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Spend as you spend can

Earlier this week (see “Hey big spender!”, May 25) we cited the daily bulletin of Landsbankinn concerning the debt level of the Icelandic household.

The numbers we quoted, however, only relate to debt vis a vis financial institutions.

Íslandsbanki went a step further yesterday and attempted to paint broad picture of the financial health of the average Icelandic home.

The original source on which both banks base their analysis is a new update of economic indicators which the Icelandic central bank Seðlabanki published on May 26.

On the liability side, the overall debt of Icelandic households is ISK 880 billion which corresponds to approximately ISK 3 million per citizen (around USD 50 thousand). The obligations are held by financial institutions, ISK 390 billion, and various funds such as pension funds, ISK 490 billion. The total debt of Icelandic households grew by 12 per cent year to year from early 2004 to early 2005.

On the asset side, real estate has appreciated rapidly, jumping 35 per cent in value during the same period. The total value of residential real estate in Iceland amounted to ISK 1.500 billion (fifteenhundred billion) at the end of 2004. The net assets of the pension funds have also been growing; at the end of last year, they clocked in at ISK 970 billion.

Looking at the income statement, the purchasing power of wages has grown by 2 per cent between this year and last. Seasonally adjusted unemployment measures only 2 per cent.

What does this all mean?

To the extent that the price appreciation of residential real estate is sustainable, the average Icelandic homeowner is considerably richer today than he was a year ago. He carries more debt, but at lower interest rates than before. But first time buyers may find it more difficult to get into the game.

And to the extent that growth in the net assets of the pension funds is real, the average Icelandic wage earner has a better cushion to fall on in his old age.

If Jón Jónsson is tired of his job, wants to go places, or gets on his boss’s wrong side, he can rest assured that the there are jobs to have in the current market. And in real terms he brings home slightly more than last year.

Islandsbanki suggests that with the sum of real estate and pension fund assets greater than total household debt, most homeowners should have positive equity. But the rapid readjustment of bank overdrafts to the same levels as those preceeding last year’s wave of mortgage refinancings means that many have spent a few months salary ahead of time. Should the climate change, and money get tight, some could be caught high and dry without cold cash.

For the past two years, the Icelandic króna has been riding high as money for the ongoing heavy industry projects has gushed into the economy, keeping down the prices of foreign goods and services. Iceland now carries a current account imbalance in excess of 10 per cent of GDP.

Iceland’s net external debt was a stratospheric 130 per cent of GDP in 2004. The net external position, which includes overseas assets, was somewhat better, but it is still an alarming 85 per cent of GDP.

In the stock market, valuations of many companies have reached levels not seen since the heydays of 1999 and 2000, and then some. Registration of new automobiles doubled from 2003 to 2004.

“Geðið ber ugg þegar gengi er hátt” wrote Einar Benediktsson early last century in his well-known poem “Einræður Starkaður”. Famously, his life alternated between boom and bust. With age, hard earned experience had taught him, to paraphrase his poem, to grow wary when the going got good. It remains to be seen if his descendants will heed his words.

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