Opening Remarks by John Kelly, Head of Statistics, to the Joint Oireachtas Committee

Thank you Chairman and members of the Committee for inviting the Central Bank to participate in this roundtable discussion on the levels and trends of personal debt in Ireland.  In order to set the scene for later discussions, I will deal with developments in personal debt through a number of charts.  These cover the aggregate level of personal debt in Ireland vis-à-vis banks and building societies.  Personal debt from other sources is not included here.  In addition, the Bank’s data do not tell us anything about the distribution of debt, which is also important.  However, the Regulator’s Financial Capability Study provides information on this.

Personal (or household) debt has grown rapidly in recent years, driven by mortgage borrowing – which has doubled since October 2004 (Chart 1).  Rapid growth in personal debt has been common in most developed countries in the past decade.  While the timing and extent of the increase has varied considerably across countries, two common causal factors have been identified: lower interest rates (both nominal and real) and, until recently, an easing of liquidity constraints on banks.  Both of these factors had a particularly strong impact in Ireland; membership of EMU brought interest rates down to a fraction of previous levels and euro-area money markets provided Irish banks with access to a greatly increased supply of funding, without exposure to exchange-rate risk.  In addition, in Ireland’s case, demographics played a key role in boosting demand for credit.  As a result, personal debt has risen faster here than in most other euro-area countries; between 2004 and 2006, for instance, mortgage debt in Ireland increased at about three times the annual rate in the euro-area (Chart 2).

Over much of the 2004 to 2006 period in Ireland, residential mortgage lending increased at annual rates of close to 30 per cent.  This was associated with strongly rising house prices and record levels of new house completions (Chart 3).  As house prices began to fall in early-2007, demand for new mortgages also began to weaken and by the final quarter of last year, the level of outstanding mortgages was almost static.  Some €3 billion in new mortgages were advanced in Q4 2008, but these were largely offset by repayments on existing mortgages (Chart 4).

One of the features of the Irish mortgage market in the last five years was the increasing share of personal mortgage borrowing devoted to buy-to-let properties - which rose from 15.4 per cent at end-2003 to a high of 23.6 per cent in Q3 2008 (Charts 5 and 6).  Expectations of capital gains from rising house prices were possibly a major factor behind this development. 

With borrowing for mortgages growing faster than other personal credit, the proportion of personal debt in Ireland which is secured on property now exceeds that of almost all other euro-area countries (Chart 7).  Ireland stands out in another way also, namely, by having one of the highest proportions of mortgage debt at variable interest rates.  This is particularly significant in present circumstances, as it means that about 80 per cent of mortgage borrowing here is benefitting from the ECB’s reductions in interest rates (Chart 8).

The now famous ‘Tracker Mortgages’ play an important role in this respect.  A recent survey suggests that up to 60 per cent of variable-rate mortgages outstanding are tracker mortgages.  This means that interest rates on about half of all mortgage borrowing are now 3 percentage points lower than last Autumn, as the reductions in ECB interest rates must be passed on in full under the terms of tracker mortgage contracts.  Most lenders have also passed on the ECB reductions in full to other variable-rate mortgages.  In aggregate, this means that the personal sector will save up to €3.5 billion in mortgage interest payments this year.  Allowing for tax relief, this will result in an increase of over €2.5 billion, or about 3 per cent, in personal disposable income.  A further positive is that this benefit will accrue mainly to the most indebted households, which need it most.

Finally, although it accounts for less than one-eighth of personal non-mortgage debt, borrowing on credit cards frequently receives media attention.  At an aggregate level, recent trends in personal credit-card debt have been reasonably positive.  Substantial repayments were made on credit-card borrowings during Q2 2007 from maturing SSIAs.  Increases in outstanding debt since then have been modest; the year-to-year change was close to 5 per cent at the end of 2008 and declined further to 4.3 per cent in February 2009 (Chart 10).  On the negative side, the proportion of balances on which interest is being charged has risen a little over the past year. 

I am happy to provide further details or take questions on any of these issues.