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.

Some Recent Pieces on Taxes, Incomes and Social Protection

Declan Jordan: Covid Crisis Shows Need for Basic Income Scheme

Rory O’Farrell: Time To Raise Taxes Not Cut Them

Laura Bambrick: The State of Sick Pay in Ireland is Sickening

Ciarán Nugent: Irish income figures exclude key sources of income for top earners and overstate the income of many low-wage workers

If the retired are not poor, is it right for them to keep all-day free bus passes?

There has been a considerable fuss over a suggestion for a modest scaling-back of the benefits to the retired. It was proposed that ‘free bus travel’ be available only at off-peak travel times. At all other times, free bus travel would continue to apply.

The fuss has been strikingly one-side: the proposal was denounced by politicians, interest groups and journalists. Otherwise, silence; including on this blog.

The case for this change is easily stated – rush hour is busy because of workers travelling to/from work at times they don’t control. So it is a more efficient use of the bus system that people with more discretion over when to travel, notably the retired, would use (free) buses only at other times.  (Of course they could travel as paying passengers at any time.) Nearly one-tenth of passengers on the buses at rush hour use free bus passes. So either we expand the bus system or we move bus-pass holders to (free) travel at another time and release a lot of bus space.

Available information suggests this change would also improve fairness. There is considerable evidence that the retired are not poor, either in income or in wealth terms. Removing a small fraction of the bus subsidy would seem to be fair, especially if it also made the bus service work better.

The CSO’s 2013 Household Finance and Consumption Survey (Table 12) indicates that in households where the head of household was under 35, median net wealth was €4,000. For households headed by a person 65 or older, median net wealth was €348,000. It seems legitimate to conclude that the retired are not poor in terms of their net wealth. (This is hardly surprising; they have had decades more than twenty-somethings in which to save. Grey and wrinkled has a few compensations.)

For incomes, the CSO Survey on Income and Living Conditions (Table 1e) reported that in 2016 median net disposable income (adjusting for household size) was €21,387 for those aged 18-64 and not a very great deal less, €17,956, for those over 65. So for every €100 of net disposable equivalised income of the median member of the first group, the median retired person has an income of €84. The costs of the retired are surely lower than those working (mortgage, children’s education costs)? In any case, according to the report (Table 2) those aged over 65, have a lower risk of poverty (10.2% v. 16.6%) and also a lower rate of deprivation (13.1% v. 20.9%) compared to those of working age.

Given the similarity of incomes, there seems a solid basis to say the over 65s are not poor in income terms either, compared to the working age population.

Yet the older generation have various non-means-tested benefits including free bus passes. They were also essentially exempted from the post-2008 income and benefit reductions. I will leave the inter-generational aspects of the planning laws for another occasion.

Subsidies for the retired was recently raised in the UK which “continue[s] to treat pensioners as though they need free travel, winter fuel allowances and the like, despite the fact they are on average now the best-off demographic group in the country.” In a comment pertinent to the Irish case, the writer argued that amongst the UK groups needing more public funds are children and the mentally ill. If money goes to the over-65s, it will be harder or impossible to finance the other programmes.

The broader setting for this discussion is whether our prevailing redistributive and other policies in fact discriminate against younger rather than older generations. Many of the retired and soon-to-be-retired, benefitted from lower costs of going to college, drastically lower house prices, and much more generous pension schemes that today’s twenty- than thirty-somethings will have. On top of this there are pensions, free bus travel and other benefits; some of this money may have more deserving uses, not excluding healthier public finances.

From this perspective, do we redistribute income on the basis of means or, say, voting propensity? Regarding the latter, a rough calculation (exit poll age data, total turnout, and population less non-nationals) suggests that in the 2016 general election turnout was 41% for voters under 24, and 61% for those over 65. 

How, then, was the bus-policy reform proposal responded to? It did not go down well! Its author was personally vilified and the proposal was drowned in ridiculous hyperbole, while more important aspects of the speaker’s policy recommendations at the conference passed unremarked. One Minister remarked that the civil servant’s suggestion was unprecedented. It’s not hard to see why.

There was the usual claim by a journalist that “free bus pass holders have contributed to the economy for decades” On that principle, shouldn’t everyone have everything free forever? (Where are our free newspapers?)

Senator Buttimer of Fine Gael demanded that the civil servant be fired. The Independent Alliance judged that this change would cause “severe hardship” and could jeopardise the ability of the retired to get to hospital. (Severe hardship? Really? No pensions, no cars, no taxis, no offspring, in Independent Alliance constituencies?)

Even the elusive Minister Ross took to the battlements to declare that the change would happen only over his dead body, although some think the Minister’s body has been alarmingly immobile since he took office. (Missing Minister.)  The Minister added that this modest change was no less than “an extraordinary assault on the rights of older people.” (An extraordinary assault?)

As for the temerity of the civil servant, I believe the department he works for is called Public Expenditure and Reform. His remarks were made at a conference where the OECD recommended that Ireland needs to focus more on evaluation of the impact of public policies. The responses amounted to saying: our supporters like this policy, we are not interested in any evaluation.

This sorry episode is reminiscent of the ‘anti-expert’ commentary of members of the Bertie Ahern governments. Minister Martin Cullen in the mid-2000s dismissed warnings of economic overheating contained in an ESRI mid-term review of the public investment programme, as merely the views of ESRI ‘sandal wearers’. He insisted that the government would press ahead in the face of the advice it had itself commissioned. Ten years on, some current Ministers seem to believe much the same thing.

The retired in the population used to be poor. That’s not been true for a long time. Policy has to catch up. The Government should seek to improve the efficiency of the transport system particularly when it can be achieved at no loss of fairness. In any event, they should give a civil hearing to policy suggestions.

Complete inflexibility from the retired may leave them with few sympathisers should the large deficits in the public pension scheme require real fiscal surgery in the future.

The Davos Lie

Larry Summers coined the phrase “The Davos Lie” back in 2007; my latest column in Critical Quarterly covers some of what I’ve written on the subject over the years. Here is another recent piece on the subject.

Update: a glitch having been sorted out, the CQ column is now freely available.

Redistribution in the Age of Austerity

Readers of this blog might be interested in this working paper we’ve just put up on the Levy working paper series. The abstract is below.

We examine the relationship between changes in a country’s public sector fiscal position and inequality at the top and bottom of the income distribution during the age of austerity (2006–13). We use a parametric Lorenz curve model and Gini-like indices of inequality as our measures to assess distributional changes. Based on the EU’s Statistics on Income and Living Conditions SLIC and International Monetary Fund data for 12 European countries, we find that more severe adjustments to the cyclically adjusted primary balance (i.e., more austerity) are associated with a more unequal distribution of income driven by rising inequality at the top. The data also weakly suggest a decrease in inequality at the bottom. The distributional impact of austerity measures reflects the reliance on regressive policies, and likely produces increased incentives for rent seeking while reducing incentives for workers to increase productivity.