Monday, March 4, 2019

Reducing the legacy debts of the credit bubble

The information provided in the annual accounts of the banks allows us to observe developments in the remaining stock of debt from the loans that were issued during the credit bubble.  For example, here are Bank of Ireland’s mortgages (PDH and BTL) by year of origination with the data going back to 2011, the first year such information was provided.

BOI Mortgages Outstanding 2018

Between the end of 2011 and the end of 2018 BOI’s stock of mortgages decreased by 15 per cent – from €27.9 billion to €23.7 billion.  However, this headline figure masks what is happening within the loan book and new loans issued each year replace those which are repaid.  The reduction in loans originating in 2011 or earlier is much greater.

At the end of 2011, BOI had €20.0 billion of mortgages that originated between 2004 and 2008, the peak years of the credit bubble.  By the end of 2018, the amount of mortgages issued in that five-year period had reduced to €11.1 billion.  This is a reduction of €9 billion or 45 per cent over the seven years. 

And that is only since 2011.  If the figures were available for earlier years they would show that well over half of the mortgage debt issued by BOI between 2004 and 2008 no longer exists.

Of course, this may overstate the reduction in debt for individual households as many may have remortgaged because, for example, they moved house.  At the end 2011, BOI had 115,000 mortgage accounts that were issued between 2004 and 2008. By the end of 2018 this number had fallen to 85,500.

We can use the number of accounts to get an average outstanding balance for each year.

BOI Mortgages Average Balance 2018

This shows that from the end of 2011 to the end of 2018, the average balance on the remaining mortgages issued between 2004 and 2008 fell by between 24 and 30 per cent.  This is not a like-for-like comparison each year as the average is calculated using only the number of mortgages which remain on the bank's balance sheet; mortgages which are repaid in full or replaced due to remortgages are not included. 

The figures above, though, probably give a good indication of what is happened to mortgages that are being reduced with regular monthly repayments.  For example, at the end of 2011, the 24,000 mortgages BOI has which it had issued in 2007 had an average balance of just over €200,000.  By the end of 2018, the number of these mortgages had fallen to 19,000 and the average balance of those remaining was €148,000 – a reduction of 26 per cent (and that is since the end of 2011 not the point of origination).

Whichever way we look at it – remaining stock or average balance – it can be seen that the legacy debts of the credit bubble have been significantly reduced.  They will have a long tail but, for BOI mortgages at least, we are probably passed the half life.

1 comment:

  1. Hi Séamus
    Interesting numbers.
    Take a €100k mortgage issued in 2005 at 4% interest over 25 years. One would expect that to be €84k by the end of 2011 and €60k by the end of 2018. So between 2011 and 2018, it would fall naturally by 28%. (Trackers would fall by about 35%) But they fell by 48%. So there is a lot of overpayment going on. But switching and trading up would also affect the figures.

    Before the crisis, the average duration of a mortgage was commonly reported as being 7 years.


    As you point out this is due to peop