New House Price Index showing wide regional variations.

The CSO has just released a new residential property price index, which is based on total transactions from Stamp duty returns, as opposed to data from mortgage lenders. The latter was only capturing around half of total transactions, so the new index is more representative of the housing market  as a whole as well as providing a host of additional information , including price and turnover  trends at a  regional and localised level.

The  inclusion of cash buyers ( or more precisely, buyers who are not being funded by Irish mortgage lenders) has not greatly altered the  perceived picture of the  housing cycle, although there are some modest differences revealed. Prices are now seen to have peaked nationally in April 2007, five months earlier than previously thought, although still bottoming in March 2013. The decline is now a little steeper, however, at 54.4% againt 50.9%, primarily due to a bigger fall in prices ex-Dublin; the crash there is now put at over 56% against 49% on the old index.

Cash buyers appear to pay less than  buyers with mortgages and the new index shows that the recovery has been a little weaker than previously perceived, albeit not dramatically so;  national prices in July 2016 were 3% below the index based on mortgage data alone. The divergence is not material in Dublin (less than 1% in June) but is pronounced elsewhere in the country, with the new index 8.4% below the old.

What about the recent trend, now that the Central Bank’s mortgage controls have bedded in? What is apparent is that prices in the Capital have slowed appreciably since last December and were flat in the first six months of this year, with monthly falls alternating with modest gains. Prices did rise in June and July, by a cumulative 2%, so boosting the annual change to 3.8%. Dun Laoghaire/Rathdown has fared the worst ( +1.1% over the past year) with Fingal ouperforming (+6.4%).

Elsewhere, the market is more buoyant. Prices ex-Dublin were broadly unchanged over the Winter and early Spring but then accelerated, rising by 6.7% in the three months to July, boosting the annual increase to  11.3%. There is a regional divergence however, with prices rising by just under 19% in the Midlands and by some 15% in the South West against 6% in the South East and 4% in the Mid East.

Prices in the Capital are still well above the national norm, of course, at an average €385,000 versus €236,000 according to the CSO, which is common feature in many economies. Dublin also significantly outperformed the rest of the country in the early years of the recovery but that now appears to have ended, with some modest catch-up underway.


Irish Q2 GDP; Deflation re-emerges.

Irish real  GDP contracted in the first quarter, by 2.1%, and the latest CSO data shows a modest  0.6% recovery in q2. Nominal GDP fell however, by 1.0%, which followed a 5.6% decline in the first quarter. Consequently, the consensus forecast for nominal GDP in 2016 is probably too high as indeed are forecasts for real growth of 4.9% and the coming weeks are likely to see some downward revisions.

Consumer spending was weak in the second quarter, declining by 0.5% in volume terms, and  business spending on machinery and equipment also fell, by over 10%. Exports, too, declined, albeit marginally. This broad weakness was offset by a 5% rise in construction and a surge in spending on R&D ( including patents and licences) which is classed under ‘intangibles’ . The latter component is extraordinarily volatile and actually more than doubled in the quarter alone ( +113%) , and as such  was the main factor behind the 39% rise in total investment spending. These intangibles are largely multinational and often purchased from parent companies abroad, so imports also rose strongly in the quarter, by 12%. There was also a postive stock build, adding 1.3% to GDP, although the sum of the components imply that real GDP actually fell, with a large statistical adjustment accounting for the positive growth figure.

On an annual basis real growth in q2 emerged at 4%, and the first quarter figure was revised up to 3.9% so giving an average for the half year also around 4%. Real GDP rose by 5.5% in the final two quarters of 2015 and that  base effect implies that annual growth may slow substantially in the second half of 2016, with the average for the year likely to be well below the 4.9% assumed by the Government.

Similarly, the nominal level of GDP in 2016 is also likely to be lower than anticipated, largely because export prices are falling . Consequently, nominal GDP only grew by an annual 0.5% in q2 , which followed a 1.5% rise in q1. On that basis nominal GDP may be largely unchanged in 2016 or indeed may even decline, with implications for the debt and deficit ratios.

Overall, a mixed bag. The real economy avoided recession , which was a risk given falls in retail sales and industrial production in q2, but deflation has re-emerged, via export prices.

Draghi as Sisyphus

Inflation in the euro zone has been below 2% for three and a half years now  and under 1% for almost two years, with the latest figure for August at 0.2%. Many people would think this a good thing in a period of very modest wage growth, as it supports real incomes, but it is a failure for the ECB , as its goal is price stability, which it defines as inflation  close to but below 2%. Very low inflation risks deflation in the Bank’s view and although the inflation trend is heavily influenced by weak commodity prices core measures are also weak: excluding food and energy,  inflation was 0.8% in August, indicating very little price pressures.

The ECB was slower than other Central Banks in cutting interest rates but the main refinancing rate is now at zero alongside a negative deposit rate of -0.4%, all designed to encourage banks to lend into the real economy. That approach reflects the importance of banks in the EA as the main providers of credit and the ECB has recently gone further down that particular road, with its  latest TLTRO scheme, allowing participating banks  to access  four-year funds at an interest rate which could fall to the -0.4% deposit rate depending  on lending growth. In other words the ECB could end up effectively paying some banks to lend money.

The ECB also decided to by-pass the banking route by embracing QE, with the purchase of government and corporate bonds designed to push down longer term rates. To date , some €1,165bn assets have been purchased, including over €940bn in government bonds, with the programme currently projected to run until March 2017.

Has any of this worked? Growth in the EA is averaging  around 0.4% per quarter, hardly stellar, but sufficient to put downward pressure on the unemployment rate, which has fallen to 10.1% from a peak over 12%. Bank credit has also started to rise, from a very weak base, with  lending to the private sector growing at an annual 1.7% rate in July and the ECB has been keen to point out that the cost of funds for EA banks in general has fallen steadily as a result of monetary policy decisions.

Yet credit growth is still contracting in many countries, including Ireland, despite ample liquidity. Indeed, data from the Central Bank here shows that in July deposits in Irish banks exceeded loans, a far cry from the 190% loan to deposit ratio seen pre-crisis. This highlights that in some countries deleveraging is still a dominant force and there are other factors at work, including capital issues for some banks, the scale of non-performing loans and the appetite from lending institutions to take on risk.

Negative rates are also an issue, in that they are putting downward pressure on net interest margins; banks are reluctant to cut deposit rates below zero but many of their loans are linked to market rates, which are falling. Initially the ECB was loathe to accept this point, arguing that higher loan growth would be an offset, but in the  minutes of the last Council meeting there was concern expressed  about the profitability of EA banks and their low stock market valuations, increasing the cost of capital for banks and hence reducing lending.

These concerns may dissuade the ECB from further cuts in the deposit rate and they also face problems with QE, in that the universe of government bonds available for purchase is shrinking, and in some cases the 33% issuer limit is likely to become a binding constraint- that will be the case in Ireland, for example. The ECB could change that limit or extend its purchase of corporate debt, although the latter already moves the Bank into allocating credit directly, which may make some Council members uncomfortable as well as stretching its mandate..

The bigger question is whether all this is having any impact on inflation and the answer would appear to be in the negative. Rather than increasing the bet, the ECB might reconsider its whole approach, with a growing  number of policymakers across the globe examining the case for more expansionary fiscal policy. On that point it was notable that the Fiscal theory of the Price Level got an airing at the recent Jackson Hole gathering, with a paper delivered by Princeton’s Christopher Sims, who is closely associate with that approach. The theory is that the price level is influenced by fiscal policy as  well as monetary policy, and argues that low interest rates  can be deflationary , in that they reduce debt service for governments and unless offset by higher spending or tax reductions will result in contractionary fiscal policy.

Generating inflation in the current environment requires much more expansionary fiscal policy, it is argued, and we may indeed end up with a changed fiscal approach in some countries, including the UK, albeit for different reasons. That appears very unlikely in the EA however, and President Draghi may end up like the legendary Greek king, doomed to push a boulder up the hill only to see it always roll back.