Wednesday, February 1, 2012

Who “went mad borrowing”?

The following quote has generated a lot of response in the past week:

“What happened in our country was that people simply went mad borrowing.  The extent of personal credit, personal wealth created on credit was done between people and banks - a system that spawned greed to a point where it just went out of control completely with a spectacular crash.  The country borrowed over €60 billion at excessive rates and the IMF eventually came in with the Troika."

It is of course the answer Taoiseach Enda Kenny gave at a panel session at the World Economic Formum in Davos last week when he was asked “what went wrong in Ireland?”.  I’m not sure what the last sentence is referring to but here we’ll focus in the extent to which “people simply went mad borrowing”.

Here is a graph of loans to Irish residents from January 2003 to January 2009.  The data can be extended to December 2011 but the actual fall in loans is exaggerated in this data because of the impact bank exits and NAMA have on the Central Bank’s banking statistics.  In January 2009 this factors were not at play and this is widely accepted to be around the time when total loans peaked in Ireland.  It can be seen that the rate of increase began to ease in late 2007 and had plateaued by the middle of 2008.

Total Loans to Irish Residents

The blue line represents total loans to Irish residents.  This increased from €110 billion in January 2003 to €350 billion by December 2008.  A rise of 220% in just six years.  Total loans went from being around 90% of GDP in 2003 to nearly 200% of GDP in 2008.  This would satisfy any criteria for going  “mad”.  The red and green lines represent total loans to Irish residents excluding two categories.

The red line excludes loans to businesses in the construction sector and for real estate, land and development activities.  The green line further excludes loans to households for buy-to-let mortgages.  The green line is thus total loans to Irish residents excluding loans for investment and speculation in the property sector.

Excluding these loans, loans to Irish residents rose from €83 billion in January 2003 to €195 billion by the end of 2008.  This is still a rapid rise but is an increase of 135% rather than the 220% increase seen for all loans.

As a percentage of GDP loans outside of investment in the property sector rose from 66% of GDP in 2003 to 108% of GDP in 2008.  This is a large increase but not catastrophic.

Loans for investment and speculation in the property sector rose from €27 billion at the start of 2003 to €150 billion at the end of 2008.  There was an increase from 25% of GDP in 2003 to 83% of GDP in 2008.

There is no doubt that borrowings by Irish people increased dramatically from 2003 to 2008 but a lot of the increase was concentrated in the construction, property and development sectors.

Loans to Irish businesses outside of the property-related sectors was €29 billion at the start of 2003 and reached €60 billion by the end of 2008.  This rise from 20% of GDP in 2003 to 33% of GDP in 2008 has not put us in the position we are in now.

Excluding buy-to-let investment mortgages loans to households rose from €52 billion to €140 billion.  Residential mortgages increased from €40 billion to €110 billion and other consumer borrowings rose from €13 billion to €30 billion.

With property-related loans perceived as being the source of our ills it is worth noting that household residential mortgages rose by €70 billion while investment and speculative loans in the property sector rose by more than €130 million.  Both increases are excessive but it must be realised that one is almost twice as large as the other and also that the increase in mortgage debt was spread over hundreds of thousands households rather than being concentrated like the property loans.

Here is a summary table and an annotated version of the graph used above is here.

Loans to Irish Residents

The stand-out figures are the 350% increase in buy-to-let mortgages and the 490% increase in loans to the construction and property sectors.

[Note: The data here are taken from the Central Bank’s Money, Credit and Banking Statistics.  This includes data from all banks operating in Ireland.  For the period in question this excluded the credit union sector which was added to the data in 2009.  Total loans in the credit union sector have not exceeded €8 billion so their inclusion would do little to alter the conclusions.  The data also exclude loans that may have been obtained from banks outside of Ireland but it is not clear now prevalent this was in the household and business sectors.]


  1. if 'Not catastrophic' is the best you can decifer from the 45 degree slope of a graph then I belive that you are grasping at straws. Call a spade a spade

    1. A couple of points on BTL:
      1. Most BTLs are owned by people with 1-3 properties, so the majority of loans were to amateur landlords.
      2. The number of BTL mortgages understates the amount of BTL that went on. In my small circle of friends, three of them ended as landlords as they moved to a new house, keeping the old smaller house or apartment. I don't believe that reclassification enters the IBF stats and in many cases, I doubt if the bank was informed of the situation.

      So I think your exclusion of BTL from 'people' is arbitrary and probably misleading.

      On development loans, two others of my small group have serious development borrowings. Like seven figures. Amateur developers dominated the rural scene...

  2. @ RS,

    I suppose it depends on our definitions of catastrophic. I could change the 45° line just by altering either axis.


    I wasn't trying to exclude anyone from 'people' merely identify the sectors where the borrowing took place. It is very hard to determine the number of people who undertook the borrowing under each heading.

    The figures on the NPPR charge show that the majority of those paying have 1 property with many more having 2 or 3 as you suggest. Could there be 100,000 people with average debts of €360,000 in the buy-to-let sector? There may be more.

    On the other hand the top 180 borrowers in NAMA accounted for €62 billion of loans with 850 people having loans transferred to NAMA in total. Although not transferred to NAMA it was estimated that there was €16 billion of developer loans smaller than €20 million in the banks across 4,000 borrowers. That is an average of around €4 million per borrower.

    1. Yeah, it's hard to avoid the elephant borrowers in the development sector, but while the scale of some of the borrowings might be surprising, that speculative development accounts for most of the losses in a spectacular bubble burst is not.

      The BTLs are what really concern me - as you say, the figure could be as high as 100k borrowers. Many of these will have given their family home as security. The squeals from the chattering classes about debt relief for this sector lead me to suspect there are a large number of "don't want to pays", but there are also a large number of people who either accidentally or foolishly ended up as landlords.

      So I suppose there are a number of cross-currents - an unwillingness among some (me!) to subsides losses where the only impact is a less comfortable retirement, a determination not to end up in this state again in another ten or twenty years (as part of which an acceptance that some/quite a few people did go mad and the rest of us need to be 'protected' from them in future is essential), and then a "how big is it and how do we get out from under it" requirement.

  3. GD,

    This is an excellent analysis of "who went mad" during the so called Celtic Tiger.