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Too much debt and not enough houses: Ireland's creditless recovery is here to stay

We’re too focused on paying down our existing debt burden to consider new lending, says a new report.

Image: PA Archive/Press Association Images

THE ECONOMY MAY be improving, but a new report by Davy Stockbrokers shows that the amount of credit in Ireland will remain low for the foreseeable future.

Credit to households and non-financial companies contracted by 3.8 per cent and 5.6 per cent respectively in the year to February 2014.

Davy said that many Irish people are still focused on paying down debt and escaping negative equity, which is reducing demand for new lending.

Debt mountain

The fundamental problem, according to Davy, is the “exceptionally high” level of household indebtedness in Ireland.

The best way to measure this is by comparing household debt against disposable income.

Total debt comes in at €169 billion, or 196 per cent of disposable income. While this figure has come down, it still compares unfavourably with our neighbours in the UK, where household debt was 140 per cent of disposable income.

While we have managed to pay down household debt by 17 per cent since 2008, the effect of this on our debt to disposable income ratio has been hampered by by declining wages and pressure from austerity measures.

First time’s a charm

New lending from banks is likely to be concentrated among first time buyers, although Davy said that the construction sector will have to rapidly expand activity to satisfy demand.

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With just 8,300 housing completions last year, the stockbroker estimates that an additional 82,000 households would need to purchase a home for ownership rates to return to 2006 levels.

However, even if demand from FTBs can be satisfied, it won’t be enough to counterbalance the sluggish activity in the rest of the market, with new lending “unlikely to compensate for repayments on the large overhang of mortgage debt”.

Increased competition between banks is promised for the limited pool of first time buyers, with pressure coming on banks to grab the biggest share of interest-earning assets possible to offset poorly performing loans.

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About the author:

Jack Horgan-Jones

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