Summary
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Eight out of fifteen Irish economic sectors experienced annual increases in credit in excess of 20 per cent in 2007.
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Annual growth in lending for real estate activities reached its lowest rate in over five years, at 27.7 per cent. At end-December, the annual growth rate for the construction sector was 24.9 per cent, compared with 48.5 per cent a year earlier.
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Property-related lending accounted for 62.1 per cent of the increase in credit in the year to December 2007, down from 82 per cent twelve months earlier; its share of total outstanding credit continued to decline in Q4 2007, after falling in Q3 2007 for the first time since 2001.
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| Source: Central Bank and Financial Services Authority of Ireland |
Lending to the Sectors – Annual Change to December 2007
The Central Bank in its analysis of Irish private sector credit (PSC) that was published on Thursday, says that of the fifteen economic sectors under analysis, nine sectors had lower annual growth rates in the final quarter of 2007, than in the third quarter. Significant sectors, such as real estate, construction, and the personal sector, are included in this group. The annual rate of increase in lending to construction and the real estate activities subsector has declined in the last five and six consecutive quarters, respectively. As a result, property-related lending, which accounted for over four-fifths of the total change in PSC during 2006, accounted for less than two-thirds during 2007.
The annual growth rate of private-sector credit (PSC) in Table 1 declined by 1.2 percentage points between September and December 2007, to 19.1 per cent. The sectoral breakdown of PSC in Table 1 includes securitised residential mortgages, i.e. they are added back into the personal sector, and the residential mortgages sub-sector.
The sectoral breakdown of total PSC at end-December 2007 and the annual changes in lending to these sectors are shown in Table 1.
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During 2007, eight sectors experienced annual increases in excess of 20 per cent.
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The health and social work sector, at 42.1 per cent, had the fastest annual growth rate in Table 1 for the third quarter running. While growth rates in lending to this sector have remained quite high since end-2004, it accounted for only 0.7 per cent of the total stock of outstanding PSC in December 2007.
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Lending to the real estate activities sub-sector increased by €17.3 billion in 2007.
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This sub-sector had the fastest annual growth rate in Table 1 during 2006, but fell to fifth place in Q4 2007, at 27.7 per cent. This is the lowest annual growth rate for the sub-sector in over five years. The average quarterly growth rate for the real estate activities sub-sector of 6.3 per cent in 2007 was just over half of the average quarterly growth rate in 2006.
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The construction sector, which recorded the fastest annual growth rate of all the sectors in Q3 2006, was ranked mid-table in Q4 2007, with a growth rate of 24.9 per cent. Residential construction activity declined during 2007, with 10,000 less housing units completed than in 2006. The CSO's Index of Employment in Construction showed that employment in private firms was 6.4 per cent lower in December 2007 than in December 2006. In addition, the Ulster Bank Construction PMI Index – a seasonally adjusted index designed to measure the overall performance of the Irish construction economy – posted its lowest reading in January 2008 since the survey began, with the housing sector recording the biggest slowdown.
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Personal-sector credit (inclusive of securitised mortgages), which accounted for over two-fifths of outstanding PSC at end-2007, expanded by 12.8 per cent over the year.1 The other housing finance and other personal sub-sectors had annual growth rates of less than 10 per cent in December 2007, while the residential mortgages sub-sector had the fastest growth rate, and accounted for 85 per cent of personal-sector credit in December 2007. The quarterly growth rate of outstanding residential mortgages in Q4 2007 of 2.9 per cent was the lowest quarterly growth rate since March 1997. This is in line with Irish Banking Federation (IBF) data, which found that the value of new mortgage drawdowns (excluding ‘switcher' mortgages) during the final quarter of 2007 was 11 per cent lower than during Q3 2007.2
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In Q2 2007, the annual growth rate of lending to the manufacturing sector increased from an average of 11 per cent during 2006, to nearly 30 per cent. Since then, the growth rate has moderated to less than 20 per cent. In December, NCB's Purchasing Managers' Index (PMI) – an indicator designed to provide a single figure measure of the economic health of the manufacturing industry – recorded the first indication of a deterioration in Irish manufacturing business conditions in fifty-two months. In Q4 2007, the CSO's Industrial Production Index for Manufacturing was 2.4 per cent lower than in the third quarter.
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The annual growth rate of the financial intermediation sector was boosted by a substantial increase in lending to non-MFI (Monetary Financial Institutions) IFSC (International Financial Services Centre) companies over 2007, and lending of this type increased by a substantial €6 billion during the final quarter.
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Lending to non-MFI IFSC companies is associated with offshore financial transactions, for example loans to Special Purpose Vehicles (SPVs) and funding of non-bank affiliates, and is not associated with the domestic economy.
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Property-related lending, in the context of Table 1, is defined as the sum of lending to real estate activities, construction3 and the personal sector for housing. The contribution of property-related lending, inclusive of securitised mortgages, to credit growth in 2007 was a twenty percentage points lower during 2007 than during 2006.
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| 1999 Q1 - 2007 Q4: Blue: Residential Mortgages Red: Total Private Sector Credit Source: Central Bank and Financial Services Authority of Ireland
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As a result, the share of property-related lending in the total outstanding stock of credit continued to decline, after it fell last quarter for the first time since 2001.
Breakdown of Residential Mortgages
The Central Bank says that the proportion of outstanding residential mortgages (inclusive of securitised mortgages)4 that were classified as principal-dwelling houses (PDHs) and buy-to-let (BTLs) remained virtually unchanged in 2007, at 76 per cent and 23.1 per cent, respectively.5 Annual growth rates dropped across all three sectors during 2007.
Although the BTL category had the biggest slowdown over the year, its annual growth rate remained the highest of the three sectors. IBF data showed that demand for BTL mortgages remained resilient despite an overall slowdown in the value of new mortgage drawdowns (excluding ‘switcher' mortgages), with the BTL category reaching its highest proportion of market share in Q4 2007. While the CSO's index of private rents was at historically high levels at end-2007, the annual increase in the index fell from a high of 12 per cent in September 2007, to 11 per cent in December 2007. This may reflect a supply-side response in the market, with the Daft.ie Rental Report stating that there was a large increase in the number of properties available for rent, especially during the second half of 2007.
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| PDH- Principal Dwelling Houses; BTL- Buy to Let Source: Central Bank and Financial Services Authority of Ireland
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| PDH- Principal Dwelling Houses; BTL- Buy to Let Source: Central Bank and Financial Services Authority of Ireland
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Personal-Sector: Eurozone Comparison
Comparisons of personal-sector credit to GDP for Eurozone countries can only be made on the basis of credit institutions' on-balance sheet lending, as comparable figures for securitised mortgages are not available. Between December 2006 and December 2007, ratios increased in most countries, with the notable exceptions of the Netherlands and Germany.6 Spain and Portugal had the fastest rising ratios of indebtedness over the period, both rising by over 4 percentage points, and Spanish households were more indebted than their Dutch counterparts at end-2007.
Ireland continued to have the highest indebtedness ratio, after it moved above the Netherlands using both the GNP and GDP measures last quarter. However, while the use of securitisations has varied across countries, those countries that are close to Ireland in terms of indebtedness ratios, such as the Netherlands, Spain and Portugal, have sizeable amounts of securitised residential mortgages. A more comprehensive measure of personal-sector indebtedness, including securitised mortgages, is likely to give Ireland a lower ranking.
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| Source: Central Bank and Financial Services Authority of Ireland |
1 For a discussion on how securitisations and reclassifications affect credit and mortgage lending, see Kelly, J. and A. Menton ‘Residential Mortgages: Borrowing for Investment', CBFSAI Quarterly Bulletin No. 2 2007.
2 Source: IBF data series on New Lending (excluding ‘switcher' mortgages), February 2007.
3 While it is acknowledged that a significant but unquantified portion of lending to the Construction sector is not property related (for example, construction work on infrastructural projects), it is usual to include this sector in property-related lending.
4 All securitised residential mortgages, which are removed from credit institutions' books, are added back into the principal-dwelling houses (PDHs) category, although this may slightly overstate the proportion of outstanding residential mortgages that are classified as PDHs.
5 A historical breakdown, from December 2003, of outstanding residential mortgages into the three sub-sectors is available on the Bank's website, http://www.centralbank.ie/. This series is not adjusted for securitised residential mortgages.
6 Personal-sector credit data for the euro area countries include cross-border lending within the eurozone.
