ZIP 1 “Río Guadarranque”

HFCS is an invaluable resource for policy makers, allowing for household-level

analysis of the composition of wealth and debt, leverage and the debt-service

burden. Highlights include: the household main residence accounts for the

majority of most households’ gross wealth (48 per cent on average); financial

assets account for a much smaller proportion of gross wealth on average (13

per cent); more than half of households hold some form of debt, with mortgage

indebtedness proving to be a particularly heavy burden for younger cohorts;

however, the mortgage repayment burden is more evenly spread across the

age distribution, with younger borrowers benefiting from low interest rates and

long mortgage terms; the median value of net wealth is €105,000, in line with

other Euro area countries (€109,000); the top 20 per cent of households hold

70 per cent of net assets – again, similar to the Euro area as whole; in Ireland,

the concentration of wealth at the top end of the distribution is driven by two

factors: larger holdings of real assets and relatively smaller holdings of debt.

1 The authors work in the Irish Economic Analysis Division of the Central Bank of Ireland. The views expressed in this article are solely

those of the authors and are not necessarily those held by the Central Bank of Ireland or the ESCB. The authors thanks John Flynn, Gerard O'Reilly, Stefan Gerlach and Gabriel Fagan for helpful comments. We are particularly grateful to Paul Crowley and Gerard Reilly at the Central Statistics Office for constructing and running the survey, as well as putting together the dataset.

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Quarterly Bulletin 01 / January 15

The Financial Position of Irish Households

1. Introduction

In Ireland, the household sector has had to cope with significant losses in income and wealth since the beginning of the financial crisis. However, the losses and associated stresses are not evenly spread and the available data sources contain very limited information on the distribution of assets and liabilities across household types. The Household Finance and Consumption Survey (HFCS) was carried out in Ireland during 2013 to provide information to fill in some of these knowledge gaps. The Irish survey was undertaken as part of the Central Bank’s and CSO’s participation in the Household Finance and Consumption Network (HFCN) within the European System of Central Banks. Amongst other things, the HFCN research network coordinates the carrying out of a household survey across the euro area, with a view to creating comparable cross-country datasets for research.

The motivation for the HFCS is to provide micro-level data on euro area households’ finances. The aim of the survey is to collect data on the distribution of assets and liabilities across households, to gather information on the importance of various wealth components and the types and extent of debt and the burden of debt service at the household level. These data allow important insights into the economic behaviour of households, and can be used to look at a broad range of issues, in particular how macro-financial linkages affect real economic outcomes. The sorts of issues which can be addressed with this data include the following: the response of consumption to wealth and income shocks (Carroll et al., 2014); labour supply responses to wealth, credit and the debt-burden (Disney and Gathergood, 2013; Daly et al., 2009); households’ risk preferences and portfolio allocation (Ampudia and Ehrmann, 2014; and Kick et al., 2014); the role of institutions and policy in debt accumulation (Bover at al., 2014); household savings behaviour (Honkkila and Kavonius, 2013); and, the impact on disposable income of changes in policy rates across the debt distribution. The broad cross-

section of households at different stages of the life-cycle available in the dataset should allow analysis of quasi-dynamic questions as well as distributional issues.

Prior to the collection of the HFCS data, there was no unique source of data in Ireland combining details of household composition, incomes, assets, debts and other financial decisions. Existing household-level survey data, such as the Survey on Income and Living Conditions and the Household Budget Survey, contain detailed information on income and expenditure patterns but are limited in their coverage of information on stocks of household assets and liabilities. Previous work on the distribution of the wealth of Irish households is therefore extremely limited, with some exceptions such as Honohan and Nolan (1993), or focussed on a subgroup of the population such as the over-55 age group (the TILDA survey in O’Sullivan, Nolan, Barrett and Dooley, 2014).

Furthermore, the financial crisis has shown how the dynamics of many economic aggregates, such as household balance sheets, consumption, financial stress and responses to over-indebtedness, are determined not only by overall macroeconomic variables, but also by household-specific characteristics. These household-specific factors are often not apparent in aggregate statistics, and as such the impact of shocks, policies and institutional changes on various groups of individuals can only be evaluated with household-level data. In short, without such micro-data it is simply not possible to accurately quantify the size and importance of these effects.

For many households, the bulk of assets consist of real estate, and mortgages constitute their largest liability. Consequently, they can be substantially affected by fluctuations in house prices or interest rates. Household-level data are essential for investigating how specific groups of the population react to such shocks. However, the risk exposure of the household sector cannot be accurately assessed by looking

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at aggregate household balance sheet data alone, which tell us very little about where precisely the vulnerabilities are. For example, loan and borrower characteristics are important determinants of debt sustainability as shown in Lydon and McCarthy (2013). However, the focus of the Lydon and McCarthy study was a rather narrow one, looking solely at the debt sustainability of households with a mortgage only (33 per cent of households). Clearly not all households have (mortgage) debt, therefore micro data that allows us to analyse the behaviour and outcomes of all households, whilst controlling for a rich set of characteristics, has much to offer.

This paper presents an initial overview of the patterns of asset and liability holdings of Irish households from this new source, focusing on broad distributions across income, wealth and age bands. We also provide some comparison to results from the other HFC surveys carried out across the euro area. Behind the results, the survey contains more comprehensive breakdowns of assets, liabilities, income and household characteristics. However, we leave analysis of detailed breakdowns of wealth components to further work, with this paper highlighting the broader patterns and drawing particular attention to the contribution of housing assets and debts in the typical Irish household’s portfolio. The scope for further research using this data in a number of crucial policy areas is discussed in the conclusion. The paper is organised as follows. Section 2 introduces the survey dataset and some summary statistics on household characteristics. Section 3 presents results on asset participation and median asset values, followed by Section 4 which does the same for debts. Section 5 looks in more depth at the extent of the debt burden on different household types. Section 6 then combines the asset and liability results to calculate net household wealth and presents comparisons of the distribution of wealth in Ireland relative to other euro area countries. Section 7 concludes.

2. Survey Description

The main aim of the survey is to gather micro- level, structural information on households’ assets and liabilities. In order to adequately capture and analyse economic decisions of households, some additional information is collected (e.g. on income, consumption, employment etc.). The questionnaire consists of a module relating to individuals and a module relating to households, as illustrated below.

The survey’s interview phase was carried out between March and October 2013. For the comparisons with results from other countries, as shown later in this paper, it is important to point out that the Irish survey lags surveys carried out in other countries by two to three