New research shows that the total wealth of all Irish households fell by almost €50 billion last year, writes Paul Tansey, Economics Editor

THE NET wealth of the average Irish household declined by more than €32,000 last year, principally as a result of falling house prices, a slump in share prices and increased household borrowings.

The total wealth of all Irish households fell by almost €50 billion in 2007, according to new research* conducted by the Central Bank.

The net worth of all households slipped from €648.2 billion in 2006 to €599 billion in 2007, a decline of €49.2 billion or 7.6 per cent, the bank calculates.

The near-8 per cent fall in the net worth of Irish households last year occurred "as significant falls in the value of both housing and financial assets dwarfed household savings", the research finds.

Moreover, household wealth is set to slip further during the current year. Research authors Mary Cussen, John Kelly and Gillian Phelan conclude: "Housing and equity markets have weakened further in 2008 and this will inevitably lead to a further deterioration in household net worth."

Borrowings by households - including mortgage loans - increased by more than €20 billion in 2007 to reach €193.7 billion. The indebtedness of the average household now exceeds €128,000 as a result.

Since 2001, household borrowings as a proportion of net household wealth have risen from 17 per cent to 32 per cent.

The 2006 census enumerated 1.47 million households in the State. Extrapolating from the trend in household formation between the 2002 census and the 2006 census, the number of Irish households in 2007 is estimated at 1.51 million.

On this basis, the €49.2 billion fall in total net household wealth last year translates into a decline of €32,600 in the net worth of the average household during 2007. Similarly, the €193.7 billion in total household indebtedness converts into average household borrowings of €128,300 last year.

Four-fifths of the net worth of Irish households now consists of the houses they own. The fall in house prices during 2007 knocked €48.7 billion off the value of the existing stock of housing assets owned by households. However, an additional €16.8 billion was spent by households on acquiring additional housing assets in 2007. As a result, the net housing wealth of Irish households fell by €31.9 billion last year. In consequence, the net housing wealth of Irish households slipped from €516.3 billion in 2006 to €484.4 billion in 2007, a fall of 6.2 per cent.

Trends in the net worth of Irish households between 2001 and 2007 are shown in the table below.

The remaining one-fifth of Irish household wealth is held in the form of financial assets. Gross financial assets comprise the cash, bank deposits, shares, securities, insurance and pension-fund entitlements owned by the household sector. Household borrowings must be subtracted from gross financial assets to ascertain the net financial assets of the sector.

In 2007, the net financial assets owned by households fell from €131.9 billion to €114.5 billion, a decline of €17.4 billion or 13.2 per cent. While households saved €10.7 billion in 2007, they borrowed an additional €20.7 billion, so that net borrowing by households amounted to €10 billion last year. In addition, falling share prices clipped almost €7.5 billion off the value of households' insurance and pension funds.

With net housing wealth declining by almost €32 billion and net financial wealth falling by more than €17 billion, the net worth of Irish households fell by more than €49 billion last year.

However, households can take some comfort from the fact that, in the preceding five years, the net wealth of Irish households increased by almost €293 billion or 82 per cent.

Recent research has indicated that the rise in Irish household wealth, and particularly housing wealth, exerted little impact on the scale of consumer spending.

Against this background, the Central Bank's study says that "it would be tempting to conclude that the marked decline in households' housing wealth in 2007 would not have a negative effect on consumption expenditure either. The effects, however, may not be symmetrical."

While the direct effects of a contraction in household wealth may be limited, the indirect effect on consumer spending may be important. Equity prices and consumer sentiment are closely linked, while lower household wealth and tighter credit conditions may constrain household borrowing and lead to higher saving levels.

"In the context of falling household net worth, this indirect effect may lead to a structural change in the relationship between household income and consumption. The outcome could be somewhat weaker consumption in the future than trends in income would suggest," the study concludes.

* Mary Cussen, John Kelly and Gillian Phelan, "The Impact of Asset Price Trends on Irish Households", Central Bank Quarterly Bulletin No 3 2008