We’re getting richer but our lost decade remains a warning

If the trends are good, the overall level of debt is still too high and Irish households remain far more indebted than their counterparts across the eurozone. If things turn sour, things could turn nasty again

EXACTLY a decade ago the US economy was formally declared to be in recession. That country’s collapsing housing market was the proximate cause. At the same time, we in Ireland were fast following suit.

Things were sliding rapidly in the first months of 2008 and even the most bullish Irish observers were finding it hard to maintain the line that a soft landing was in store.

The decade since has been one of two halves. The period to early 2013 was unrelentingly dire.

As the recession ground on, many of the gloomiest voices were stating with great certainty that there could be no recovery unless the Government, which was bust and in a bailout, spent large amounts of money it didn’t have.

They were proved as wrong as those who said that all would be dandy during the property frenzy.

The past five years has been characterised by recovery. It started slowly. But it gathered pace with time. It also widened.

Growth across the country is now broad-based if certainly not perfectly uniform. Another positive feature of the expansion is that it is not being driven by the sort of unsustainable increases in indebtedness that characterised the years before 2008.

But for all that, there is no getting away from the fact that the past decade has been a lost one in so many ways. Most obviously, fewer people have jobs than 10 years ago and more people are jobless than in February 2008. The lost decade is also to be seen in the collective wealth of Irish households.

This week the Central Bank published figures on the national balance sheet, including everything from cash in bank accounts to the value of pensions and homes.

Because they are complicated and time-consuming to compile, they are not bang up to date, referring the July-September period last year.

The new numbers showed Irish private wealth stood at more than €700bn in late summer, just shy of its peak in 2007.

Developments in recent months, including the continued rise in property prices, have almost certainly pushed the collective wealth of Irish households to its highest level in history. As discussed below, this is mostly a good news story.

But before looking at what is making us collectively wealthier, it should be pointed out that because the wealth is being spread over more people – Ireland has had one of the biggest population increases in the developed world over the past decade – wealth per person is still a good deal below its peak.

On average, every man, woman and child in the country was worth just under €149,000 as of the third quarter of last year. That is down €17,000 on the peak 12 years ago.

It will probably take another year or two to surpass the previous high water mark, and that is provided bad things don’t happen, such as this week’s turbulence in financial markets becoming more damaging and longer lasting.

How, some readers may ask, are these figures arrived at and what do they include?

Wealth is the value of everything we own. But to get an accurate picture of how much a person or a nation is worth, what is owed also needs to be considered. The average per person wealth figure, cited above and illustrated in the accompanying graphic, subtracts all the debts of households from the value of all of their assets.

Debt has been a huge part of Ireland’s story in the 21st century in a way that it rarely if ever was before in the country’s history. It has blighted many lives over the past decade.

The trends in household debt, confirmed yet again this week in the Central Bank’s latest figures, are unambiguously good.

Excessive borrowings of the past are being paid down. The total borrowings of the State’s households has fallen by €60bn since the height of the binge.

Then the average household owed the equivalent of more than two years of disposable income. Now total debt is 1.4 times greater than disposable income. It continues to fall by this most important metric of debt sustainability.

If the trends are good, the overall level is still too high and Irish households remain far more indebted than their counterparts across the euro area as a whole.

It will be into the next decade before more normal (and safer) levels are reached, and that is only provided the economy stays rosy.

If things turn sour and many people enter a downturn saddled with too much debt, things could turn nasty again.

While the €153bn Irish households owe remains a cause of concern, it might be reassuring to know they collectively own assets worth almost six times more.

Homes account for well over half of household assets. When the number-crunchers at the Central Bank added up the current value of properties owned by Irish households, they found that they were worth almost half-a-trillion euro as of last autumn.

Reflecting changes in property prices over the past decade, that is still far below peak. The total value of homes is more than a €100bn down on 2007. But it is up €200bn since the low point in 2013. That change, more than anything else, is what has driven the rise in household wealth since the economy turned around.

HOUSING assets and debts make up two out of three parts of the household balance sheet. The third is financial assets of various kinds.

The most liquid of all assets is cash: in wallets and under mattresses, and on deposit in bank accounts. It has been rising steadily, surpassing €140bn for the first time last year. That reflects a stronger economy more generally.

Another big financial asset is pension wealth. Irish households’ pension funds were worth €126bn at the last count. Although there has been a worrying decline in pension coverage in the private sector, those who are enrolled have done very well in recent years.

Pension funds invest mostly in stocks and bonds. Both have soared in value in recent years, in part at least thanks to money-printing by central banks. That artificial stimulus is being phased out.

Nobody fully understands how the giant experiment in money printing will end. If it ends badly, it could undo some of the wealth gains of recent years.