Personal debt has doubled to ‘danger levels’

A leading economist has expressed concern at the “dangerously high” level of personal debt being carried by the Irish public, with almost a doubling since 2001.

People whose debt far outweighs their income are very vulnerable, Tom Healy, director of the Nevin Economic Research Institute (Neri), has warned.

He believes “economic activity is bound to slow down some time in the not too distant future”.

Mr Healy pointed out that, from being 12th out of 24 countries in a ranking of OECD countries on household debt in 2001, Ireland has shot up to third place in the rankings, behind Denmark and the Netherlands and just ahead of Norway.

He said the level of personal or household debt as a percentage of disposable household income was in excess of 200% in 2014, according to OECD figures. That compared with a ratio of government debt to GDP of under 100% last year.

“The trend in household debt since 2001 shows a pre-recession peak of 236% of net personal disposable income in 2007, up from 111% in 2001, which was probably well above the average in the previous decade,” said Mr Healy.

“In simple terms, a representative Peadar and Elizabeth Murphy-Smith with a combined debt of €33,000 in 2001 [and] a combined income of €30,000... six years later their combined debt had jumped to, say, €120,000, while their income had risen to say €50,000.”

He said that although wages and others costs were chasing to follow the property bubble, “the total of personal debt was racing ahead at breakneck speed to reach some of the highest levels in the OECD world”.

Mr Healy said that recent figures showed a return to “dangerously high” debt levels.

“According to the Central Bank total private debt — households and corporations combined — came to 258% of GDP in the third quarter of last year — dangerously high considering that economic activity is bound to slow down in the not too distant future,” he said.

“When people lose their job or become suddenly ill and unable to work or experiences a pay cut, they are typically faced with a huge challenge in meeting loan or mortgage repayments.”

Mr Healy said that was particularly true of Ireland, where much of the boom in property prices was driven by easy lending and low interest rates.

“When the property market collapsed in 2008-2010, along with a sudden stop in inter-bank lending, many households were straddled with huge amounts of personal debt in the form of mortgages which they were not able to service,” he said. “The scale of mortgage distress rose sharply as many were forced into restructuring or non-payment.”

Mr Healy said a further twist in the private household debt situation is it is heavily concentrated among the poorest households. He pointed to analysis by the TASC which showed that, in 2013, 37% of the total value of debt was concentrated in the bottom 10% of all households ranked by net wealth.

“These households are hugely vulnerable to interest rate increases in the long-term,” he said. “Many are caught in the shadow world of payday loans and loan sharks charging exorbitant rates of interest.

“The Celtic Tiger period was an extreme example of how markets fail to properly value assets including that most precious of assets – your own home. It is not evident that all the necessary lessons have been learned.”

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