Sunday 16 December 2018

Surge in consumer spending fuelled by escalating property prices

Photo credit: Julien Behal/PA Wire
Photo credit: Julien Behal/PA Wire

The 'wealth effect', consumer confidence buoyed by the rapid rise in property prices, has led to a surge in spending on home improvements, foreign holidays and high value household goods.

House and apartment prices are rising at €50 a day, according to latest figures, and the cost of an average-sized family home in some Dublin locations will top boom-time prices within a year.

One key barometer of burgeoning confidence is the spending spree on home improvements this year, including high-value extensions, new kitchens, and other renovations. 

New figures obtained by the Sunday Independent reveal that homeowners are spending huge amounts to improve their home as escalating house prices limit their ability to trade up.

The figures from the Revenue Commissioners show that 9,478 homes have been extended at a cost of more than €402m this year. This compares with €326m in 2016.

Near full employment, and promised pay increases next year, are also fuelling increased spending.

And in a further sign of renewed hope in the economy is the increased spend on foreign holidays. Bookings are up 7pc in the past 12 months and more people are opting for five-star travel to exotic locations instead of traditional package holidays.

Overall, property prices have risen almost 47pc on average since their lowest point at the height of the economic crash in late 2013, according to the House Price Report by property website,

They say house prices nationally are rising by more than €50 on average each day.

In addition, household debt is at its lowest level, since 2005. It is now 30pc less than its 2008 peak.

A cautious shift in consumer sentiment has been evident since early this year.

Spending on a range of household goods including large electrical items such as refrigerators, washing machines and televisions is on the increase.

New data from the Central Statistics Office last week show the volume of retail sales was up 4.5pc in October, compared with the same period last year.

This upward momentum is pointing to what is described as the “wealth effect”.

This theory refers to the tendency of people to adjust their spending in relation to their perceived economic well being. Rising asset prices — such as the value of the family home — make them feel better off, which leads to a willingness to spend more.

However, economists stress that in Ireland discretionary spending is still within a narrow range.

And it is a long way off the freewheeling splurges seen during the Celtic Tiger era.

Alan McQuaid, chief economist at Merrion Capital, says people are generally feeling better off, as the economy continues to improve.

“A lot of people have houses — so there’s wealth in their property.”

He also pointed out there is a “wealth effect” in the recovery of property prices for those who were in negative equity.

“There’s no doubt that psychologically all this makes people feel better.

“Although they were minor, there have also been some positive tweaks to the tax system,” added Mr McQuaid.

“But the key issue is unemployment. We’ve gone from 15pc down to 6pc; more people are at work. More people have more income compared with what was the situation during the crisis. The bottom line is to have a job. If you have a job, you have a better chance to pay off outstanding debt — and also to spend.”

The Revenue Commissioners have confirmed that almost 9,478 homes have been extended at a cost of €402m from January to October this year.

The improvements were carried out under the Government’s Home Renovation Incentive (HRI) scheme. This compares with €326m last in 2016 — and sources suggest the figure will rise dramatically in 2018.

Introduced in October 2013, the HRI provides tax relief for spending house improvements. It provides for 13.5pc of the expenditure to be returned by way of an income tax credit over two years.

This latest trend comes as second-time buyers have been hit by this week’s changes to mortgage lending restrictions.

While Central Bank Governor, Philip Lane, left existing guidelines much as they are, he did make a slight adjustment on how exemptions to the lending limits operate.

This will largely hit those trying to ‘trade up’ to a larger home.

Before the changes, banks were able to allow 20pc of all borrowers an exemption from designated income limits. This exemption did not distinguish between new and second time buyers. However, under the changes announced last week banks can now exempt only 10pc of second-time and subsequent buyers from income limit rules from January.

In contrast banks will be able to do a deal with 20pc of first time buyers if they qualify for an exemption.

Meanwhile, Mr McQuaid said young families in need of more space are most likely to renovate or extend their property due to the lack of supply.

“There’s also the issue of older people who don’t necessarily need the accommodation they had when their family was young.

“Facilitating them to move on to somewhere else is also an issue in the current property market.”’s House Price Report, released last October, found that the price of the average home is now nearly €241,000 — 8.9pc higher than the same time last year.

According to the report, the average house price in Dublin is just over €354,000 — an increase of almost 10pc on last year.

Meanwhile, Austin Hughes, chief economist at KBC Bank, agreed that there’s an “element” of the wealth effect at play.

“But I think it’s a broader confidence issue — people sense the worst is over. They feel they got through the recession and while things could have been a lot better, they could have been a lot worse.

“Consequently, they feel they’re in a position to spend a little more.

“Retail sales have been choppy throughout the year. Consumers have been very careful about their spending.

“As we move towards Christmas, they feel a little bit more entitled, or inclined, to spend a little bit more.

“You could call it the wealth effect or equally a survival effect. It is a wealth effect in the sense that people feel that things aren’t as bad as they were.

“People feel they can put their head just a little bit more above the parapet.

“It’s spending a little more, rather than splashing out...Christmas presents get a little bit better, for example.”

Meanwhile, Pat Dawson, chief executive of the Irish Travel Agents Association (ITAA), said holiday bookings have increased between 7pc and 8pc in the past 12 months and some peak dates next summer are already full.

“There’s no doubt there are healthy signs out there —families are currently booking trips to Lapland for 2018, a day trip for a family of four costs about €3,000.

“Holidays to the US are also in strong demand.”

But he expressed concern about the impact the high cost of living is having on disposable income.

“The employment level is very good, but I’d be a bit concerned by the level of salaries, compared to living costs, particularly in Dublin.

“That’s not helping the level of disposable income.”

At the higher end of the market, he said a minority of travellers are spending an average of €10,000 each on “big, blowout holidays”.

“There’s no shortage of demand among wealthier individuals, who are well able to afford the higher end of the market.”

He said a significant proportion of retirees on generous civil service pensions are able to fund regular breaks overseas.

Ireland’s unemployment rate has been dropping consistently for the past 18 months and now stands at 6pc, according to CSO figures for October.

Employer’s group ISME predicts that up to 60pc of its members could offer pay increases next year.

The Economic and Social Research Institute (ESRI) says pay hikes in the region of 2.5pc are realistic.

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