Population Pressure on Housing greater than thought

The CSO produced another set of surprising data today, at least to some, with the publication of preliminary figures from the recent census. The population had been estimated at 4.64 million as at April 2015 , implying an average annual rise of around 15k since the 2011 census. Consequently the 2016 census figure , at 4.76 million, was much higher than generally expected, with the total increase over the past five years at 170k, or around 35k per annum. The natural increase (i.e. births minus deaths) was put at 198k, with the residual, net migration, at just -28k. In other words there has been a net outflow from Ireland over the past five years but it is now seen as much lower than previously estimated; the CSO had put net emigration over the four  years to April 2015 at 100k. So the numbers emigrating may have been lower than thought  and/or immigration may have been higher, with the latter more likely, given past episodes of population underestimation.

This Blog has pointed to growing capacity constraints in Ireland, particularly in and around the capital, and these figures only serve to underline the point. On housing, the census reveals that the housing stock rose by just 19k over the past five years so what limited new construction we have seen has barely managed to offset depreciation.

The CSO points out that the growth in households (3%) has lagged that of population growth as a whole (3.7%) , indicating that the availability of housing is an issue. The census reveals that the vacancy rate of housing nationally , excluding holiday homes, has fallen to under 10% from 11.5% in 2011 and 12.5% in 2006. In the past houses were built in areas that people did not want to live so the vacancy rate varies wildly across the country, from well over 25% in Donegal and Leitrim to single digits in Dublin and surrounding counties. Indeed, if one excludes holiday homes (small in number) the vacancy rate in South Dublin is 3.9%, and below 6% in both Fingal and Dun Laoghaire Rathdown.

Trying to suppress the symptoms of excess demand for housing ( by, for example, capping rents) is not sensible in economic terms and the only solution is to build more.  Moreover, these figures imply that the consensus estimate for housing demand of 25k per annum is now too low, as net emigration  has been overestimated, and indeed may already have turned to net immigration.

Irish GDP data shock, highlighting virtual economy.

Anyone familiar with the Irish economy will be aware that the multinational sector has a huge impact on the export and investment data, contributing to the volatility of recorded GDP. Surprises in the latter are therefore not uncommon, but the latest example is without doubt the most jaw-dropping to date. The CSO had estimated that Irish real GDP rose by 7.8% in 2015, an unexpected figure in itself, but have now revised that growth rate to an astonishing 26.3%. Yes, 26.3%. Moreover, nominal GDP in 2015, which was put at around €215bn, is now over €41bn higher at €255.8bn, having risen by over 32% from the previous year on the new data. For those who prefer GNP as a more appropriate measure for Ireland ( it adjusts for multinational profit and other income flows ) real growth in 2015 was still stratospheric, at 18.7%, with the nominal increase at 24%.

What’s going on?. There were a number of factors at work, relating to changes made to the GDP methodology. The first is that business spending on R&D and patents is now captured as investment and classified as intangibles. The latter  rose by over €11bn in 2015, a 100% rise and contributing most of the overall 32.7% increase in capital formation; building and construction rose by over 13% but spending on machinery and equipment expanded by only 3%.

The external sector saw massive value and volume changes, reflecting the inclusion of offshore manufacturing activities and the fact that aircraft for leasing  are now counted  as exports and imports  as opposed to the  previous net impact . Exports  are now deemed to have risen by just shy of €100bn in 2015, and by over 34% in volume terms, with the volume rise in imports put at 22%, with the result that the external sector contributed 18 percentage points to overall GDP growth. That export surge also resulted in a huge balance of payments surplus for Ireland, amounting to over €26bn or 10.2% of GDP.

Extraordinary figures. Spending by the government and households paint a  more realistic picture of economic life on the ground in Ireland last year. Personal consumption did pick up, reflecting rising employment and strong growth in real incomes, expanding by 4.5% in real terms, the best performance since 2007. Government spending on goods and services also rose , albeit by a modest 1.2%.

For many, these GDP figures are not ‘real’ but they are used as the denominator in calculating Ireland’s fiscal and debt ratios. Consequently, the latter  now ended 2015  at 78.7%, well below the euro average, instead of the previously published 93.8%.

If that step jump in GDP last year was indeed a one-off data-related adjustment the risk now is that 2016 will see a dramatic ‘slowdown’ or even contraction. Indeed, real GDP actually did contract in the first quarter, by a seasonally adjusted 2.1%. Consumer spending continued to show good momentum, up over 2% in the quarter, but investment fell sharply , reflecting double digit percentage falls in machinery and equipment and intangibles, while exports  fell by 5% and imports by 10%. On an annual basis GDP is still growing, by 2.3%. and all forecasters, the government included, will now have to make a stab at what all this means for recorded growth in 2016 and beyond. The range of estimates is likely to be wide and handsome.