks to provide a source for measuring price and quantities in the short term interbank loan market involving Irish banks.
  • Early research results identify differences between the interbank and customer payments networks with the customer payment network displaying a small number of highly connected banks in addition to a large number of isolated banks.


Central Bank of Ireland Macro Financial Review 2016:1

The Bank’s most recent Macro Financial Review (MFR) was released recently. As well as providing an in-depth view of financial developments and risks in all key sectors of the economy, the MFR also contains a number of interesting analytical boxes on topics such as the components of NFC debt, SME actions after a credit rejection, household financial vulnerability estimates, residential property price expectations, new indicators of systemic stress and financial conditions, CoCo bonds and reciprocity in macroprudential policy.

The key messages from this most recent MFR can be summarised as follows:

  • Risks to the economic outlook are weighted to the downside and relate mostly to uncertainty in the external financial environment.
  • While economic conditions are improving, public and private sector indebtedness remain high.
  • Workout of impaired loans and disposal of non-performing loans in banking sector ongoing, domestic bank profitability remains weak.
  • Mortgage regulations: Call for evidence which will inform review opens from 15 June to 10 August.

The full report can be downloaded here.

Mortgage term as a credit condition

The aim of this post is to introduce the topic of mortgage term to maturity in an Irish setting. I will outline how mortgage terms were highly pro-cyclical during the pre-2008 expansion, and that they were used by credit-hungry borrowers to make high-leverage strategies more affordable on a monthly basis. It is well established that credit conditions, as measured by Loan to Value ratios (LTV), Loan to Income ratios (LTI) and Debt Service Ratios (DSR, ratio of monthly repayments to net income) reached unsustainable levels in Ireland in the run-up to the 2008 crash.[1]  By contrast terms have received much less attention. Previous work by McCarthy and McQuinn (2013) on Irish credit conditions is the only piece known to me which contains an analysis of mortgage terms. They show that median terms increased rapidly in the 2000-2008 period, and did not decrease after the housing market crash. Further, they show that terms were higher for First Time Buyers, and that longer terms are correlated with an easing in other credit conditions. Today’s post concerns recent analysis carried out by my colleague Edward Gaffney which looks at the distribution of mortgage terms for loans originated between 1997 and 2014.

Why should mortgage terms be of interest to us? Firstly, they can have a huge impact on mortgage affordability. Identical loans, for identical houses, to people with identical incomes, at identical interest rates, can have widely varying monthly repayments driven by varying terms. As a simple example, a loan for €250,000 at an annual rate of 4.5 per cent has a monthly repayment of €1,581 when taken out over 20 years, which falls to €1,183 when that loan is extended to 35 years. A saving not to be sniffed at!

Secondly, they appear to have associations with risk-taking behaviour. Research from Central Bank colleagues[2] has shown that, controlling for a range of factors associated with higher credit risk, mortgages with longer terms are more likely to default, even though a longer term allows for a lower monthly mortgage repayment, all else equal!

Finally, terms also have a big impact on banks’ profitability, as longer term loans will have higher lifetime interest income for the bank. Further, longer terms allow banks to make larger loans while continuing to respect any Debt Service to Income rules that may be in place.

So what can we say about mortgage terms in Ireland? In all that follows, I will focus on the First Time Buyer (FTB) segment of the mortgage market. Our first figure (Fig 1) provides clear evidence from Edward’s work that mortgage terms lengthened significantly during the boom phase in Ireland. Of the 1997 cohort still outstanding in 2014, 60 per cent were originated with terms of 20 years or less, with 90 per cent having terms under 25 years. At the turn of the millennium, the 35 year mortgage was close to non-existent. However, its proliferation through the period of rapid credit growth was quite remarkable, moving to a market share of roughly 50 per cent by 2006-07, with a further 5 per cent of the market taking terms between 35 and 40 years.

While Kelly, McCann and O’Toole (2015) report that credit conditions tightened considerably in the aftermath of the financial crisis, Edward’s chart shows that “credit tightening” in mortgage terms has been much less stark, with 60 per cent of mortgages originated in 2014 still having terms above 30 years.

Fig 1: The distribution of originated mortgage terms per year, First Time Buyer segment 1997 to 2014.


This evidence of a structural shift towards longer terms begs a number of questions relating to the role of term as a credit condition. Figure 2a from Edward’s work provides conclusive evidence that, during the boom phase, longer terms were associated with higher leverage. In 2007, those taking out 40 year mortgages had an average LTV of over 90, with LTVs of 85, 72, 60 and 50 as we move in five-yearly intervals down to 20 year mortgages. While these LTVs have converged since the crisis, the rank ordering persists. Figure 2b completes the picture by showing that borrowers on different terms have in fact been accessing similarly valued houses, which implies of course that those with longer terms were taking out larger average loans. Taken together, these figures strongly suggest that term was being used by FTBs to mount the property ladder at as high a point as possible for a given down-payment amount, using higher originating LTVs to access valuable housing with small down-payments and large loans, while easing the monthly repayment burden of this high-leverage strategy via longer terms.

Figure 2: Average LTV and property value for mortgages originating at different terms.

(a)    LTV (b)   Average Property Value
 term_ltv  term_val

Our next piece of evidence links borrowers’ incomes to mortgage terms. Figure 3 reports clear differences in originating Loan to Income ratios (LTI) across term groups. Those on 40 year mortgages in 2007 were accessing loans with an average LTI of 5, while the equivalent number was under 3 for those with 20 year mortgages, again providing strong evidence that mortgage terms were used as part of a broad “credit conditions package” by credit-hungry borrowers. Figure 3(b) confirms that this highly-indebted strategy was in fact more common among high-income borrowers in the run-up to 2008, with median incomes falling as terms shorten. The one exception to this rule is the 40-year mortgage, which appears to have been popular among lower-income households with extremely high LTIs during its short existence.

Figure 3: Average LTI and income for mortgages originating at different terms.

(a)    Loan to Income ratios (b)   Incomes (median)
 term_lti  term_inc

So where did this “credit condition package” leave borrowers on a monthly basis? It is unclear from the above whether long terms acted to offset the affordability difficulties brought on by high-leverage strategies. To do this, Edward calculates a monthly repayment to gross income (RTI) ratio for each loan in the data, applying an indicative opening interest rate. The evidence is conclusive: despite the fact that longer terms mechanically improve mortgage affordability by lowering repayments all other things equal, it was still the case up to 2008 that borrowers with longer terms were taking out such large loans that their RTIs were in fact higher than borrowers with shorter terms. This is likely part of the explanation for the finding of Kelly, O’Malley and O’Toole (2015) that longer-term mortgages have higher default probabilities, even after controlling for a range of explanatory factors.

More posts on the mortgage market in Ireland to follow over the coming months.

[1] McCarthy and McQuinn (2013) and Kelly, McCann and O’Toole (2015)

[2] Kelly, O’Malley and O’Toole (2015)