Sunday 22 July 2018

Richard Curran: National net worth figures mask full story of how many families are really managing

'When it comes to debt we are still one of the most debt-laden in Europe. Borrowing has come down by around €60bn since the crash.' Stock image
'When it comes to debt we are still one of the most debt-laden in Europe. Borrowing has come down by around €60bn since the crash.' Stock image
Richard Curran

Richard Curran

The late Páidí Ó Sé understood how to use numbers very well. I remember the Kerry GAA legend once posing for a photo with two fans who wanted a picture. Páidí stood between the two men, smiled at the camera and joked: "We are three great men. We have eight All-Ireland medals between the three of us."

Of course, Páidí had eight and the other two boys didn't have any. But he knew he was still technically correct. One could argue they had an average of 2.6 All-Ireland medals each.

It shows how tricky and even deceptive numbers can be when used in certain ways.

I was reminded of the story when I read the Central Bank's recently-published figures on the net worth of Irish households. It seems our net worth rose to a record €727bn at the end of last year, which eclipsed the Central Bank's previous peak of €720bn reached in the second quarter of 2007.

Household net worth is calculated as the sum of housing and financial assets minus their liabilities. Apparently if you divide that national net worth figure by the population you get an average net wealth of €151,657 per person.

Nobody is suggesting that we are all individually worth that kind of money, but the figures are useful for painting a broad picture of how far the economy has come since the depths of the recession.

However, reading too much into the averages from the total figures could give a slightly misguided interpretation of where many households are at.

The figures clearly show how net wealth in Ireland has grown, but it doesn't really show how it is divided up. The scale of the increase in net worth since the crash has been driven by a number of factors. More people are working. Many have seen the value of their house increase dramatically in recent years.

The figures show that net worth increased by almost €15bn in the final quarter of 2017, with half of the increase coming from rising property prices. The question is, whose net worth is that?

When it comes to debt we are still one of the most debt-laden in Europe. Borrowing has come down by around €60bn since the crash.

Overall household debt fell to €151bn in the fourth quarter of 2017 and is back at the levels of late 2005.

Irish households in the 35-44 age group remain highly indebted, whereas younger generations have lower debt levels relative to the rest of the euro area.

Those in the older age group who own their homes and have little or no mortgage left, are the ones seeing the greatest increases in their net worth.

Given that it is now cheaper to make repayments on a mortgage than it is to rent, there is an extraordinary transfer of wealth taking place. Those who pay rents that are 23pc higher than pre-crash levels should really go and buy a house based on that logic.

However, if they cannot raise the deposit or their earnings are not high enough to qualify for a mortgage, they are in trouble.

In 2017, the average loan-to-value ratio for first-time buyers was 79pc, so they were putting up around 20pc of the money themselves. This amounted to average deposits of €50,000.

So, if you have family who can give or lend you some of that deposit, you can buy a house, watch it increase in value, pay less per month than in rent and see your net worth rising.

If you cannot get your hands on €50,000 you must pay massive rent, watch that eat up your disposable income and you are increasing the net worth of your landlord.

There are other factors at play that might not show up in the total national net worth figures. Household sizes in many homes around the country may well be getting bigger. Because of the dysfunctional property market, more young people are staying at home with their parents for longer.

If household sizes are growing, then so too might the net worth per household, because there are more of them in there, especially younger twentysomethings who do not have a lot of debt.

Many workers have enjoyed pay rises in recent years but exorbitant rents are devouring the disposable incomes of a whole generation of people.

Back in 2007, at height of the boom, the 2.2 million people in the economy who were working forked out €13bn in income tax. Last year, the same number of people working paid income taxes (including USC) of €20bn.

So, when it comes to real disposable income, things remain quite tough for a lot of people.

The phenomenon of negative equity in the housing market has almost disappeared. At one stage there were close to 300,000 homes in negative equity.

House price rises have lifted the vast majority of those people out of negative equity and would of course have lifted the national net worth figures considerably.

In fact, national net worth has risen by 69pc in the last five years and around two thirds of that increase is due to higher house prices. And this is good for those affected.

However, unless they are willing to go and borrow again, they probably can enjoy little of the benefit that getting out of negative equity might bring.

In theory, lifting out of negative equity enables people to sell the house, trade up and move to a more suitable home for their needs. For example, they may have children now and need a house instead of an apartment or whatever.

The equity in their house frees them up to take out a new mortgage by providing them with a deposit. But house prices remain below peak boom levels so if they bought close to the old top, the equity in their property is modest and they are maybe 13 years older now.

They also have to find a suitable home, where houses for sale are very thin on the ground.

So for many of them, they can relax in the fact they are no longer in negative equity, but they may in fact not be able to do very much with that right now.

Tens of thousands of people have ended up living in places they never envisaged living for the long term. They are now back in some kind of net worth on the financial score board, but still pretty much stuck.

There are nevertheless some real positives from these total net worth figures. They provide a kind of rough scorecard of overall economic performance.

Personal credit was skyrocketing the last time we reached peak net worth as a nation.

We have technically surpassed that net worth figure but it is very hard to say how many people are enjoying the full benefits of that rise.

Many people will say they don't feel as well off as they did in 2007. This might be because they were supplementing their income with large wads of cheap credit. That is not happening as much now.

Economically, the country is more focused on its strengths from indigenous exports, tourism and FDI rather than construction. These are all very positive changes. We now need more housebuilding, not less.

The Central Bank has been a strong guardian against loose credit from the banks and it has held the line despite some early criticism. But can it hold that line into the future?

The Central Bank points out that younger generations here have lower debt levels relative to the rest of the euro area, and "this is where there will be significant credit demand over the coming years".

It is inevitable that generation will demand more credit in the years ahead. They are after all getting screwed in some many other ways, they may see access to credit as a way forward.

Pressure will mount to loosen lending criteria. Will those people be stopped from repeating past mistakes?

That is the real question.

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