Loan drop fails to halt credit use

CREDIT demand increased in February despite clear indications that people have started to borrow less for housing.

Since October borrowing for non-mortgage purposes is accounting for the bulk of the monthly credit increase. This is being spurred on by solid economic growth expected to be more than 5% this year.

Analysts forecast the trend will continue and that Irish people are likely to continue to expand their debt rate at nearly four times the European level. Following a pause in January, year-on-year growth in private-sector credit (PSC) surged in February, when the underlying growth rate was up 26.9% from 26.6% in January.

Maintaining the trend since October, non-mortgage credit accounted for more than 60% of the €3 billion rise in private-sector credit, while its year-on-year growth rose to 25.3% from 24.8% in January.

In February, adjusted net mortgage credit increased by €800 million. This was well below the average monthly rise in the second half of last year and was €80m lower than February 2004. It would be wrong to put too much emphasis on a single month’s data, said chief economist Bloxham Stockbrokers Alan McQuaid. But the figures provide a “further indication demand for residential mortgages may have peaked.”

February was the seventh month in a row showing a decline in the annual growth in residential mortgages. Mr McQuaid stressed the underlying growth rate is falling and not the amount borrowed.

In February, the annual rate of growth in mortgage finance fell to 25.5% from 26% the previous month. While the configuration of the private-sector credit figure may be changing, Mr McQuaid warned private sector credit in Ireland will continue to outpace the rest of Europe by a very large margin for some time.

Evidence suggests demand for housing peaked at last year’s figure of 77,000. That has seen house price projections cut to single digit figures by some forecasters.

Dr Dan McLaughlin forecast 6% for this year but estate agents Douglas Newman Good is staying bullish with a forecast yesterday of 12% house price growth for 2005. Because interest rates are still running at historic lows Mr McQuaid expects little impact on the demand for credit in the immediate future. He said some softening of demand will occur when the ECB raises rates by 0.5% before the year end. Mr McQuaid is forecasting two hikes of 0.25% and another 0.5% in 2005.

The Economic and Social Research Institute is sticking by its forecast of 0.25% increase this year and a 0.5% jump in 2006 as the ECB moves to keep inflation in check. Even with higher rates, economists expect the demand for credit to stay growing at over 20% per annum for some time - well ahead of the European average of 7% per annum.