Household wealth in Ireland: results from the 2018 HFCS survey

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. 

Economic implications
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.

Wellbeing not GDP must be our measure of progress

A piece by Paul O’Hara in The Irish Times today. And a few days ago Cliff Taylor wrote on ‘Why Irish households are not, after all, among the best off in the EU’.

Central Bank Quarterly Bulletin 3 2020

Guest post by Stephen Byrne, Central Bank of Ireland

Today the Bank published its third Quarterly Bulletin of the year. The report contains a detailed overview of developments in the economy since the publication of last Bulletin in early April as well as our latest macroeconomic forecasts out to 2022.

Given the scale of uncertainty surrounding the economic impact of Covid-19, two different scenarios for the economic outlook are outlined in the Bulletin (see featured image above).

In the “baseline” scenario, the economy reopens in line with the Government’s phased plan, allowing for a rebound in economic activity in the second half of the year. Some containment measures would remain in place meaning that activity would be constrained in some sectors for a longer period. Beyond the initial rebound, recovery is expected to be gradual, in line with a slow unwinding of precautionary behaviour as the effects of the shock on consumers and businesses lingers. The unemployment rate is set to decline from its second quarter peak of about 25 per cent as the year progresses and is projected be around half that level by the end of this year, before averaging just over 9 per cent next year and 7 per cent in 2022.

The baseline scenario sees output recovering to its pre-crisis level by 2022. However, the level of activity will be significantly below where it would have been had the economy grown in line with expectations before the outbreak of the pandemic.

In the “severe” scenario, the strict lockdown period is assumed to have a more damaging impact on economic activity and is not successful in effectively containing the virus. Stringent containment measures would remain in place, or would be re-instated, albeit not as severe as before, based on an assumption that there would be a resurgence of the virus at some point over the next year. In this scenario, there is a subdued economic recovery with a larger permanent loss of output. Unemployment remains higher for longer in this scenario and would average just below 17 per cent in 2020, while consumer spending is projected to fall by around 14 per cent and GDP by over 13 per cent this year. In this scenario, the projected recovery in growth in 2021 and 2022 would not offset the loss of output this year, leaving the level of GDP in 2022 about 5 per cent below its pre-crisis level.

Both of these scenarios assume that a Free trade agreement in goods between the UK and the EU, with no tariffs and quotas on goods, takes effect in January 2021. If such an agreement is not reached, then the EU and the UK would move to trading on WTO terms from January 2021. Box D of the Bulletin discusses the implications of such an outcome.

The bulletin also contains analysis of the impact of Covid-19 on debt dynamics and sustainability, as well as a detailed examination of the regional labour market impacts of the pandemic.

Finally, an accompanying signed article explores alternative long-term recovery paths for the economy and assesses the impact of fiscal and monetary policy supports. The Article considers how hysteresis – or scarring ­­– effects could influence the pace and nature of the recovery. The paper shows that, as a highly open economy, Ireland benefits from the positive effects of monetary and fiscal policy measures implemented abroad. The assessment of the combined effects of domestic and international policy supports indicates that the actions will help to meaningfully reduce the scale of the output loss in Ireland from the pandemic.

Potential Output and Output Gaps

 

Happy new year to all. In case some of you missed it, the Department of Finance published two working papers (by Gavin Murphy, Martina Nacheva and Luke Daly) just prior to Christmas looking at the ever topical issue of Ireland’s output gap. Both papers can be accessed at this link. The first paper takes a detailed look and review of the main methods used to estimate the cyclical position of an economy. The authors highlight the diversity of modelling approaches used across institutions both within Ireland and abroad. The second paper outlines in detail the methodology used by the Department to produce estimates of the output gap for Ireland. To date, the Department has used the European Commission’s harmonised approach (i.e. common to all EU Member States), which has at times resulted in counterintuitive estimates of Ireland’s cyclical position. This research seeks to develop more plausible estimates taking better account of the nature of Ireland’s small open economy. Such work will enable the Department to better evaluate the appropriate fiscal stance and the sustainability of public finances over the medium term.  For those with an interest in macroeconomic modelling and forecasting as well as fiscal policy related issues, the papers offer an invaluable source of information into what can be a complex area.

 

New Central Bank Quarterly Bulletin

Today, the Bank published its fourth quarterly bulletin of the year (Quarterly Bulletin (QB4 – October 2018), containing new projections to 2020.

The economy continues to grow at a robust pace and momentum has picked up since our last set of published forecasts (July). Economic activity remains underpinned by robust and broad based growth in employment and incomes. In turn, underlying domestic spending has gained further momentum reflecting strong consumption and (underlying) investment expenditures. Overall, we see underlying domestic demand growing by 5.6 per cent this year, before moderating to 4.2 per cent in 2019 and 3.6 per cent in 2020. In GDP terms, we expect growth of 6.7 per cent this year, 4.8 per cent in 2019 and 3.7 per cent in 2020. The labour market continues to move towards full employment with the headline unemployment rate expected to be below 5 per cent in 2019 and 2020.

While the outlook remains favourable, a number of significant downside risks remain. On the domestic side, the main vulnerabilities relate to the cyclical strength of the recovery. On the external side, risks centre on Brexit and any further disruptive changes to international tax and trading regimes given the openness of the Irish economy.

Aside from the normal outlook and commentary, the Bulletin contains a number of Boxes highlighting research on some key issues. These include pieces on Brexit, the international economy and risks relating to Corporation Tax flows. The Bulletin also contains a chapter on financing developments in the economy and a signed article examining financial risks and buffers in the Central Bank.

Boxes

  • Macroeconomic Implications of the UK Government Brexit White Paper: A Preliminary Analysis (Box A – page 13)
  • International economic outlook (Box B – page 17)
  • Risk related to Corporation Tax Flows (Box C – page 33)

On the financing side of the economy, there are pieces on:

  • Income Statement Statistics and Ireland’s Banking System (Box A – page 48)
  • Retrocession: Reinsuring the Reinsurer (Box B – page 52).

Signed Articles

The Bulletin includes a signed article by Doran, Gleeson, Kilkenny and Ramanauskas (2018), on “Assessing the Financial Risks and Buffers of the Central Bank.”