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Irish household finances more resilient than before the last recession, says Central Bank

The study takes 2013 to represent ‘the low-point of the last recession in Ireland’.

Image: Shutterstock/William Potter

IRISH MEDIAN HOUSEHOLD income peaked in 2018 at €47,700, surpassing the previous boom-era highpoint observed in 2007.

A research paper published today by the Central Bank details the growth of Irish household wealth between 2013 — shortly before the economy began to emerge from the last recession — and 2018.

It suggests that for the median household, net wealth grew by 74% — or over €76,000 — to €179,200 between 2013 and 2018.

Authored by David Horan, Reamonn Lydon and Tara McIndoe-Calder, the study takes 2013 to represent “the low-point of the last recession in Ireland”.

“House prices had bottomed-out after falling by 55% from their peak; the unemployment rate peaked at just under 16% in late-2012, and median disposable household incomes had fallen to €34,088 from €40,500 in 2007.

“In contrast, by 2018 all of these indicators had rebounded – unemployment had fallen significantly, but was still above pre-recession levels, at 5.4%; household incomes had recovered some ground; and, house prices grew by 74%.” 

Screenshot 2020-09-22 at 14.10.07 A table illustrating changes in the distribution of wealth in Ireland across the spectrum

Net wealth takes into account a household’s real assets, such as its income and property; its financial assets, like how much money it has in the bank, and also the household’s level of debt.

Crucially, median incomes increased by 18% between 2013 and 2018, from €40,240 to €47,700.

With incomes on the incline during the period, the growth of median Irish net household wealth was driven in part by a reduction in household debt-to-income ratios. People were better able to pay down debt in 2018 than they were during the crash and were less willing to take it on.

In 2018, 51.8% of households held some form of debt, down from 56.8%
in 2013. The largest drop was observed in the 30-35 age bracket, where the proportion
of households with any debt fell by over 10 percentage points, from 64.4% to 54.3%.

The report concludes that total debt fell from €120 to €117 billion over the five years, driven by a “significant” €8.2 million decline in mortgage debt.

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According to the study, net wealth increased across the spectrum and inequality fell during the period.

“A key driver of this,” the report suggests, was “the decline in negative equity, which fell from 33% of mortgaged households in 2013 to 4% in 2018.”

Overall, the study’s authors suggest that Irish households are more resilient as they face the latest recession than they were in 2008.

“Our work indicates that if house prices and/or incomes fall [as a result of Covid], we would not expect household debt to drag on spending in the same way as it did going into 2008.”

This is because “households have rebuilt their balance sheets substantially” since then and also because less equity is being withdrawn from property to fund investment and spending.

“This means that income shocks and expectations will be the most important determinant of household consumption in the medium term,” the study argues.

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