The Irish Central bank has just published an update on the Financial Accounts of the Irish economy, incorporating figures to the third quarter of 2014. The data provides some positive news on Irish household wealth and the sustainability of household debt while confirming that deleveraging remains the order of the day.
The amount of outstanding loans to Irish households peaked at just over €200bn in the third quarter of 2008 and has been falling since, declining to €160.6bn , bringing the debt figure back to levels last seen in mid-2006. The scale of the deleveraging (over €43bn) is remarkable, as is the duration; net mortgage debt continued to fall in the final quarter of last year according to the monthly data, implying that the household debt figure , when updated, will have declined for over six years.
Debt relative to household income is a standard measure of debt sustainability and on that metric the situation continues to improve. That was not the case at the onset of the deleveraging as household income was also falling. Consequently the household debt ratio did not peak until late 2009, at 218%, and was still above 200% three years later. Disposable income has finally started to pick up so the debt ratio is now falling at a more rapid clip, declining to 177% on the latest figure, the lowest in nine years.
On the other side of the balance sheet Household assets have been rising in value. Financial assets have been boosted by the bull market in equities ( captured in insurance company reserves) and housing wealth by the upturn in residential prices and completions. Consequently the net worth of Irish households ( i.e. housing and financial wealth minus liabilities) now stands at €574bn. This is well short of the figure at the peak of the boom (over €700bn) but is €84bn above the figure a year earlier and is further confirmation that household wealth is recovering.
What are the implications of these trends?. Rising wealth is generally supportive of consumer spending, and a paper from the ESRI by McCarthy and McQuinn found that in Ireland a 10% rise in housing wealth would boost consumer spending by 1.1%. On that basis we can say that the 14% rise in housing wealth seen over the year to the third quarter could have boosted spending by 1.5%, or by €1.2bn. Of course other factors have been at work and consumer spending has emerged well below most forecasts, which brings in the second implication- deleveraging has undoubtedly had a strong negative influence on household consumption, with the gross savings ratio averaging over 14% in the first three quarters of 2014, double the figure in 2007.It is impossible to know how long household deleveraging will continue and as such it represents a risk to any forecast of future household spending.
One final implication. Irish banks have seen an improvement in net interest margins but their assets are still falling, with deleveraging a significant factor. They are making new loans, of course, but that is being offset by debt repayment, both by households and firms, and again the recent monthly figures from the Central bank showed that the trend decline in bank assets was still evident in December.