Developments in household savings have attracted some attention during the pandemic. With spending opportunities curtailed due to public health restrictions household deposits, in aggregate, soared.
Here, though, we will look at pre-pandemic figures to assess the savings behaviour of the Irish household sector. We will start with the Gross Savings Rate. Essentially, this is household disposable income that is not used for current consumption. When looking at this we see that Ireland doesn’t really stand out at all.
In 2019, the gross savings rate of the Irish household sector was just over 10 per cent and put Ireland as the median in the EU15. Irish households had consumption expenditure of €104.6 billion from a total gross disposable income of €116.4 billion, leaving gross savings of €11.9 billion. Total gross disposable income is gross disposable income with an adjustment for changes in pension entitlements.
However, that only gets us to the end of the current account. To fully compare household sector spending against household sector income we must work though the transactions in the capital account, including gross fixed capital formation, i.e. investment spending. The end of the capital account gets us to net lending/net borrowing which shows whether there is a surplus to be lent or a deficit to be funded after all spending (current + capital) has been accounted for.
Relative to disposable income, the net lending of the Irish household sector in 2019 was the third-highest in the EU15. Capital transactions (including capital formation) absorbed €5.6 billion leaving €6.3 billion (5.4 per cent of total gross disposable income) unspent and available to go on the financial balance sheet of the household sector. Only in Sweden and Germany was there household sectors with higher net lending rates than Ireland.
Not only did Ireland in 2019 have a level of household net lending that would be more appropriate for a mature economy it had a level that was higher than it had been in Ireland a few years previously.
In the aftermath of the 2008 crash, the Irish household sector became a significant net lender as the borrowing of the Celtic Tiger came to a halt and households sought to repair their balance sheets. However, after 2012 this net lending declined and had fallen to around 3 per cent of total gross disposable income in 2016.
The economy continued its recovery in the years that followed and aggregate household income grew but spending (current plus capital) did not keep pace and the net lending rate was above 5 per cent in each of the three years prior to the pandemic.
Of course, the pandemic resulted in major upheavals. One result was that savings increased in almost all EU14 countries (updated data for the UK is no longer provided to Eurostat). Within this group the largest such increase took place in Ireland with the net lending of the Irish household sector going from 5.4 per cent of total gross disposable income in 2019 to 21.2 per cent in 2020.
We’re not concerned about the 2020 level which was artificially elevated by various features and responses to the pandemic but more with the pre-pandemic 2019 level where, as set out above, Irish households had the third-highest level of net lending as a share of total gross disposable income in the EU15.
If Irish households’ spending in 2019 as a share of income was comparable to what they were doing in 2016, expenditure (consumption plus investment) would have been around €4 billion higher. If Irish household expenditure matched the net lending outcome for Denmark in 2019, spending could have been around €7 billion higher and if it matched the Finnish outcome spending could have been around €12 billion higher (though €5 billion of net borrowing would have been required).
The chart of the gross savings rates across the EU15 for 2019 indicated that it was not consumption expenditure that led to the relatively higher net lending rate in Ireland. Ireland’s household gross savings rate was the median for the EU15.
The issue arises in the capital account and is clearly seen if we look at the household gross investment rate: household gross fixed capital formation as a share of total gross disposable income.
And there we see Ireland right down towards the bottom. In 2019 (i.e. pre-pandemic), Ireland had the second-lowest household gross investment rate in the EU15. This contrasts with each year in the period from 1996 to 2008 when Ireland had the highest household investment rate in the EU15. The household investment rate peaked at 29.2 per cent in 2006, around six times the current level.
From a national accounts perspective, what we mean by “investment” is linked to additions to the capital stock of fixed assets. The most significant fixed asset for the household sector is of course residential property. So, when we are talking about the gross fixed capital formation or “investment” of the household sector we are primarily talking about new dwellings purchased by households or extensions/upgrades to existing dwellings owned by households.
Investment in the context here is not putting money into financial assets such as shares nor it is the purchase of second-hand or existing dwellings as this is not capital formation but the change in ownership of an existing asset.
There is no doubt that purchases of new dwellings by households is muted. And that would seem to be more due to supply constraints rather than a reluctance to spend. One of the reasons Ireland has a lower household investment rate is that there are fewer new capital assets (i.e. new dwellings) for households to purchase.
It should be noted that a sector can also undertake investment if it buys existing assets from another sector. So, if households were to buy existing dwellings from the government sector (such as local authorities) or from the corporate sector this would count as investment for the household sector.
For the selling sector it would be included as disinvestment – a reduction in the capital stock of that sector – and in overall terms the capital stock of the economy would be unchanged. However, in overall terms the net flows of existing dwellings between sectors have been relatively modest, though perhaps with a trend towards more net purchases by non-households.
In 2017 and 2018, there was a net flow of existing dwellings from non-households to households of around 2,000 per annum. This reversed in 2019, though the net flow to non-households via transactions in that year was small (158 existing dwellings).
And it may be that the topline numbers for household investment miss something significant compositional changes within the household sector. The vast majority of transactions in existing dwellings are intra-household – where one household sells to another household. In 2019, there were 40,606 such transactions.
Figure from the Banking and Payments Federation show that first-time buyers drew down 22,500 mortgages in 2019 and that 14,500 of these were for existing dwellings. Unless purchased from non-household entities these purchases would not count as investment for the household sector.
However, there is evidence of changes in use of existing dwellings within the household sector. Figures from the RTB show a decline in the number of tenancies registered with them and an increase in the number of termination notices received by tenants because the landlord wishes to put the property up for sale. There isn’t conclusive use (such as a register of residential properties of type of use) but it does seem as if properties are leaving the private rental sector and becoming owner-occupied.
This is investment by owner-occupiers and disinvestment by landlords but as both are in the household sector is does not appear in the topline numbers for the sector. So while it does look like Ireland had an unnecessarily high household net lending rate before the pandemic it could be that some of our spending is being masked because it is first-time buyers purchasing existing dwellings that were previously in the private rental sector.
That doesn’t mean there isn’t a need for additional new dwellings for the household sector to purchase – there clearly is – but that headline numbers such as housing output or new dwelling purchases may not throw light on where the failures of our housing system are at their most acute.
There certainly is scope for Irish households to spend more – and energy prices are likely to be an automatic trigger of this. Consumption will bounce back if public health restrictions remain lifted.
This should see the household savings rate revert to 10 per cent of thereabouts. If more new dwellings are made available for purchase by households this would increase the household investment rate. But it is possibly the private rental sector that has the most pressing need for capital formation and it does not seem as if that will come from the household sector.
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