ANALYSIS:High levels of household debt are weighing on growth but it is by no means certain it is unsustainable as the Dutch and Danish face higher levels
HOW RICH is Ireland? Yesterday, that question was answered more definitely than even before.
Economists at Ireland’s Central Bank, using new Irish and European figures, for the first time gave a comprehensive assessment of how rich households are compared with their peers across the rest of the continent, and how that position has changed over time.
Instead of comparing income measures, such as gross domestic product, they compare assets and liabilities to give a more accurate picture of how rich countries are.
The good news from the study is that Irish housesholds collectively have not been impoverished by the crash. As Chart 1 illustrates, in 2010 Ireland ranked mid-table among 14 western European peers, sitting snugly between the richer Dutch and the poorer Danes.
The bad news – illustrated in the second chart – is that Irish households experienced the biggest decline in net wealth over the period 2007-10. Even more depressingly, more up-to-date figures show that wealth destruction continued apace in 2011. Households are considerably poorer now than they were 16 months ago.
The first chart also shows that Spanish households are the richest in Europe. This is because property prices remain artificially high despite the bursting of that country’s construction bubble. When they do inevitably fall, there will be more trouble – for Spain and the rest of the euro zone.
Chart 3 shows household assets as of the end of 2010. In developed economies where wealth has been accumulated over long periods, household assets typically dwarf incomes. That is the case in Europe. As the chart shows, the value of Irish households’ property and financial assets were almost nine times greater than their aggregate disposable income as of the end of 2010.
As Chart 4 shows, Irish households were the third most indebted among the 14 at end-2010. As is the case everywhere, household debts are dominated by mortgages. Although it had been clear that households had been reducing their debt levels, yesterday’s study shows they have been doing so more rapidly than their counterparts in Europe.
At last count, as of the end of September 2011, total debt outstanding was €191 billion. That is down from the peak (of €212 billion three years ago) but it remains almost three times higher than a decade ago.
Such high debt levels accumulated over a relatively short period have led many people to conclude that recovery will be impossible without widespread household debt write-downs.
There is no doubt that such high levels of debt are weighing on growth, particularly when households see the value of their assets shrinking, but it is by no means certain that the current high levels of household debt are unsustainable, for two reasons.
First, and as Chart 4 shows, both Dutch and Danish households are even more indebted. In neither country is the case being widely made for large-scale write-downs.
Second, the value of Irish households’ assets is 3.5 times greater than their debts. That is very far from insolvency.
This study offers hugely important insights into the long-neglected issue of household balance sheets.
Its authors – Mary Cussen, Bridin O’Leary and Donal Smith – have done a huge service. Their work will go a long way to making for a more informed debate on Irish wealth.