An Taoiseach Enda Kenny might be a little confused about whether or not we did in fact all party during the boom – variously proclaiming that “people went mad” borrowing during the boom but also that “we are not responsible” for the ensuring crisis – but a new report published by the Central Bank of Ireland shows that those over 40 years of age and employed in the education sector obtained the highest average-value equity release loans during the boom period 2005-2007, an average of €76,099 in 2005. In other words, it was mature teachers who partied hardiest and who went on spending sprees using money borrowed on the never-never.
Equity release is a term used to describe borrowing secured on the unencumbered value of your home, so if you obtained a €200,000 mortgage to buy a €200,000 home and the home then increased in value by €50,000, you might have subsequently borrowed an additional €50,000 secured on the increased value. Typically in Ireland, the interest rate on equity release loans was 2-4% cheaper than unsecured lending, so you might have obtained an equity release loan of €25,000 to buy a car and pay 3% per annum, but if you obtained an unsecured car loan from the bank it might cost you 5-7% per annum, so equity release lending was obviously popular if you had a house.
To put the partying in context, for the first half of 2012, banks in Ireland have lent an overall total of €1.1bn for mortgages, mostly to first time buyers and movers, but also including top-ups and equity release. Back in 2006, banks lent a staggering €5.5bn (at least) for equity release alone, and whilst most of it – 91% in fact – was reinvested in property, a significant proportion went on large-scale consumer durables like furniture and cars. And of course there was consumer spending on everything from holidays to handbags.
In the property boom peak 2006-2007, it was householders aged 20-29 years of age who worked in Financial Services who were mostly likely to obtain equity release loans, but it was the over-40s working in Education who obtained the biggest individual loans. It should be said that householders working in Education were least likely to obtain equity release loans in the first place, but when they did get them, Boy were they the biggest! Also by 2007, farmers were obtaining loans at the same average level as teachers.
The report from the Central Bank is co-authored by the CSO’s Niall O’Hanlon – he’s the chap behind the monthly house price index – and the Bank’s own Reamonn Lydon.The report – from which the table and graph above are extracted – is well worth a read as it examines in a very clear format the recent history of lending and property prices. The report is noteworthy for reaching what you might have thought was a rational conclusion, but one which is at odds with previous Irish research. “Hogan and O’Sullivan conclude that the marginal propensity to consume out of housing wealth is essentially zero.” (p. 47). This conclusion contrasts with the results from our own analysis, which shows that housing equity withdrawal plays a significant role in explaining various types of economic activity, most notably residential construction and motor and furniture sales.”