Central Bank says about 80% of the annual increase in Irish Private Sector Credit in year to June 2006 was accounted for by property-related lending

Irish
Central Bank says about 80% of the annual increase in Irish Private Sector Credit in year to June 2006 was accounted for by property-related lending
By Finfacts Team
Aug 25, 2006, 17:49

On Friday, the Central Bank of Ireland published a sectoral breakdown of Irish private credit sector developments in the year to June 2006.

Recent strong growth in private-sector credit (PSC) continued in June 2006, although the headline (unadjusted) growth rate moderated slightly to 27.3 per cent, from 27.7 per cent a year earlier.¹

About four-fifths of the annual increase in credit was accounted for by property-related lending.

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Green Line - Construction; Ted Line - Real estate activities; Black Line - Total : Source - Central Bank and Financial Services Authority of Ireland (CBFSAI)

Lending to the Sectors – Annual Change to June 2006

The sectoral breakdown of total PSC at end-June 2006 and the annual changes in lending to these sectors, are shown in Table 1.

In the year to June 2006, there was a general increase in credit across all fifteen sectors, with ten sectors experiencing annual growth rates in excess of 20 per cent.
There was continued strong growth in credit to the Real Estate Activities sub-sector (65.5 per cent), and the Construction sector (58.9 per cent). The growth rates of credit to these two sectors are shown in Chart 1 from Q1 2002 to Q2 2006. Since Q1 2003 credit to both sectors has been increasing at a much higher annual rate than total credit.

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Personal-sector credit, which accounted for nearly 39 per cent of the annual increase in PSC (adjusted for lending to non-bank IFSC companies), expanded by 23 per cent, compared to 31.3 per cent a year earlier. Reclassifications, resulting from a review of how credit is classified, have boosted lending for Real Estate Activities and Residential Mortgages and depressed annual growth in Other Personal credit.
Property-related lending, in the context of Table 1, is defined as lending to Real Estate Activities, Construction² and the Personal sector for housing. The contribution of property-related lending to the annual increase in credit growth (adjusted for lending to non-bank IFSC companies) rose to 80.2 per cent in Q2 2006, from 75.1 per cent a year earlier. The share of property-related lending in the total stock of outstanding PSC (adjusted for lending to non-bank IFSC companies) reached 65.7 per cent in the Q2 2006, from 61.4 per cent a year earlier.

Source: CBFSAI. Data are based on NACE Rev. 1 industrial codes.
a The sectoral proportions of total lending have not been adjusted for lending to non-bank IFSC companies.
b The growth rates have not been adjusted for mortgage securitisations, lending to the IFSC nor valuation effects arising from exchange rate movements. Adjusted growth rates for overall PSC, mortgage credit and non-mortgage credit are available from the CBFSAI Monthly Statistics.
Note: Sectoral credit data for earlier periods are available in Table C8: All Credit Institutions: Sectoral Distribution of Advances, of the Statistical Appendix to the CBFSAI Quarterly Bulletin.

The proportion of household borrowing, in June 2006, that is secured on housing is shown for the euro-area countries in Chart 2.³ The Netherlands has the highest ratio at 89.5 per cent, followed by Ireland at 80.2 per cent.

While both these countries have high personal debt to income ratios, they also have the highest proportion of household debt secured on housing. Both countries are well above the euro-area ratio of 70.3 per cent.

Source: CBFSAI and ECB website, www.ecb.int/stats/money/aggregates/bsheets/html/outstanding_amounts_2006-06.en

1 PSC growth rates, adjusted for transactions between credit institution and non-bank IFSC companies and valuation effects arising from exchange-rate movements, are available in the CBFSAI Monthly Statistics. The adjusted year-on-year change in June 2006 was 30.3 per cent.

2 While it is acknowledged that a significant but unquantified portion of lending to the Construction sector is not property related, it is usual to include this sector in property-related lending.

3 The ratio for Ireland is somewhat different from Table 1, as the ECB data for lending to households include lending to nonprofit institutions serving households and cross-border lending within the euro-area.