Houseowners withdrew €29.8bn of housing equity between the third quarter of 2002 and the first quarter of 2009, according to a report released by the Central Bank today.By John Walsh, Business CorrespondentThis level of equity withdrawal was unprecedented in this country by historical standards. It was also extremely large by international standards.
Homeowner equity withdrawal is common in economies that experience sharp rises in house prices.
This was driven by three factors in Ireland over that period, according to the Central Bank.
“There was a significant increase in the propensity for existing homeowners to take out top-up loans during this period; second, the combined effect of large numbers of transactions and booming house prices meant that sellers in the final link of a property-transaction chain, ie those not purchasing another property, withdrew substantial equity upon selling; and third, relative to equity withdrawals, the rate of equity injections declined due to a fall in deposits from first-time buyers and a decline in the rate of amortisation.
“The latter was driven by the increased prevalence of interest-only loans and significantly longer loan-terms. The dramatic collapse in the Irish property market means that all of these factors have been reversed, moving the household sector from one of net equity withdrawal to net equity injection,” said the Central Bank.
The study covers the period from 1978 to 2012. From the late seventies to the early noughties, Irish homeowners for the most part paid down mortgage debt. However, from 2002 onwards, this country experienced one of the biggest housing bubbles in any western economy. But since 2008, there has been roughly a 60% fall in house prices.
The Central Bank notes that over the past five years homeowners have reverted to paying down debt, including mortgage debt.
“A number of factors contribute to this current period of aggregate equity injection, including a reduction in the number of mortgage transactions, a tightening of credit conditions and the reduction by households of their financial liabilities.
“The main reason for the current low levels of equity withdrawal is the lack of housing market transactions, after a number of years of falling house prices, which in turn means fewer opportunities for sellers to realise housing equity. Irish households have suffered large declines in net worth as a result of the drop in valuations of their properties.
“This has also contributed towards households reducing aggregate equity withdrawals.”
In another paper released by the Central Bank today, it shows that in the second quarter of last year, non-financial corporations had the second highest debt levels relative to GDP in the EU. However, this masked two very distinct trends.
Multinationals based in Ireland have ramped up their debt over the past few years to reflect increased levels of activity.
But when this debt is measured against their balance sheets, the overall debt levels are below the EU average.
Irish-owned companies are heavily reliant on the domestic banking system for credit. Since the crash they have paid back roughly €10bn in bank loans.