Households have cut their debt by a third since crash

Irish households have reduced their debt by a third since the crash, figures from the Central Bank show.

After a nearly a decade of belt-tightening, household debt in the Republic stood at €135.3 billion, or €27,489 per person, in the second quarter of 2019.

While this was still one of the highest debt levels in Europe, it was 33 per cent, or €67.6 billion, lower than the boom-time peak of €203 billion recorded in the third quarter of 2008 just as the financial crisis hit.

The Republic's household debt-to-disposable income ratio was put at 117 per cent, lower than countries such as Denmark, Netherlands, Sweden and the UK.

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Experts indicate that the current debt level for households may flatter their actual financial position. This is because in calculating household debt the Central Bank uses the market value of non-performing loans, many of which have been sold on by banks at a discount.

In most cases, however, the discounts have not been fully passed through to borrowers in arrears.

In contrast to household debt, the State’s national debt is going the other way. Last year it rose to €206 billion, up from €201 billion in 2017, and remains high by internationally standards.

The Government paid out €14 million a day or €5.2 billion in interest last year in interest to service it.

While national debt as a proportion of gross domestic product (GDP) has been falling – it dropped to just under 65 per cent in 2018 – the absolute level of debt has remained elevated since the crash, leaving the State vulnerable to sudden shocks.

On the other side of the ledger the Central Bank figures show Irish households are, on paper at least, richer than at any other time. They show household net worth climbed by €12 billion to a new high of €780 billion, which equates to €158,574 per person.

The headline figure eclipses the boom-time pre-crash peak of €719 billion achieved in the second quarter of 2007.

Household net worth is calculated by adding the total value of the housing stock and financial assets – such as cash savings, shares, pensions and possessions such as cars and antiques – and subtracting debt owed or liabilities.

It is, however, considered a crude measure of prosperity as it hides the distribution of household assets and liabilities across income groups and age categories.

Property

Most of the net worth of Irish households is tied up in property, which has risen in value in recent years on the back of an undersupply.

The Central Bank said the increase over the quarter was driven by improvements in both households’ financial assets and housing assets.

“Mortgages make up the bulk of Irish household debt, and this component has started to grow again in 2019,” Goodbody analyst Dermot O’Leary said.

“ However, mortgage credit growth in this cycle will be constrained by the macro-prudential rules, meaning that mortgage credit should grow in line with incomes.”

Mr O’Leary said Goodbody was forecasting debt to start rising again in the coming years, “but at a modest pace”.