Irish household wealth has risen to €1 trillion, or €1 billion, according to the latest figures from the Central Bank of Ireland. So are we all rich? Let’s see the detail.
1. The long term: While short-term movements in house prices and financial markets tend to grab the headlines, wealth is a long-term business. Irish household wealth has transformed over the last 20 years, with net wealth rising from €359 billion in 2002 to €1.036 billion last year. Most of this longer-term increase (€400 billion) is due to the higher value of the houses we own, driven by both home purchases and the increase in the value of existing stock. The property wealth now amounts to 649,000 million euros. But Irish households have also increased their holdings of financial assets, including money in the bank, stocks, other investments, etc. These have risen to €532 billion from €178 billion 20 years ago, an increase of €344 billion. The third part of the equation is liabilities: loans such as mortgages and other loans, which are subtracted to arrive at the net worth figure. These have increased from €66 billion in 2002 to €145 billion today.
There have, of course, been ups and downs over the years. The most notable relates to the huge backlog of property-related loans prior to the financial crisis. In particular, total household indebtedness soared to a high of €211 billion in 2008, just as the bubble was bursting. Much of this was secured in a housing stock then valued at around €600bn. So it’s been a case of once bitten, twice shy for Irish households in terms of indebtedness: they’ve paid off more loans than they’ve taken on in the meantime.
While financial assets have accumulated, home ownership remains the foundation of Irish wealth, with property value accounting for around two-thirds of total net assets. This ratio has remained more or less constant over the years, except during the financial bubble, at which point real estate wealth accounted for more than 85 percent of total assets, fueled in part by people buying investment properties. . Wealth then plummeted as house prices fell, before rebounding after 2013, first gradually, then more rapidly.
Before the Covid hit, housing had started to decline a bit as a proportion of total wealth as house prices stagnated. But they have since taken off. Central Bank data shows that housing wealth has increased by a whopping 102 billion euros over the last year. The increase in property value represented €95 billion, the largest annual appreciation on record. The remaining 7,000 million euros corresponded to the purchase of new homes, so most of the increase in wealth corresponds to those who already own properties.
Financial assets increased by €32 billion over the past year and are more than €100 billion more than before Covid-19 hit, reflecting a large increase in savings over the period, whose rise now is slowing down, and increases in the price of financial assets. Large falls in stock markets in recent months are likely to have reduced the value of financial assets, although new savings, although lower, are still relatively high. House prices, for now, continue their upward march
2. The debate about the family home. The vast majority of Irish wealth remains “tied” to family homes. Newer buyers will also have mortgages on the other side of their home’s balance sheet. Therefore, housing wealth is illiquid and cannot be easily used: households can withdraw the money they have in the bank and sell financial assets, but they need a place to live. However, the family home is still an asset that can be passed on to the next generation, or is sometimes sold when people “trade in” to a smaller home in the future.
The figures show that any wealth tax in Ireland will be much less far reaching if it does not cover the value of the family home. However, even supporters of a wealth tax often argue that the family home should be excluded. One way to capture the value of family homes for taxes is through capital acquisitions or the inheritance tax. Generous tax-free allowances (currently €335,000) apply to children who inherit from parents. Houses are also subject to local property tax, although reform of this ensured that bills remained close to their levels when the tax was introduced in 2013 and revenue from this source is falling as a percentage of total tax revenue.
This area of capital tax and property tax is likely to be closely scrutinized by the Tax and Welfare Commission, whose report is now with Finance Minister Paschal Donohoe. It is expected to be noted that capital taxes and property taxes in Ireland are low by international standards and this is an area to consider for increasing revenue. But it remains to be seen whether this government or the next decides to go there. Sinn Féin has opposed the local property tax as unfair and wants to abolish it, financed by other tax increases.
The large proportion of wealth found in Irish homes, and the huge financial dividend for longer-established homeowners, also underscores the long-term financial gap between this generation and younger people, many of whom are who cannot afford to move up the property ladder. Housing has been the traditional way the Irish have accumulated wealth and, more importantly, had a place to live in retirement when their incomes fell. If more and more people are renting long-term, how can they afford to live in retirement?
3. The resilience of households: One positive result of the figures is evidence that Irish households in general are now financially stronger. Compared to the position that is headed for financial collapse, with all its painful consequences, debt levels are lower even in cash terms and net worth is on a more solid footing. That said, if there were to be a significant drop in house prices, it would rapidly reduce net worth.
Households have also built up significant financial reserves during Covid-19. Household savings dipped a bit in the second quarter as spending increased post-Covid. However, over the past year, household financial assets rose by €32 billion to an all-time high of €532 billion, fueled in part by a sharp rise in the amount of money in the bank. Many households have some wiggle room in the face of the cost of living crisis.
However, there are a couple of points to note here. One is that we know from previous CSO data that household wealth is largely concentrated among better-off households: poorer households are less likely to own their own home and have a lot of cash in the bank.
This means that the short-term position of many less affluent households is now likely to be precarious as costs soar. A Central Bank paper by economists Simone Arrigoni, Laura Boyd and Tara McIndoe-Calder looked at savings across households with different incomes in a recent study. Previous Central Bank research had shown how low-income households are more exposed to the cost-of-living crisis, as they spend more income on areas of high inflation such as fuel, transportation and food. The latest work shows that while overall savings rose sharply during the pandemic, the poorest households may not have been able to afford to participate, given how tight their finances are. Therefore, many may have limited reserves of savings in the bank to help weather the current crisis.
4. The bottom line: Ireland’s wealth remains property-driven and therefore dependent on house price trends. The country’s wealth has accumulated in recent years, and financial asset holdings are steadily growing, but how the next generation can afford to accumulate wealth remains a big question. And while cash in the bank can help weather a cost-of-living crisis, many low-income households have little wiggle room.