Tuesday, May 1, 2012

State savings soar while Irish consumers shy from housing market

House purchase transactions slump ….

Irish house prices have been collapsing since they peaked in 2007. The rate of the decline reached 16.7% on an annual basis last year. Sellers have severely reduced their asking prices, sometimes by as much as 70% from their peak expectation

New mortgage lending is down by 30% at the end of 2011 compared to a year earlier.  Some 11,000 property loans amounting to €2.1 billion were granted in 2011 compared to 110,800 with a cumulative value of €27.8 billion in 2006, although the fall in house prices account for a significant element of this dramatic change. Official statistics indicate that 10,500 residential units were completed in 2011 compared to 93,000 in 2006.

The downturn in housing means lower levels of tax relief claims for mortgage interest:

Tax Year Number of Mortgages Tax Relief Cost € Million
2008 778,100 705
2009 782,700 486
2010 490,900 375
2011 488,000 357

There has also been a dramatic slump in the amount of stamp duty that that State has been collecting in respect of purchases an long-term leases of residential property where stamp duty of €10,000, or more applied (typically on property selling for €1 million, or more):

Tax Year Number of Stamped Instruments
2006 33,192
2007 26,072
2008 14,888
2009   5,809
2010   3,027
2011     646

State savings rise …

But despite these aggressive price drops consumers remain reluctant to buy houses in case prices will fall further and this dynamic could well exacerbate further price drops. A shortage of mortgage credit is also compromising the market.  High levels of youth unemployment or emigration reduces the potential number of first-time buyers.  Those in jobs perceive less security or the prospect of further drops in their income or the threat of economic uncertainty.

At some stage demand will recover and the strong increase in consumer savings with State will help this.  State savings are a component of the spending capacity of the exchequer supplied by domestic private investors. Total State savings have increased from €6.24 billion in 2007 to the current level of €14.5 billion.  Expressed as a percentage of GDP State savings has risen from 3.3% in 2007 to 12% in March 2012.

The principal saving products are:

SAVINGS PRODUCT % Total 2007 % Total 2012
3-year Savings Bond, (3.23%) 26.9% 33.4%
4-year National Solidarity Bond, (3.56%)       -   2.0%
5.5 –year Savings Certificates, (3.53%) 35.7% 31.2%
6-year Investment Savings, (3.37%)   6.5%   3.7%
10-year National Solidarity Bond, (4.14%)       -     .7%
Deposit Accounts (1%) 20.8% 18.5%
Prize Bonds 10.1% 10.5%


The annual coupon of 1% on the National Solidarity Bonds and the interest on deposit accounts are subject to Deposit Interest Retention Tax, currently levied at 30%.  Otherwise the returns on State savings are not subject to tax.

There has also been a significant growth in the popularity of Prize Bonds.  The 50th anniversary of the introduction of Prize Bonds was marked in 2007 when the total amount outstanding was €632 million.  This grew to €1.47 billion in 2011.

The National Pension Reserve Fund was valued at €14.5 billion at 31 December last.  This comprises a Discretionary Portfolio valued at €5.4 billion and the Directed Portfolio valued at €9.1 billion.  Funds in the Discretionary Portfolio are not all readily available.  There is a legal commitment to invest €1.2 billion in various targets of which €800 million are in Ireland – for water metering.  A Strategic Investment Fund will channel resources ona commercial basis from the National Pension Reserve Fund towards productive investment on the basis of a matching commercial contribution from private investors in areas of strategic significance – such as infrastructure, venture capital and the provision of long-term capital for SMEs  Last November €250 million was committed to a new infrastructure investment fund which is seeking €1 billion from institutional investors.

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