Irish Household wealth climbs and debt falls

Irish household debt (defined as outstanding borrowings from financial institutions) peaked in late 2008 at €204bn and has been falling since, declining to  just under €150bn in the fourth quarter of 2015, according to the Central Bank, the lowest in a decade. The debt burden (debt relative to household disposable income)  has also declined significantly, to 155% from a peak of 215%,  although still leaving the Irish ratio well above the euro area average ( which is under 100%) and the third highest in the European Union.

No one can be certain at what point the deleveraging will stop but one factor which may impact is that Household wealth continues to recover, with the result that Household net worth has risen from a cycle low of €440bn to €626bn, the highest since early 2009. The upturn in wealth  was initially driven by rising equity markets ( boosting pension fund reserves) but over the last few years the recovery in residential property prices has been the made driver. Indeed, financial wealth actually fell in the latter half of 2015 but was offset by further housing gains.

Last year also saw a substantial rise in the (gross)  Household saving ratio, to 9.5% from 5% in 2014. On the face of  it then, Irish households are rebuilding savings, despite the meagre returns on deposits, and regardless  of a significant improvement in their financial position, at least in the aggregate, are still more comfortable repaying debt rather than borrowing.

New Mortgage lending in Ireland likely to fall this year

Net mortgage lending in Ireland has been falling for  over six years now, with any new lending offset by debt repayments. The former, having collapsed from 2007, was given a brief fillip by changes to tax relief in 2012 , but only started to gain sustained momentum from 2014; over 20,000 mortgages for house purchase were drawn down that year, from 13,500 in 2013, with 2015 seeing another  advance, to over 24,000. The prospect of further growth this year looks doubtful, however, given the data just released for the first quarter, and we expect new mortgage lending to fall in 2016, in volume and value terms.

Figures on mortgage approvals, available monthly,  are a good leading indicator of actual lending, although the relationship is not exact from quarter to quarter as borrowers may delay drawing down the loan or even change their decision. Approvals started to fall on an annual basis last August, indicating that the Central Bank’s new mortgage controls were beginning to bite, and the pace of decline picked up momentum over the winter months, resulting in a 20% annual fall in the final quarter of 2015. The first quarter of this year has seen a marginal change in momentum, albeit still leaving approvals 17% below the same period a year earlier.

A decline in the actual number of drawdowns for house purchase was therefore likely in Q1 and that duly emerged, with a 9% annual fall to 4,664 . The next few quarters may see even larger percentage declines given the trend in approvals and we now expect a figure of around 20,000 for the year as a whole, or some 4,000 down on 2015.

The value of new lending for house purchase came in at just €900mn in the first quarter, a two-year low, but this was only 1.7% down on the previous year because the average new mortgage rose by 8%, to €193,600, but we suspect that lending will also fall in value terms through the year, with the volume effect offsetting a 5% rise in the average mortgage . Consequently, we forecast that the value of  new mortgage lending for house purchase in 2016 will fall to €3.8bn from €4.5bn last year.   The headline mortgage data also includes top-up loans and re-mortgages, which are both growing at a rapid pace . The  absolute figures are very small, however, and their inclusion increases the forecast  for total mortgage lending only modestly, to €4.4bn from €4.9bn in 2015.

A final point. One curiosity about the housing market in recent years is that the number of loans for house purchase has been remarkably stable relative to transactions, accounting for around 50%. That pattern was actually repeated in the first quarter, as transactions also fell sharply, based on the Property Price Register, such that mortgage  loans equated to 49% of total sales. Credit has certainly not been the main driver of the recovery in residential property prices so the implication is that weaker new lending may not have a huge impact on house prices , although it is clearly bad news for mortgage lenders.