Data on Irish wealth is limited – so a new Central Bank paper with an assessment of the latest estimates of the average assets of Irish households is worth a look. The survey, undertaken by the Central Statistics Office, shows that by 2018 Irish people were significantly richer than five years earlier. And – no surprise – the vast bulk of wealth for most households was tied up in property, mostly the family home. Assets such as savings have increased a bit, but in terms of cash resources Irish households still rank behind their peers elsewhere in the EU. Let's looks at the data from the CSO's Household Finance and Consumption (HFC) survey and at the conclusions drawn by the Central Bank.
1. The wealth of the Irish: What do the figures show?
The outline data from the survey was published earlier this year and has since been revised a bit and added to by international comparisons.The average household had net wealth – assets minus debt – of €179,200 in 2018, up by €74,000, or 76 per cent, from the previous survey in 2013. Note that this is the median – the middle figure at which the same number of households have more wealth as those that have less.
This factors out the distorting impact which a small number of households with a lot of cash would have if we took an ordinary, or mean, average. Taking the mean average, looking at the total amount of wealth and dividing it by the 1.85 million households, gives a much higher average figure of €365,000.
This is still lower than other Central Bank estimates of average household wealth of around €440,000, drawn in part from banking data. This is thought to reflect he tendency of people in surveys to underestimate, or under declare, the value of assets, especially bank deposits.
The latest HFC survey shows that the increase in wealth between 2013 and 2018 was partly due to people paying down debts and accumulating more money in deposits and other assets. But by far the most important factor was a 74 per cent increase in house prices over the period.
Total gross wealth, before subtracting debt, is €667.4 billion – of which around 60 per cent is accounted for by principal private residences. But add other property, including farm land and investment property and physical assets such as cars and real assets, and total real assets account for some 84 per cent of total wealth. We like to be able to touch and feel our investments. The average home value in the survey was €250,000.
For middle and middle/higher incomes, the family home is typically the most important asset by far, accounting for over 90 per cent of wealth. In the lowest income households, few own a home, while the very wealthiest households tend to have more other assets, including investment property and a much wider spread of financial assets. But for most it is all about property – and the sharp rise in house prices and high level of home ownership means wealth here has risen much more rapidly than the EU average since 2013, according to the Central Bank calculation, leaving us as fifth place in the euro area.
2. The Central Bank’s take – we have learned some lessons from the last crisis
A key problem in the financial crisis which hit in 2008 was the exposure of households to massive borrowing. Right through the figures there are now examples of how households balance sheets have changed, with less borrowing and a much lower level of debt and repayments than in the run up to the last crisis. Hard lessons seem to have been learned, although difficulty getting loans will also have been a factor. The overall level of debt in households has fallen since 2013, despite the growing economy, from €120 billion to €117 billion,
For houses which have debts, the average (median) ratio of debt to assets has fallen from 38.5 to 22.6. While rising house price play a role here, households have also been paying down debt. Within the key 30 to 49 year old age group – the range which got into most trouble last time via collapsed house prices and negative equity – debt for the median household has fallen by over €22,000, or 18 per cent over the five years.
Debt has also fallen in relation to income – on average debt is now two thirds of income, versus 100 per cent in 2013. All this means Irish households are more financially resilient and less exposed moving into the Covid-19 shock.Those with mortgages are concentrating on paying it down. While top-up mortgages accounted for almost one third of loans in 2007, the figure has now collapsed to 7 per cent.
Other debt is also limited with loans for the likes of home improvements and car purchases averaging a modest €6,200 for those who have such loans. In the 30-49 year old age group, car loans are popular, with average repayments of €300 a month. Average household incomes in this age group have risen strongly from €47,250 in 2013 to €58,000 in 2018.
Households also have increased their net liquid assets – cash they can assess at short notice. The median value of this has increased from €2,000 (or 5.1 per cent of income) in 2013 to €3,000 (6.4 per cent of income) now.
However these liquid assets here are still lower than the EU average. And the data shows that the least wealthiest fifth of the population have few assets and little by way of financial buffers – and this group will include many of the lower earners in sectors such as hospitality and tourism, worst hit by the pandemic. The vast majority rent their accommodation and the figures show the net wealth of all renters is €21,500 on average, compared to €253,500 for owner occupiers. Also, 40 per cent of households say incomes just meet expenses each month and 13 per cent say expenses are ahead of income– so many households will really struggle with an income shock, for example from a period of unemployment. The squeezed middle remains squeezed.
3. The taxing questions
There is no doubt that the idea of how to tax wealth is now back on the agenda internationally and in Ireland, particularly in the wake of the Covid-19 hit to public finances. The data shows a big gap between the top and bottom. The wealthiest 10 per cent of households have mean gross wealth of €1.932 million versus €35,000 in the lowest 10 per cent. Central Bank calculations shows that the distribution of wealth has become less unequal in recent years and across most indicators the State has lower level of wealth inequalities than other euro area countries.
How would wealth be taxed? One way would be via an increase in local property tax. As the family home is by far the main asset for Irish households, a gradual increase in this tax would be a way to tax Irish "wealth". However the parties of the left – including Sinn Féin – remain opposed to the tax, claiming it is unfair. In an interesting decision this week, despite the hole in local authority finances from the pandemic, Dublin City councillors decided to maintain a 15 per cent cut in LPT bills from the basic rate for next year, as the council has the power to do. Fianna Fáil, Fine Gael, Sinn Féin and Independent councillors all voted to keep the 15 per cent reduction. It will be interesting to see the mix as all councils vote by the end of month. Some, including Waterford and Mayo have voted through increases. Meanwhile, the Minister for Finance Paschal Donohoe announced that the next revaluation for the tax is being postponed – again – until net year, meaning bills will stay at 2013 levels and thousands of new homes bought since then will remain exempt.
The second way to increase tax on wealth would be to increase inheritance tax. However this is a hot button political issue too and after a hike during the financial crisis, the tax burden has been eased since, particularly for children inheriting from parents.Senior officials in the tax strategy group, drawing up options for this year’s budget, did mention the possibility of increasing inheritance tax (CAT) and pointed out that significant extra relief had been given to children inheriting from parents in recent years, with a €110,000 rise in the tax free threshold to €335,000. However there is no sign of an immediate change here.
The third way to tax wealth is a straightforward charge on people's assets. The Department of Finance and ESRI have looked at this – it is complicated, though some countries do have such taxes. In the tax strategy group papers, senior officials pointed out that "given how much wealth is tied up in property, particularly people's principal private residence (which for many is their main or even sole asset), if a wealth tax were to be proposed for Ireland, it would almost certainly have to take account of the value of people's homes."
It added that the vast majority are already subject to LPT and stamp duty and CAT. Wealth taxes are also hard to calculate and collect, the papers said “and there is currently no basis on which to model any such tax”.
Nonetheless, how to tax the wealthiest more will be a key topic in Ireland and internationally over the next few years,
