Consumers could face serious financial risk if interest rates rise sharply or if they lose their jobs, such is the high level of personal debt in the economy, the Central Bank has warned. Una McCaffrey reports.
Last year, for the first time to date, Irish people had more debt than they were able to pay back out of their disposable income.
The Central Bank now estimates that personal debt stood at 120 per cent of disposable income at the end of 2004, up from 97 per cent in 2003.
This means that for every €1 of after-tax income last year, people owed €1.20. Ten years ago, before the economic boom, they owed just 48 cents for every €1 in after-tax income.
"In general, the more developed an economy, the higher the ratio is," Mr John Kelly, the deputy head of the bank's statistics department, said yesterday. He was speaking at the publication of the bank's first quarterly bulletin of 2005.
This surge in the ratio of personal debt to disposable income could cause big problems in the future if the pace of growth is maintained, the bank's economists believe.
The bank warned of the "heightened vulnerability" of households to higher interest rates or changes to their job status. Interest rates are currently at a cyclical low, but most commentators expect them to begin rising within the year.
Mr Kelly said that, while current levels of indebtedness did not give rise to huge concern, it would be better to see the debt-to-disposable-income ratio "flattening".
"As a Central Bank, we always have to worry a bit," Mr Kelly said.
When taken together, all households in the Republic owed €85 billion at the end of September. This was almost six times higher than in 1995, with the increase attributable to a greater general level of comfort with debt.
Disposable income has, however, grown much more slowly, allowing debt to surpass it for the first time last year. Irish households are now more indebted than most of their European neighbours.
The main driver behind the shift in the appetite for debt was the property market, with ever-climbing house prices translating into a greater demand for mortgage credit than ever before. Last December alone, lenders advanced €1.6 billion in home loans.
The Central Bank pointed out, however, that while the high level of house prices and strong growth in credit were still a cause of "concern", mortgages had the benefit of being well secured on properties. This means that they can be repaid if the property is sold.
Growth in demand for housing loans, which account for roughly 80 per cent of all lending to households, is furthermore expected to slow as house prices stabilise.
The Bank went on to note that unsecured and expensive credit card debt has also been climbing in line with the State's collective wealth.
At the end of last November, €1.8 billion was owed on credit cards, although the bank estimated that about one-third of this would have been paid back without incurring any interest penalties.
The bank also noted that growth rates in credit-card debt had been easing over recent years. "There is, therefore, no sense of an explosion of credit-card debt in Ireland."
The Bank said the general outlook for the economy remained "broadly favourable", even though it has slightly reduced its gross national product economic growth projection for this year.
The reduction, from 5 per cent to 4.75 per cent, reflected developments in the international economy rather than at home, the economists said. Unlike some other commentators, they did not identify the expected fall-off in house-building as an obvious risk to the economy, suggesting instead that it would result in a shift towards other areas of building.
The prediction came as the Construction Industry Federation said the surge in house-building had peaked, with 2005 to see a fall in the number of units completed.