Figures reveal how bank borrowing spree fuelled property bubble


Statistics show that the level of personal borrowing shot up during the bubble years, writes COLM KEENA, Public Affairs Correspondent

TAOISEACH ENDA Kenny said in Davos that what happened in Ireland was that “people simply went mad borrowing”.

Whatever about insanity, the data available for personal credit in Ireland and elsewhere shows clearly that the level of borrowing by Irish households during the bubble years exceeded that in other European economies.

This private debt continues to be a huge drag on the economy.

A recent report from consultants McKinsey put Ireland’s household debt as a percentage of gross domestic product at the end of the second quarter of last year at 124 per cent.

The average for a mature economy, according to the report, is 77 per cent.

Ireland came ahead of other troubled economies such as Greece (66 per cent), Italy (45 per cent), Portugal (99 per cent), and Spain (82 per cent).

Statistics on the website of the Central Statistics Office show how household credit levels, including mortgages, grew during the bubble years.

While the figure was €58.6 billion in 2001, it had jumped to €202.5 billion by 2008. This means it grew by 245 per cent in seven years.

In terms of gross national product, it jumped from 59 per cent of the size of the economy, to 1.3 times the size of the economy.

The level of lending was both a factor of, and a contributor to, rising property prices.

While much of the growing debt was due to people buying their home, a lot of it was discretionary investment.

The growth in the size of personal credit card balances is an indicator of how discretionary credit changed.

Outstanding balances on personal credit cards was €1.9 billion at the end of December, 2004, but just shy of €3 billion by the end of December 2008.

All through the bubble years the Central Bank produced regular reports recording the steady rise of credit levels in Ireland. They make for grim reading.

Sectoral Developments in Private Sector Credit December 2005, kicked off by pointing out that 2005 was a record year for private sector credit growth.

It grew by 29.7 per cent, up from a rise of 24.4 per cent the previous year.

A huge proportion of the growth was due to increased borrowing for construction, property investment, and household borrowing, including mortgages.

A graph produced with the report showed how property-related lending, as a proportion of total lending, rose from about 45 per cent at the end of 2002, to almost 65 per cent by the end of 2005.

Property-related lending accounted for four-fifths of all lending in 2006.

However, the surge began to ease during 2007, when property accounted for less than two-thirds of private credit.

Nevertheless, there was still a substantial amount of money lent to construction and property investment firms, and to households.

Three-quarters of outstanding residential mortgages in 2007 were for principal dwellings, while almost a quarter were for buy-to-let properties.

Over the years mortgage credit tended to be more than half of all property-related lending, and often significantly more than half.

A graph included in the 2007 private sector credit report from the Central Bank showed Ireland’s personal sector credit inching towards 100 per cent of GDP, while the euro area average was stalling at approximately 55 per cent.

It wasn’t noticed until later that during the bubble years the banks themselves had gone on a borrowing spree, sourcing huge sums abroad for delivery to their Irish customers.

In a paper in the Economic and Social Review in summer 2009, before he was appointed governor of the Central Bank, Patrick Honohan charted the growth in net foreign borrowing by AIB, Bank of Ireland, Irish Life and Permanent, and Anglo Irish Bank.

It jumped from approximately 10 per cent of GDP in late 2003 to more than 60 per cent by late 2007.

Since the crash, the burden of this debt has fallen on to the State.

In a paper for the World Bank in May 2009, Honohan suggested that the strong economic growth in Ireland during the 1990s produced a false sense of confidence, or hubris, among policy makers.

This opened the way for a subsequent “old fashioned property bubble”.