Household savings rose dramatically due to the pandemic. And, after two years, the exceptional amounts banked by consumers amounted to a quarter of their disposable income. The elevated savings rate continued to autumn 2021, with initial data suggesting that savings returned to a more normal level in the run-up to last Christmas.
However, the accumulated exceptional savings largely remain in bank accounts. As yet, there is little sign of how households will use their funds. Although, unlike during lockdown, people can now spend in bars, restaurants and on holidays abroad, the pandemic has also left people a bit more cautious, which is tempering consumer spending.
Habits have also changed, so there could be a small but lasting switch in the pattern of consumption.
Though queues are a new normal in Dublin Airport, the volume of traffic is still significantly lower than it was in 2019, while household incomes are now higher than they were two years ago. Thus, there is some way to go before we are back to pre-pandemic spending patterns, and there is certainly no evidence of a temporary savings-driven blowout.
Households, however, may need to dip into savings to pay for higher energy costs.
Cautious demographic
It’s likely that much of the extra savings were accrued by better-off and older households, many of which already had a significant financial cushion. These households may be more innately cautious, and less likely to splurge, and this may explain why pent-up savings have not really been run down yet to any noticeable degree.
Some of the savings may be earmarked for home improvements. However, with a lead-in time on the planning front, and a shortage of available builders, there will be a lag before such projects materialise.
Across Europe and North America, house prices are rising rapidly, fuelled by bumper pandemic savings levels. Here in Ireland during lockdowns younger people may have managed to save more towards a house deposit, particularly those who saved on rent by moving to cheaper rural areas or in with parents. The bank of mum and dad has also managed to grow its nest egg.
All this means there are more funds available to spend on housing, while supply remains constrained relative to demand. This savings glut is almost certainly one of the factors driving the exceptional rise in house prices of 15 per cent in February of this year compared to last year. This takes house prices back to almost the same level as they were at their peak in late 2007.
Housing stock
However, the impact of these factors on the housing market could have been even greater – investment by households in housing in 2021 was only slightly higher than previous years. That suggests we haven't yet seen a large share of pandemic-era savings entering the housing market. This is a relief, as the slow supply response means that a wall of money hitting the housing market would only result in even more rapid inflation.
The experience after the second World War in countries that escaped major devastation was that a significant part of the excess savings built up by households over the war years was invested in expanding the housing stock. In countries like Ireland, Sweden and the US, this saw a temporary surge in house prices in 1947 and 1948, two or three years after the war ended. If such a pattern of behaviour were repeated in Ireland after a similar lag, it would suggest that there would be substantial further pressure on the housing market in 2023 and 2024.
This underscores the urgency to expand housing supply, and be more nimble in responding quickly to growing demand, to ensure that any future surge in investment in house purchase produces houses rather than inflation.
In the late 1940s, the production of housing rose rapidly with the injection of additional demand. We built large volumes of housing in the Celtic Tiger years (albeit regrettably some was characterised by poor standards, with high remediation costs).
However, today’s supply response remains slow. On the one hand, there are many sites with fast-track planning permissions that are yet to be built on, while many other projects are mired in planning or legal delays. The planning and approval cycle for public sector housing can take years before foundations are poured.
We need to get the right balance of simpler, speedier processes that still deliver good-quality housing. The urgency and speed that characterised our management of Covid would be a good template to follow for tackling the problem of housing supply.
