| Irish still worry about money |
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| Gerard O€Neill writes that financial institutions need to readdress their segmentation and product development policies in order to ensure that the services they are offering actually meet the needs of the population |
How secure is Ireland€s consumer-driven economic boom? What happens if interest rates go up - will Ireland€s over-stretched borrowers precipitate a recession if they cut back on spending and borrowing? How has the past five years of economic boom impacted on the consumer: are people behaving like it will go on this way forever?
These are just some of the questions that we sought to address in our recent €Future of Money€ research programme. A concern for many in the financial community looking ahead over the next few years is that €the bubble will burst€ if Irish consumers experience an unforeseen shock. We polled a representative sample of 500 consumers throughout Ireland to assess the current state of mind of borrowers and savers, and to gain some insight into the fragility or otherwise of the current boom.
Winners and Losers
Has the Celtic Tiger made people feel more comfortable about their financial circumstances? Amárach asked consumers to rate their current financial situation on a scale of one to ten, where 1 equals extremely difficult and 10 equals extremely comfortable. (See figure 1)
Despite Ireland€s GDP per capita exceeding many of its European neighbours, one in five Irish adults consider their financial situation to be difficult (i.e.: scoring their financial situation just 1-3 out of 10). Those most likely to say money is a worry are students, singles, and under 35s. The over 50s or €empty nesters€ are most likely to be feeling comfortable having got over the expensive child rearing years. Thus lifestage as well as economic factors play an equal part in peoples€ sense of financial wellbeing.
The middle-ageing of Ireland€s population over the next 10 years should, €other things being equal€, translate into an increase in the proportion of the population who consider their financial
situation to be good or very good.
Home lies
One of the key pressures today for younger families is mortgage repayments. This is the source of much fear about the recessionary impact of a sharp rise in interest rates on Ireland€s economy. Indeed, Ireland€s level of owner occupation is among the highest in Europe. Just over half of 25 to 34 year olds and eight in ten 35 to 49 year olds own their home. As property prices (and rents) have surged over the last few years, have people become financially overstretched? Our survey provides some insight into the current situation of those renting and those with mortgages. (See figure 2)
At first glance, homeowners and tenants do not appear to be overly burdened with rent or mortgage payments. The average after-tax percentage of salary going on rent or mortgage payments is a reasonable 25%. However, wide disparities exist, with one in eight are paying more than 40%. This is particularly prevalent in Dublin.
The bottom line, however, is that the majority of home owners do not actually have mortgages - and a large proportion of those with mortgages have only a few years worth of repayments left. Thus a hike in interest rates would only impact severely upon a minority of homeowners - though a very vocal one at that.
It€s all in the mind
Psychology plays a greater part in peoples€ decision making with regard to financial services than any other variable. Our research shows that - despite the increase in affluence brought on by the Celtic Tiger - Irish consumers still suffer from a lot of negative feelings about money and their financial situation. A majority worry about their financial situation; just over half say that their bills are always much higher than expected; and as many as 4 in 10 feel that their financial situation is out of control. (See figure 3, over)
Unmet needs
These findings suggest that there are still large sections of consumers whose needs are not being met by current offerings or who are not fully aware of the services that are available.
The scale of unmet needs is quite daunting. For example, two-thirds of Irish adults do not think they have made adequate provision for their retirement. Over half of 35 to 49 year olds are not comfortable with the amount of funds they are putting away for their golden years. This, perhaps, explains why over one in four of them plan to continue doing some work after retirement.
Once at retirement age, a third still do not think they have enough funds to see them through. Moreover, one in five of the over 65s plan to continue working. While one in four are worried that they will outlive their nest egg.
People seem to understand the importance of planning for their future needs but many feel unable to keep even their current finances under control. There will be a ready market for those financial services that coach and manage peoples€ needs through their lifecycle.
For those in the financial services sector, the findings in Amárach€s research have a number of important implications:
despite half a decade of double digit growth, Irish consumers still worry about their financial future, even if many feel powerless to do anything about it: therefore demand for long-term savings and investment products, including pensions, will undoubtedly grow.
Irish consumer spending is relatively interest-rate proof because of the demographics of those with mortgages: indeed, we can expect to see the share of the population exposed to interest rate rises actually declining in time.
Provisions for retirement are a major source of concern for older adults:
therefore products aimed at those who plan to retire over the next 10-15 years will enjoy rapid growth over the coming decade.
The prospects then are for continued strong growth in demand for retail financial services: but against a background of shifting consumer psychology and changing perceptions of financial needs.
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Gerard O€Neill, Managing Director, Amárach Consulting
€The Future of Money€ can be
downloaded from Amárach€s web site: www.amarach.com
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| Article appeared in the November 1999 issue.
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