Friday 28 October 2016

We are getting wealthier, but we are still not spending

Published 08/05/2015 | 02:30

Household debt is continuing to fall, but we still remain deeply in debt
Household debt is continuing to fall, but we still remain deeply in debt

Are you less mired in debt than you were a few years ago? Do you feel you are getting richer? And if you are feeling flush, are you spending more freely?

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The answer to the first two questions is emphatically Yes.

On average, personal indebtedness is down and the value of people's assets - property, pensions and the like - continues to rise strongly, according to new figures from the Central Bank.

Less marvellous is the answer to the question about whether the feel-good factor associated with being better off is making people open the purses and wallets. The answer to that question is No.

Let us consider how changes in personal wealth affects the pace of recovery. People's wealth is tied up in property and financial assets. But an increase in the value of your house or a soaring stock market does not mean you that you suddenly have more cash. The gain is only realised if you sell.

We know, however, that when people see the value of their homes and investments rise, they are more inclined to splash out and less minded to save the income that they do have. In the economics jargon, this is known as the "wealth effect".

Despite the average household getting richer over the past three years, there has been little sign of a wealth effect in Ireland. The share of incomes used to save or to pay down debt has not fallen. That may be because those with debts feel they are too big and are determined to reduce them. It may also be that after such a crisis, people are saving more to build up buffers in case times turn tough again.

But as the outlook gets rosier, the confidence to live a little more is likely to grow. If people save less, it will give a spur to economic activity. And, for what it's worth, my hunch is that such a spur is coming - the many "precautionary savers" may be starting to feel that they have enough cash squirrelled away for a rainy day.

So if that is the broader context, what do yesterday's new figures tell us?

They showed that the average Irish person is worth just over €130,000, when everything owned is totted up and everything owed is deducted. That figure is well down from 2007, when wealth peaked at an all-time high. That said, it is a big increase on the post-crash low point, reached over three years ago. The latest figures, for the final months of last year, show not only that the average person is getting richer, but that all the moving parts of the wealth story are moving in the right direction.

Our wealth has traditionally been tied up in property. Today, it still accounts for just over half of household wealth. People are, on average, getting richer in large part because their homes are becoming more valuable. From a post-crash low point in 2012, the Central Bank estimates that the value of all the homes in the country combined has risen by close to €100bn.

The rest of people's wealth is held in the form of pension investments, insurance funds, assorted financial assets and cash. Total non-property assets of all households in country stood at €365bn at the end of last year, well above bubble-era peak despite the global financial crisis.

So households collectively owned €750bn. If your mind is not boggled by this number you may be wondering about the other side of the balance sheet - debt.

As those in negative equity know, measuring wealth is not just about the value of your assets, it also about how much you are liable to pay back. In just five years up to 2007, Irish households increased their debt levels three-fold. By the time the crash came Irish households owed €200bn.

This, as it happens, is about the same amount as the Government now owes. The difference is that while the Government continues to add to its debt pile, households are cutting theirs - personal debt was down by almost a quarter between 2007 and the end of last year.

Because it is so much easier to rack up debts than to pay them down, the after-effects of the five frenzied years to 2007 are still with us. They will be with us for many more years because we Irish, even now, remain one of the most indebted peoples in the world.

Irish Independent

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