Wednesday, March 6, 2019

Housing Costs in the SILC

Eurostat’s Statistics on Income and Living Conditions (EU-SILC) have lots of household-level data.  Here we will look at outcomes related to housing costs and look for the impact of the ongoing difficulties with housing in Ireland in the data. 

We’ll start with what Eurostat call “total housing costs” as a share of disposable income.

EU15 SILC Housing Costs to Disposable Income 2004-2017

In 2017, Ireland had the lowest “total housing costs” as a share of disposable income in the EU15.  In Ireland, the average share of housing costs was 16.1 per cent of disposable income in 2017 and this has been falling slightly in recent years, i.e. household disposable income is growing faster than housing costs – on average across all households. 

The picture isn’t much different if we look at the median instead of the average with Ireland again being towards the bottom.

EU15 SILC Median of the Housing Cost Burden 2004-2017

In 2017, in Ireland the median housing cost burden was 11.3 per cent of disposable income.  Half of households had a housing cost burden as a share of disposable income that was less than this.

Of course, we would like to know what is included in “total housing costs” used as the numerator in the above charts.  The details are provided here.  For all tenure types it includes the following if they are paid by the occupant:

  • Structural insurance,
  • Mandatory services and charges (sewage removal, refuse removal, etc.),
  • Regular maintenance and repairs,
  • Taxes, and
  • The cost of utilities (water, electricity, gas and heating).

For all tenure types housing costs are considered gross of any housing benefits (i.e. housing benefits should not be deducted from the total housing cost), then for each tenure type it also includes:

OWNERS: Mortgage interest payments, net of any tax relief

TENANTS at market price: Rent payments

TENANTS at reduced price: Rent payments

The most notable thing is that principal repayments on mortgages are not included as part of “total housing cost”.  In part, this reflects the element of choice involved.  If two borrowers take out identical mortgages except one is over 15 years and one is over 25 years it is not appropriate to consider that the household with the shorter term has higher housing costs – they have a higher savings rate.  Of course, the degree to which households have control over the pace of capital reduction on their mortgage may not make it a matter of choice at all.

There will also be differences across countries where borrowers in some countries tend not to make ongoing capital repayments which may be a factor in explaining why countries such as  The Netherlands, Sweden and Denmark are so high in the previous charts.  Capital repayments also increase the equity the household has in the property so aren’t a consumption expense.

Thus, it could be argued that this measure of “total housing costs” doesn’t give a full picture of housing costs but rather is the answer to a question that seeks to find something that is consistent across households and countries and not subject to change due to choices or preferences.  The size and length of mortgage payments will still be picked up through the interest component of “total housing costs”.

It would be useful if “total housing costs” as a share of disposable income was provided by tenure status but it does not seem to be available.  It is, however, provided in Purchasing Power Standard (PPS) units for “owners” and “tenants”.

EU15 SILC Owners Total Housing Costs in PPS 2004-2017

EU15 SILC Tenants Total Housing Costs in PPS 2004-2017

It would be useful if owners were broken down by those with a mortgage or loan and those with none, and if tenants were broken down by those paying the market price and those paying a reduced price.  This is particularly true for Ireland where there are more tenants paying rent at a reduced price then at the market price.

The chart for tenants above shows housing costs rising in recent years. This was around two per cent a year up to 2016 but accelerated to 4.5 per cent in 2017.  This will likely be dampened by the presence of tenants paying a reduced price (such as to local authorities and housing bodies) in the cohort so we could expect the increase for those paying at the market rate to be higher.

Eurostat also provide the share of rent in disposable income for tenants.  Again, it is for all tenants so both those paying a reduced price and the market price will be included.  As a share of the average disposable income of renters, Ireland has the third-lowest average rents in the EU15.  However, Ireland had been the lowest up to 2017 but lost this position due to the increase in rents highlighted above.

EU15 SILC Share of Rent in Disposable Income 2004-2017

Eurostat measure the housing cost overburden rate as being the share of population living in households where total housing costs (as defined above) exceeds 40 per cent of household disposable income.  In 2017, Ireland had the second lowest housing cost overburden rate in the EU15, with only Finland having a (slightly) lower rate.

EU15 SILC Housing Cost Overburden Rate 2004-2017

Ireland might have the next-to-lowest level for all households but as with most of these measures there is plenty going on under the surface.  Here is the 2017 breakdown of the housing cost overburden rate by tenure status.

EU15 SILC Housing Cost Overburden Rate by Tenure Status 2017 Table

Ireland’s overall rate might be 4.5 per cent but for tenants with rent at the market price the housing cost overburden rate is 21.5 per cent putting Ireland sixth-lowest in this category in the EU15.  Thus, just under one-fifth of tenants paying market rates had “total housing costs” in excess of 40 per cent of their disposable income.  As shown in the chart below tenants paying market price has always being the tenure status with the highest housing cost overburden rate in Ireland.

SILC Housing Cost Overburden Rate by Tenure Status in Ireland 2004 to 2017

It may also be surprising how little this is changed over period shown, though there is now a noticeable upward trend since 2013.  It has gone from 16.6 per cent  in 2013 to 21.5 per cent in 2017.

The picture is much the same if we reduce the threshold.  The next chart looks at the share of the population by tenure status where “total housing costs” exceed a lower threshold of 25 per cent of disposable income.  Again, tenants paying the market rate fare worst but here the increase is only visible after 2015 and at 60 per cent in 2017 is the highest in the series.

SILC Housing Cost Burden greater than 25pc of Disposable Income in Ireland 2004 to 2017

And, just for completeness here is a chart of the housing cost overburden rate (40 per cent of income threshold) for tenants renting at the market price across the EU15.  Ireland, has generally had one of the lower housing costs overburden rates for tenants paying market rates since 2004, but, though still near the bottom, Ireland’s relative position has been moving upwards in recent years.

EU15 SILC Tenants Housing Cost Burden more than 40pc of Disposable Income 2004-2017

Next, is the housing cost overburden rate for households that are at-risk-of-poverty, i.e. those with an equivalised disposable income of less than 60 per cent of the median.  Again, this is another instance where Ireland is near best-in-class in the EU15, with only Finland again having a slightly lower rate.

EU15 SILC Housing Cost Overburden Rate AROP Households 2004-2017

Ireland’s position in the above chart indicates that Irish households who are at-risk-of-poverty have to devote a lower share of their disposable income to housing costs than in other countries.  For example, in Denmark around 80 per cent of households who are at-risk-of-poverty have housing costs that are greater than 40 per cent of their disposable income.  And, the more income that has to go on housing costs the less there is for other items of consumption.

To explore this further, Eurostat also calculate an at-risk-of-poverty rate that deducts “total housing costs” from household disposable income.  This uses the standard at-risk-of-poverty threshold, i.e. 60 per cent of the national median equivalised disposable income, but compares it to household income after housing costs have been subtracted from it which can give an indication of what is available to spend on items other than housing.

EU15 SILC AROP after Housing Costs 2004-2017 2

Using this approach Ireland had the fourth-lowest at-risk-of-poverty rate in the EU15 in 2017.  Housing costs include rents at the market price but this has not resulted in any noticeable increase in this measure and, in fact, has declined slightly in the past few years.

As “total housing costs” used to calculate the above shares and rates excludes capital repayments on mortgages it may be that the calculations and ratios do not give a full insight into housing costs.  To this end, participants in the SILC are asked to assess the “financial burden” of their housing costs on the scale of give their view of whether it is:

  • a heavy financial burden,
  • a financial burden, or
  • not a financial burden.

Eurostat’s notes tell us that here a broader approach is to be taken to housing costs when this more subjective view of housing costs is being assessed:

With regard to the calculation of the financial burden of the total housing cost, the following methodological issues should be taken into consideration:

  • The objective is to assess the respondent feeling about the extent to which housing costs are a financial burden to the household.
  • Total mortgage repayment including instalment and interest is to be taken into account for owners and actual rent for renters. In addition, service charges (sewage removal, refuse removal, regular maintenance, repairs and other charges) are to be considered.

Here is the share of people living in households who consider the impact of their housing costs (including capital repayments on mortgages) to be a heavy financial burden.

EU15 SILC Financial Burden of the Total Housing Cost 2004-2017

This is likely closer to what we expect for Ireland. The share of people living in households who assessed that they were experiencing a heavy financial burden due to housing costs increased after 2007 and reached 43.3 per cent by 2013. It has since fallen back and was down to 28.4 per cent in 2017, though still the seventh highest in the EU15 – Ireland’s relative position was fourth highest in 2013.  However, as this is a subjective measure such cross-country comparisons may not be entirely valid.  Still, the individual trend for Ireland is revealing and the 2017 level is close to the levels seen from 2004 to 2007.

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.

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