Will pandemic savings go the same way as SSIAs?

What did we do with our SSIA (special savings incentive account) money back in the 2000s? We spent it on housing. More precisely, on deposits for home purchases. In a twisted way, we used our savings windfall to acquire more debt, reaping a world of pain in the process.

The SSIA episode is more relevant to today's economy than you might think. The Central Statistics Office (CSO) on Tuesday drew a parallel between the additional €16 billion placed on deposit last year – so-called lockdown savings accruing from households not being able to spend on things like transport, childcare, holidays, eating out – and the €12 billion added at the height of the SSIA incentive in 2006.

Pandemic savings are similarly arriving as inflation rises, driven in the main by energy prices

While the surge in savings in 2020 is larger, both appear to be one-off events and both had (or will have) a considerable impact on the future direction of the economy.

The Central Bank has predicted super-charged growth of 15.3 per cent this year on the back of a rapid resurgence in consumer spending linked – in part – to the unwinding of excess savings built up during the pandemic.

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The speed at which these savings are released will determine the speed of recovery, particularly in the worst-hit, consumer-facing sectors of retail and hospitality. Back in 2006/2007, the SSIA money added to existing overheating pressures in the economy. Pandemic savings are similarly arriving as inflation rises, driven in the main by energy prices.

SSIAs were introduced in 2001 by former minister for finance Charlie McCreevy to incentivise household saving. As part of the scheme, the government topped up savings in SSIAs by 25 per cent of the amount saved each month over a five-year period. The scheme attracted about 1.1 million subscribers and saw the accumulation of an estimated €16 billion in savings.

Unintended consequences

While it was widely praised at inception for engendering greater financial prudence, it had unintended consequences and, like many things from that period, got caught up and mired by the crash that followed.

But they've not been totally discounted. Former Central Bank governor Philip Lane recently mooted the idea of having another SSIA scheme so the public could get in on the act of saving when times are good.

In the peak year 2006 – as mentioned – an additional €12 billion from maturing SSIAs was placed on deposit. This boosted consumption and spending at perhaps the wrong time for the Irish economy, just when we needed to take the foot off the gas.

While surveys at the time suggested people intended to do a multitude of things with their SSIA savings – buy cars, take holidays and carry out house improvements – a recent report by the Department of Finance suggests a surge in spending in these areas is not immediately identifiable in the data.

It is possible that the savings accumulated during the pandemic could simply flow into the housing market

CSO figures do show that Irish households in 2007 invested about five times as much in fixed capital, which is essentially housing, than households did last year.

So we can say – with confidence – that a significant portion of the SSIA windfall ended up in housing back in 2006 and 2007, a powder keg that was just about to blow.

“The end of the SSIA scheme coincided with a housing market boom that was beginning to show signs of unwinding,” the department’s report noted.

“As such, it is possible that the savings accumulated during the pandemic could simply flow into the housing market, especially given that these savings likely accrued to higher-income households who are more likely to be homebuyers,” it said.

Property expenditure

The report cited the findings of a survey by Irish Times-owned property website MyHome.ie, indicating that the majority of prospective homebuyers have not been affected by the economic impact of the pandemic.

The survey found that almost 60 percent of respondents had been able to save more for a deposit since the beginning of the pandemic, and nearly three-quarters of respondents intended to purchase a property in the next year.

“While it is important not to over-interpret the evidence from the SSIA scheme in terms of its relevance to the current crisis, these findings can shed light on how consumers might behave once the pandemic is over,” it concluded, suggesting households were likely to divide the savings accumulated since the beginning of the pandemic between consumption and investment or “re-savings”.

In its summer economic bulletin, the Central Bank's director of economics and statistics, Mark Cassidy, said household deposits – the regulator's proxy for savings – had increased by €21 billion over the past 18 months.

He estimated that €9 billion to €12 billion of this was “forced or precautionary” and would flow back out into the economy in the form of additional spending in the near to medium term. Some of it is expected to be spent in housing, potentially fuelling further house price growth, he said.

Many had predicted property values would decline as a result of the pandemic but a number of factors – including increased savings and tight supply – have led to an acceleration in prices. They were rising at an annual rate of 10.9 per cent in August with half of the growth coming in the previous three months. With an eye on those accumulated savings, the industry is forecasting further price growth.