Personal debt is strangling us
They say love is blind but the Irish love affair with debt is set for a real eye opener, writes Louise McBride
WE seem to have been walking around with blinkers for the last few years. By the end of this year, the average household will be borrowing way more than it is earning -- €158 for every €100 earned, according to Goodbody Stockbrokers.
This is a far cry from the shrewd days of 1995, where we borrowed about €50 for every €100 earned.
And our heavy indebtedness has finally come home to roost, thanks to soaring unemployment, higher mortgage interest rates, rising food and fuel bills, and the dreaded R- word. Almost €200m worth of unpaid debts was pursued through the courts over the last year -- twice as much as in 2003.
Some counties have seen their average debt triple over the last five years. Clare has jumped from being one of the least indebted counties in Ireland to the county with the highest average debt, according to a report by Business Pro, a Dublin firm which records court actions taken by those pursuing unpaid debts.
The report, given exclusively to the Sunday Independent, breaks down debt across Ireland. It found that in 2003, the average debt to land a Clare person in court was €6,159. This has since surged to €20,596.
In Kilkenny, the average debt chased through the courts has jumped from €6,050 five years ago to €17,943 today. The average debt in Monaghan was €5,141 in 2003 -- it is €12,563 today. In Dublin, the average debt has risen from €5,720 to €10,115 over the last five years.
The Business Pro report includes debt pursued through the courts after an individual or business has been unable to pay for telephone, fuel and tax bills, as well as repayments on personal and credit union loans.
The report does not include mortgage debt. Even so, the debts that have arisen on the back of unpaid personal loans, and utility and tax bills, have certainly mounted up. Five years ago, only two counties had average debts over €10,000. Today, seven counties do -- Clare, Dublin, Galway, Kildare, Kilkenny, Monaghan and Roscommon.
With an average debt of €9,941 (87 per cent higher than it was five years ago), Louth is almost in the danger zone. So, too, is Donegal, where the average debt is €9,198, and Meath clocks in at €9,616. And the chances are it's only a matter of time before more counties run into the €10,000 debt zone.
"There has been so much easily available and cheap credit in Ireland over the last five years that a lot more people were borrowing money," said James Treacy, managing director of Business Pro. "A certain percentage [of those loans] will always go bad -- that is one of the reasons debt will go up over the next year."
The credit crunch, where lenders have tightened their belts in response to a mortgage crisis in the US, continues to rumble on.
Since the credit crunch erupted last August, it has become more expensive for lenders to raise the money they need to offer loans. This expense has been passed onto borrowers. As well as increasing mortgage interest rates in response to movements in the European Central Bank (ECB) rate, banks have independently increased their rates in a bid to protect themselves from the credit crunch.
"In the next twelve months, the credit crunch will really start to bite," said Treacy. "It takes about 12 months for a debt problem to manifest itself through the courts.
"The average debt will go up by about 40 per cent over the next year. Some people, particularly Dubliners, might have relied on the value of their properties to bail them out of debt problems in the past -- but that's no longer an option.
"Rising fuel prices will also mean that more people will run into difficulties paying their oil, gas and electricity bills."
Across Ireland, the average debt pursued through the courts is about €8,900, according to Business Pro, and this could hit about €12,500 over the next year. People who took out particularly large mortgages in recent years -- or who topped up their mortgages so they could afford fancy house renovations or cars -- could be in even deeper water. Between 2003 and 2005, when ECB rates were at all-time lows, banks were throwing money at customers. Early last year, some lenders were still offering borrowers mortgages of up to six times their income.
Despite this, banks were remarkably upbeat about the shape of their mortgage books when they appeared before a Dail Finance Committee last week. The chief executive of Permanent TSB, David Guinane, said that mortgage arrears were at the lowest level the company had ever seen.
For borrowers on the ground, however, the reality is a lot different. Almost a quarter of those who contacted the State-funded Money Advice and Budgeting Service (MABS) for help with debt this year are mortgage holders, according to figures just released by MABS.
Thousands of those who contacted MABS are struggling with an average debt of almost €10,000 -- that's 25 per cent higher than the average debt held by those who contacted MABS for help last year.
The total amount owed by people who contacted MABS for the first time this year is €63.3m. Two-thirds of this is owed to banks and financial institutions, 17 per cent to credit unions, 2 per cent to moneylenders, and 3 per cent to companies who provide electricity, gas or telephone services.
If banks weren't worried about the level of debt in Ireland, why have they tightened their purse strings so much in recent months that mortgage lending growth has fallen to its lowest level in 16 years?
One area where lending growth hasn't fallen, however, is credit cards -- worryingly, the most expensive type of credit. The total amount owed on credit cards has increased by 11.9 per cent over the last year, according to the latest Central Bank figures. For each month this year, the amount owed on credit cards has gone up on the same time last year. For example, in May 2007, we owed €2.67bn on credit cards. Last May, we owed almost €3bn.
"The big problem is that the span of personal debt is so wide," said Paul Joyce, senior policy researcher with Dublin's Free Legal Advice Centre (FLAC), which offers advice to people in debt. "Along with their mortgages, people have taken out personal and credit union loans, as well as loans under hire purchase agreements and credit cards."
For the first time in more than nine years, the total number of people on the dole stands at over 200,000. Any of these 200,000 people who took out a hefty mortgage in recent years simply will not be able to afford their mortgage repayments -- unless they have a lot of spare cash to hand.
Yes, house prices are falling but the national average house price still stands at €275,176. Repayments on a mortgage of this size could be about €1,652 a month. For someone who has just lost their job, the most they will get on the dole is about €197.80 a week, or €857 a month. This only covers half of the mortgage repayments on an average priced home -- never mind the other household bills that need to be paid.
"Two years ago, no one had any reason to doubt that someone would be in gainful employment for the long term," said Richie Smith, director of the credit rating company, Experian Ireland. "This isn't the case today. Emigration will start rising. People will start to leave the country and some of them will leave with their debts.
"On the business side, a lot of those in the construction sector are in difficulty. Some ancillary businesses are suffering. Sole traders like restaurants, bars and delis will be the next to suffer."
Business owners already feature heavily among those being pursued through the courts for unpaid debts. Almost half of the 21,861 court actions taken over the last year by those seeking to recoup their debts were against business owners, according to Business Pro. One in 10 actions were taken against tradesmen.
Almost 13,000 court actions -- 6 per cent of the total number -- were taken against builders and contractors. The same amount of farmers as builders were chased through the courts for unpaid debts. Transport companies, shop workers and publicans also featured high among those that actions were taken against.
Ironically, almost 400 court actions -- about 2 per cent of the total -- were taken against solicitors and barristers who had not repaid debts.
"Delinquency rates are going up across the board in every organisation," said Smith.
Yet the banks still appear to be chirpy and brave-faced. Maybe they're afraid to be entirely honest about what's going on behind closed doors. Or maybe they need to take off the blinkers.