Up to 10% of home equity withdrawn in boom
Irish households were withdrawing equity from their homes to the tune of 10 per cent of their collective disposable income at the height of the property bubble, according to a new study by two economists at the Central Bank.
While this further inflated the bubble, once the bubble burst, the process went sharply into reverse and has been deepening the downturn.
Households are now injecting about 10 per cent of their combined disposable income into their homes.
Reamonn Lydon and Brídín O’Leary have for the first time attempted to measure the way people withdraw or inject wealth out of or into their homes.
Their model is based on ones used in Australia and Britain and measures trends over more than three decades.
Their figures show that equity withdrawal at its peak was similar, if slightly higher, than during the British property booms of the late 1980s and mid-2000s.
During the Irish crash, however, the study notes that “relative to the UK, Australia and historical Irish comparators, the level of equity injection as a percentage of income is extremely high”.
The study finds that changes in the supply of and demand for credit were the key drivers of the withdrawal process, along with price developments in the residential property market.
“Increased competition during the early- to mid-2000s played a significant role in reducing mortgage interest rates, allowing for greater household leverage by lowering the debt repayment burden,” the report says.
Key factor in bubble
The report also provides further evidence pointing to changes in international finance, rather than falling interest rates associated with euro membership, as the key factor in driving the Irish property bubble.
As illustrated in the accompanying graph, Irish households historically put more equity into their homes than they extracted, although the amount narrowed as a percentage of disposable income very gradually between 1980 and 2002.
Thereafter, a very dramatic change took place, with massive equity withdrawal taking place at an accelerating pace for four years.
From early 2007, that process went into reverse and by 2009 households were once again injecting equity into their homes.
Although the amount of equity injection has been broadly stable since the beginning of 2011, it remains at historically high levels.