Banks remain heavily exposed to property

Outstanding loans for construction and real estate projects hit €100 billion for the first time last year, writes Paul Tansey, Economics Editor

Total outstanding bank loans for construction and real estate development topped €100 billion for the first time in the final quarter of 2007, according to data on private-sector credit released yesterday by the Central Bank.

By the end of 2007, the total amount of bank credit extended for real estate activities and construction had reached €105.8 billion. In the course of last year, bank lending to these two property-based sectors increased by €22.5 billion or 27 per cent.

Credit advanced to the principal productive sectors of the economy increased by €28.2 billion during 2007. Thus, loans advanced for real estate development and construction accounted for 80 per cent of all core business lending last year.

More generally, as shown in the table, total private-sector credit outstanding rose from €329 billion to €392 billion in 2007, an increase of €63 billion or 19.1 per cent.

While the rate of private-sector credit growth is now slowing appreciably, the Irish banking system remains heavily exposed to the property sector. Property-related lending - encompassing credit extended to the property and real estate sectors and to personal borrowers buying houses - climbed €39 billion last year to reach €246 billion.

Property-related lending accounted for 62 per cent of all private-sector credit growth in the economy last year.

Moreover, by the year's end, property-related loans comprised 63 per cent of all outstanding credit extended by the Irish banking system to the private sector.

However, the annual data for private-sector credit expansion masks a steep slowdown in property-related lending in the final quarter of last year.

Lending to property-related borrowers increased by just €10 billion, or 4.2 per cent, between September and December 2007. Indicating the scale of the slump in the housing market, during the final quarter, lending to the construction sector virtually stood still, while the amount of residential mortgages outstanding increased by just 2.8 per cent.

During 2007, the scale of lending growth to construction and real estate development continued to surpass rates of credit expansion to all other productive sectors in the economy.

As shown in the table, the amount of credit extended to real estate activities had reached €79.8 billion by the end of 2007, an increase of €17.3 billion, or 27.7 per cent, on the stock of credit outstanding a year earlier.

Lending to the construction sector increased from €20.8 billion to €26 billion in the course of 2007, representing a rise of €5.2 billion or 24.9 per cent.

Compared to the corporate sector, private households adopted a much more conservative approach to borrowing last year. Households increased their borrowings at only half the rate of real estate developers.

Total lending to the personal sector increased by just 12.8 per cent. Residential mortgages remain by far the largest component of personal borrowing, accounting for some 85 per cent of the total.

The growth in personal borrowing is thus largely dictated by the scale of mortgage borrowing by households.

And households applied the brakes to mortgage borrowing last year. The stock of residential mortgages outstanding increased by just 13.5 per cent in 2007. This prompted a slowdown in housing sales that became more pronounced as the year advanced.