Debt levels in the Republic are growing at an "unsustainable" rate. This is the bottom line in an analysis presented yesterday by the Central Bank and the Financial Services Authority has warned. If borrowing growth does not slow quickly, this could threaten financial and economic stability over the coming years, it says, in its most significant warning to date on the market.
The new analysis reveals that the ratio of personal credit to disposable income is now 95 per cent, more than doubling from 43 per cent over the past decade. While this growth might be seen as a natural consequence of higher economic growth and cheaper borrowing, the Bank has concluded that it cannot continue "inexorably" without having implications for the wider economy.
"When you get above 100, you start to worry," said Mr John Kelly, the Bank's deputy head of statistics and author of the study on private-sector credit.
Comparing Ireland to the rest of Europe, the Bank has concluded that the ratio of Irish private-sector borrowings (including corporate borrowings) to GDP is "mid-ranking" in the euro-zone context. It has also found that the household, or consumer, share of credit is not excessive. However, it emerges within the research that private-sector credit has been growing about three times faster than the euro-zone average for the past four years.
"While our end-2003 position within the euro area was comfortable, there is a limit to the extent that Ireland can sustain rates of credit growth which are a multiple of the euro-area average," the Bank cautioned.
Over the same four-year period, mortgage lending as a proportion of personal disposable income has risen from 51 per cent to 77 per cent.
Singling out mortgage lending as an area of particular concern, the study recognises that most Irish mortgages are set at variable interest rates, thus leaving Irish consumers more exposed to rate hikes thatheir euro-zone counterparts. "Interest rates must be close to the bottom of the cycle if they're not at it," said Mr Kelly.
He noted European Central Bank data showing that the Republic is one of the cheapest euro-zone countries in which to borrow to fund a house purchase.
The Bank said it was "clear that a significant declaration in the rate of increase in mortgage credit is necessary in order to limit the increase in households' debt to income ratio".
The caution comes less than a month after the Economic and Social Research Institute warned that the Irish mortgage market could tilt towards overheating within the next year and a half, if current lending growth is maintained into 2005.
Residential mortgage credit grew, on average, by 25 per cent for most of last year. Within the housing market, the Bank highlighted the potential fragility of the buy-to-let sector, which has been hit by falling rents over the past year.
The Bank has also found that average house prices across the Republic, at €221,000, are substantially higher than anywhere else in the euro zone. Average prices in Dublin, at €291,000, are second only to London. Mr Tom O'Connell, head of economic analysis and research with the Bank, said yesterday that double-digit growth in house prices "can't continue indefinitely".
The Bank is predicting greater balance in the housing market over the next few years, as increased supply has a "dampening effect on house prices" It has called for "prudent lending policies" that will help to "limit excesses on the part of both lenders and borrowers". However it is not the first time it has stated this - and still borrowing levels continue to head higher.
