Economics: The Central Bank's warnings about the level of personal debt are becoming ritualistic, the latest prompting a familiar wave of moral panic in the media.
The general thrust of the commentary implies that borrowing is excessive and that it is a problem for everyone, rather than a rational response to low interest rates, full employment and an unprecedented supply of housing. It also ignores the notion of individual responsibility - the economy isn't borrowing, individuals are.
No doubt some people are borrowing too much and will have to face the consequences but, in the aggregate, there is little evidence to suggest that a big problem exists. Moreover, there are far more savers than borrowers in the economy and the Irish savings rate is similar to that of Germany, twice that of the UK and five times that of the US - facts which sit uneasily with the caricature peddled about a nation hooked on credit cards.
The level of outstanding household debt has risen rapidly in recent years, but from extremely low levels. Fifteen to 20 years ago, the government may have borrowed to beat the band (with the taxpayer picking up the tab) but individuals did not, reflecting a backdrop of mass unemployment, double-digit interest rates and a financial sector which saw lending as a personal favour rather than a business decision. All three changed radically in the 1990s, prompting a rapid increase in borrowing, albeit mostly secured on property.
That remains the case: personal debt stood at some €90 billion at the end of 2004 with €73 billion in the form of residential mortgages, having risen by around 25 per cent over the previous year - a pace of growth maintained into 2005.
However, even a glance at the detail of mortgage growth last year reveals that the rise in indebtedness owes more to the boom in house completions than to any recklessness on behalf of borrower or lender. Around 99,000 mortgages for house purchases were paid out last year - a record number and a 17 per cent increase on the 2003 total - with the average size of a mortgage rising by only 7 per cent to €171,000. So the main driver of the rise in mortgage debt was simply the big increase in numbers getting on the property ladder.
A similar increase may well occur this year, given that house completions are likely to be in line with last year's 77,000. Is anyone seriously suggesting that Irish households would be better off if only 35,000 were built, as that would lead to a much smaller increase in debt?
The stock of mortgage debt is also a pretty meaningless number as it represents only one side of the balance sheet - the debt was used to acquire assets, which in this case have grown in value. There are now more than 1.5 million houses in Ireland, with an average price of more than €300,000 at end-2004, giving a total value of €480 billion, which clearly dwarfs the €73 billion of outstanding liabilities. Moreover, household deposits alone in the banking system exceed €53 billion, so the debt is not even that large relative to liquid assets.
The key, therefore, is not the stock of debt but households' ability to meet the payments of that debt.
Again the aggregate figures show little cause for concern - the annual interest cost on the outstanding mortgage debt is around €2.5 billion, or some 3 per cent of total household income, and if one adds in unsecured debt, which carries a higher interest rate, the total servicing burden is only around 6 per cent of household income.
This debt service is extremely low, reflecting the fact that most people in the economy have no debt either because they choose not to borrow or they have repaid their mortgages.
The percentage of income saved has also risen in recent years and probably exceeded 11 per cent of disposable income last year, a figure comparable to the norm in continental Europe.
Interest rates can and do rise, as the Central Bank pointed out, but so does income, and financial institutions generally stress-test mortgages for interest rates two percentage points higher. Unsecured debt is generally not matched by assets and hence presents different issues.
The total outstanding is not high (some €15 billion to end-2004) but has grown strongly of late, with attention often focused on credit cards. There are now 1.95 million cards at issue to the personal sector in Ireland, with a monthly spend of some €900 million.
Yet the outstanding balances at the end of each month stands at only €2 billion, which includes balances that may well be paid in full. Again, then, the aggregate data is not quite as scary as often portrayed.
The cost of borrowing on a card is high relative to other bank sources, however, and the people who can afford it do not borrow on credit cards and the ones that do may be less able to repay. This calls for education and individual responsibility, not hand-wringing about total debt levels.
Dan McLaughlin is chief economist at Bank of Ireland
