Personal balance sheets are in good shape to cope with rising interest rates and economic uncertainty, but aggregate levels disguise inequalities
IRISH household net wealth has topped €1trn for the first time and the value of housing assets is now greater than at the peak of the Celtic Tiger.
New data published by the Central Bank this week showed that big increases in property values and cash savings boosted household wealth to €995bn by the end of 2021. About two-thirds of that total – €630bn – consisted of housing assets, surpassing the previous record of €604bn from 2007.
With house price rises showing no signs of slowing down this year, the total wealth figure has certainly surpassed the €1trn mark.
In contrast to the pre-crash situation, however, Irish household debt levels are now in line with the European average, meaning personal balance sheets are in good shape to cope with impending rate rises and an uncertain economic outlook, said Goodbody chief economist Dermot O’Leary.
He pointed out that Irish debt stood at 200pc of disposable income on the eve of the financial crisis, whereas it was at just 97pc at the end of December.
More than a decade of debt deleveraging and record savings rates during the pandemic has radically changed the financial well-being of Irish household at the aggregate level.
Yet as the Central Bank pointed out that its data says nothing about wealth distribution and does not capture the experiences of households at the individual level.
While the pandemic boosted the savings of many professionals who were able to work from home for the last two years, workers in the worst affected sectors such as hospitality suffered from job cuts and loss of income.
Mr O’Leary said that households that were vulnerable to rate rises were “hidden in the data”.
The European Central Bank is now widely expected to start increasing rates in July for the first time in more than a decade, which will eventually mean higher mortgage bills for the nearly 500,000 households with either a tracker or variable home loan.
Growth in financial assets was also a major driver of wealth gains last year, as those with pensions and investments enjoyed a strong year for returns. Financial markets are performing poorly by comparison this year, though, so some of that wealth may eroded in the last few months.
Although the savings rate is above pre-pandemic levels, savings started to tail off late last year as households began to spend down their cash.
However, with inflation becoming more of a factor in 2022, hitting a 22 year high of 7pc in April, consumers are showing more caution, so that trend may not continue.
According to data compiled by AIB, consumer spending was flat in April as the rising cost of goods and services started to hit people’s pockets.
UK research firm Capital Economics said high inflation will continue to weigh on real incomes in rich countries and there is limited scope for savings to make up the difference.
Spending growth, therefore, is likely to weaken, meaning economic growth could follow.