It is now nine months since the Central Bank introduced limits on mortgage lending, designed to prevent the re-emergence of another housing bubble. Controls on Loan to Value and Loan to Income ratios make sense , in our view, but not in an environment where net mortgage lending has been contracting for over six years and where the supply of new housing is running far below estimates of medium term demand. The Bank’s research on the topic concluded that the policy would dampen credit growth , have a limited impact on prices and a negative effect on housing supply and that indeed appears to be the case. An unintended consequence is that the pressure on rented accommodation has grown, pushing private sector rents to an all -time high. It would be foolish to blame the Central Bank for all the rental growth but if there is excess demand for housing it will emerge in either house prices or rents and measures to put a lid on the former will merely spill over to the latter.
According to the CSO, residential rents rose by an annual 10.3% in the third quarter and the increase in the three months to September was 3.2% so pressure is clearly upwards. The CSO figure is national and the data on Daft.ie, which broadly tracks that of the CSO, shows that rents are rising faster in the Capital, with a 10% annual increase in Dublin City in q2, against an 8.6% figure nationally.
Calls for rent controls in Dublin have been heard (and indeed are not uncommon in cities elsewhere, including New York) but that would be equivalent to dealing with the symptom rather than the underlying cause. The demand for housing is growing, reflecting rising employment, a resumption of growth in disposable incomes, and a sharp fall in net emigration(in fact migration may be turning positive again) with an annual requirement of some 25k seen as a reasonable estimate, including up to 8k in the Capital. On the supply side the collapse in completions bottomed out in 2013, at 8.3k and 2014 saw a pick up, to 11k. Over the first nine months of this year the national figure was 8.9k, including just over 2k in Dublin (city and county) , consistent in our view with an annual total of around 3.2k in Dublin and under 13k for the whole country.
The low base of completions means that modest absolute levels of house building still translate into impressive percentage gains and that is the case with gross mortgage lending for house purchase, with the number of loans rising by 50% last year. The pace of growth has slowed this year, to 29% in the second quarter, following a tightening of credit standards, and the latest approvals data shows a very rapid change in trend; approvals in the three months to August were just 1.1% above the same period in 2014 while the figure for August alone was 4% down on the previous year. The average new mortgage , at €191k, is also virtually unchanged on a year earlier and our earlier estimate of 23k new mortgage loans in 2015 and lending of €4.3bn may be too high.
One would expect the Central Bank’s controls to have a bigger impact on credit and house prices in Dublin than elsewhere, given the large price differential in favour of the capital. That does seem to the case; Dublin prices rose by over 22% last year, more than double the pace in the rest of the country, but this year has seen a marked deceleration, with the annual increase slowing to 6.5% in September, the weakest pace in over two years. In contrast, house price inflation ex Dublin has picked up , rising to 11.4% on the CSO figures.
The Central Bank has therefore precipitated a slowdown in mortgage lending and helped to dampen house price inflation in the Capital but given the rate of house completion there is little prospect of a change in the trend for residential rents, absent a severe demand shock to employment.