Irish household wealth has risen to €1 trillion — or one thousand billion euros — according to the latest figures from the Central Bank of Ireland. So are we all rich? Let’s look at the details.
1. The longer term: While short-term moves in house prices and financial markets tend to grab the headlines, wealth is a long-term business. The wealth of Irish households has transformed over the past 20 years, with net wealth increasing from €359 billion in 2002 to €1,036 billion last year. The bulk of this longer term rise — €400 billion — is accounted for by the increased value of the houses we own — driven both by household purchases and the increase in value of the existing stock. The wealth held in property now totals €649 billion. But Irish households have increased their holdings of financial assets as well — including money in the bank, shares, other investments and so on. These have risen to €532 billion from €178 billion 20 years ago, a rise of €344 billion. The third piece in the equation is liabilities — borrowings such as mortgages and other loans, which are subtracted to arrive at the net wealth figure. These have risen 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 build up in property-related borrowings ahead of the financial crash. Notably, total household borrowings soared to a peak of €211 billion in 2008, just as the bubble was bursting. Much of this was secured on a housing stock then valued at around €600 billion. So it has been a case of once bitten, twice shy for Irish households in terms of borrowing — they have paid down more borrowings than they have taken on in the meantime.
While the financial assets have built up, home ownership remains the bedrock of Irish wealth, with the value of property accounting for around two thirds of total net assets. This proportion has remained roughly constant over the years, at least during the financial bubble, at the peak of which housing wealth represented more than 85 percent of total assets, driven in part by people buying investment properties. Wealth then plunged as house prices fell, before recovering after 2013, first gradually and then more rapidly.
Before Covid hit, housing had started to edge down a bit as a proportion of total wealth as house prices stalled. But since then they have taken off. The Central Bank data shows that wealth held in housing has risen by a whopping €102 billion over the past year. Increasing property values accounted for €95 billion of this, the largest annual revaluation on record. The remaining €7 billion was accounted for by new house purchases — so the vast bulk of the increase in wealth is accruing to those who already own properties.
Financial assets increased by €32 billion over the past year and are more than €100 billion higher than before Covid-19 hit — reflecting a large rise in savings over the period, the increase in which is now slowing, and rises in the price of financial assets. Big falls in stock markets in recent months are likely to have reduced the value of financial assets, although new savings — while lower – remain relatively high. House prices, for now, continue their upward march
2. The family home debate. The vast bulk of Irish wealth remains “tied up” in family homes. Newer purchasers will also have mortgages on the other side of their household balance sheet. Housing wealth is thus illiquid and cannot be easily drawn on — households can draw down money held in the bank and sell financial assets, but they need somewhere to live. However, the family home is still an asset that can be passed on to the next generation, or is sometimes sold as people “trade down” to a smaller home in later life.
The figures show that any tax on wealth in Ireland will have much less scope if it does not cover the value of the family home. However even supporters of a wealth tax generally argue that the family home should be excluded. One way that the value of family homes can be caught for tax is via capital acquisitions, or inheritance tax. Generous tax-free allowances — currently €335,000 — apply to children inheriting from parents. Houses are also caught by the local property tax, although the reform of this ensured that the bills still remain 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 the tax on property is one which is likely to be closely examined by the Commission on Tax and Welfare, whose report is now with Minister for Finance Paschal Donohoe. It is expected to note that capital taxes and taxes on property in Ireland are low by international standards and this is an area which should be looked at for increased revenue. But whether this government or the next one decides to go there remains to be seen. Sinn Féin has opposed the local property tax as unfair and wants to abolish it, funded by other tax increases.
The large proportion of wealth held in Irish houses — and the huge financial dividend to longer established homeowners — also underlines the longer-term financial gap between this generation and younger people, many of whom can’t afford to get on the property ladder. Housing has been the traditional way Irish people have accumulated wealth and, crucially, had somewhere to live in retirement when their income fell. If more and more people are renting in the long-term, how do they afford to live in retirement?
3. The resilience of households: A positive spin-off from the figures is the evidence that Irish households, in general, are now financially stronger. Compared to the position heading into the financial crash, with all its painful consequences, debt levels are lower even in cash terms and net wealth is more solidly based. That said, were a significant fall in house prices to occur it would quickly reduce net wealth.
Households have also built up significant financial buffers during Covid-19. Household savings declined a bit in the second quarter as spending rose post-Covid. However, over the past year, household financial assets rose by €32 billion to an all-time high of €532 billion, driven in part by a sharp rise in the amount of money in the bank. So many households have some leeway 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 heavily concentrated among better-off households — poorer households are less likely to own their own home and to have a lot of cash in the bank.
This means that the shorter-term position of many less well-off 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 on different incomes in a recent study. Earlier Central Bank research had shown how lower income households are most exposed to the cost-of-living crisis as they spend more income in high inflation areas like fuel, transport and food. The latest work shows that while overall savings rose strongly during the pandemic, poorer households may not have been able to afford to join in, given how tight their finances are. Many may thus have limited buffers from savings in the bank to help ride out the current crisis.
4, The bottom line: Ireland’s wealth remains property driven and thus reliant on house price trends. The country’s wealth has built in recent years — and holdings of financial assets are growing steadily, but how the next generation can afford to accumulate any wealth remains a big question. And while cash in the bank may help to ride out the cost-of-living crisis, many lower-income households have little leeway.