Credit growth not a threat to housing boom

Over the last five years the messengers of doom have brought forth a variety of scenarios, which they purport will end the current buoyant period of growth in the housing market. One such argument, which has been expressed with increased frequency of late, suggests that the biggest risk to the stability of the property market lies in the rate of credit growth, specifically mortgage credit growth. Stated simply, the argument suggests the recent pace of house price inflation has been largely underpinned by borrowings and that as a result the market is unstable.

As with most arguments, there does initially appear to be some logic to this line of reasoning. The level of credit advanced to the Irish private sector has increased quite significantly in recent years. The annual growth rate of residential mortgage lending to Irish residents, for example, has increased by approximately 25 per cent per annum from May 1999 to December 2000.

However, given the considerable reduction in interest rates in recent years, such an increase in the debt burden was largely predictable; if we take on a European interest rate regime, we can assume that we will take on a European level of debt.

Secondly, while the pace of credit growth has been particularly strong in recent years, we did begin this period of growth with very low levels of debt by European or indeed international standards. In 1995, the rate of outstanding residential mortgage credit to GDP stood at 22 per cent; by 1999 that figure had increased to approximately 28 per cent.

It is worth noting that at 28 per cent, Ireland's outstanding debt is still very low by European standards. The latest available figures for our European counterparts show the mortgage debt/GDP ratios ranging from in excess of 60 per cent in the UK to over 70 per cent in the Netherlands. Furthermore, despite having increased considerably in recent years, overall personal credit as a proportion of personal disposable income in Ireland is also relatively low in comparison to other countries. Another reason to dispute this perceived threat to the stability of the Irish property market lies in the trend of falling loan-to-value ratios. An analysis of loan-to-value ratios in the period 1995 to 2000 reveals a continuous reduction in the ratios. At the beginning of this boom in 1995 the ratio of residential mortgages to house prices stood at 62 per cent for new houses and 65 per cent for other properties. The latest available statistics reveal that these figures have fallen to 58 per cent and 63 per cent respectively. While it is inevitable that a number of loans will exceed this norm, the downward spiral in the average loan-to-value ratio underwrites the degree to which the financial sector is insulated against risk and reflects positively on the long-term stability of the market. In contrast, at the height of the UK property boom in 1988, almost one quarter of all first mortgages were for over 100 per cent of the assessed value of the property, with a further third over 95 per cent. This was at a time when lending from other sources was also very high and when transaction levels were near their maximum, so that particularly large numbers of households were exposed to very high level of debt.

In conclusion, despite the increase in both overall and mortgage credit in Ireland in recent years, Irish indebtedness is still relatively low by European and international standards. Furthermore, the falling interest rate environment means that the interest burden of personal credit has actually fallen in recent years. All of this suggests that the immediate vulnerability of the Irish property market to the recent increase in borrowing is not significant. That said, the Government's current fiscal stance is somewhat worrying because it has created an ethos whereby the vast majority of people are anticipating significant increases in their disposable incomes in the coming years - an attitude that could induce further increases in borrowing and therefore debt burden. Furthermore, Ireland's comparatively low level of indebtedness does imply some scope for mortgage credit to expand even further, applying more pressure to property prices. However the Irish position in relation to debt is far removed from that experienced in other countries in advance of the collapse of their property industries. For those who continue to await the collapse of the Irish property market the disappointment continues.

Marian Finnegan is an economist with the Sherry FitzGerald Group