Housing Market Forecasts for 2017

We do not as yet have full-year data for the Irish housing market in 2016 but the main developments are clear enough. Transactions remain low, with  stamp duty filings some 5% down over the first ten months, implying  an annual outturn below the previous year’s 50,000. The later indicates a turnover rate of just 2.5%, against perhaps 3.5%-4%  in a more normal market.  New mortgage lending did  recover a little in 2016, after a marked slowdown in response to the Central Bank’s controls, but the pick up was modest; total lending  was an estimated €5.4bn with the number of mortgages for house purchase at some 24,500, or less than 1,000 ahead of 2015. Housing supply also picked up, but at an estimated 14,500 is still well below demand projections , while residential property prices showed strong momentum from mid-year and probably rose by 9-10% nationally.  Dublin lagged the rest of the country ,which saw double digit price gains.

Turning to 2017, the market is again likely to be dominated by the shortage of supply relative to demand. Forecasts for the latter had centred around 25,000 a year but are now nearer 30,000, following the release of the 2016 census , showing the return of net immigration. Our supply model is based on lagged registrations ( with some adjustments) and we have pencilled in 17,000 completions for this year, a strong percentage increase on the 2016 figure but clearly still well shy of demand estimates. Moreover, the population is currently rising faster than the housing stock and that will remain the case  for 2017 on our forecasts, and that implied decline in the housing stock per capita also adds to the upward pressure on house prices, which are also being supported by rising household incomes and low mortgage rates. As a result we forecast a 12% rise in prices nationally ( to end-December)  absent any major demand shocks.

House prices are still below equilibrium on our fundamental model and do not look excessive relative to rents, as the latter have been rising at an annual 8-10% for some time now. This would seem to reflect the supply/ demand imbalance noted above but the Government has decided to intervene in the market by directly limiting rent increases to an annual 4% in areas where rental pressures are deemed acute. Standard economic models would suggest that such controls may be ineffective but if significant may dampen price pressures by reducing the return on rental property and hence its attractiveness as an investment.

Mortgage affordability remains extremely supportive on our model. although 2017 may see some modest deterioration, via a combination of higher average mortgages and a mild pick up in mortgage rates, given the recent rise in longer term interest rates. Nevertheless, affordability will still be better than the long run average and we forecast a significant rise in new lending, driven by the increase in house completions.The Central Bank’s surprise decision to ease  mortgage controls in 2017  ( they did not appear to be binding) will also allow increased leverage, and First Time Buyers can also avail of the Help to Buy scheme to bolster the required deposit, so bringing forward housing demand.

In sum, the number of new mortgages for house purchase is projected at 30,000, and a value of €6.4bn, with total new mortgage lending ( i.e. including top ups and re-mortgaging) rising to €7.2bn. That would be the highest figure since 2009, and another step towards what one might call a normally functioning housing market.

Forecast Errors in Budget 16 Highlight Fiscal Risks for 2017

This blog has argued that Ireland should not have moved its Budget date from December to early October, as it increases the risks of  forecasting errors, which history shows can be large. That was again evident in 2016, but what is also revealing, and perhaps ominous, is that the final fiscal outturn was also very different to that expected less than three months earlier, making the 2017 targets more challenging than initially thought.

The 2016 Budget envisaged the State running a current budget surplus of €0.5bn, offset  by a capital deficit of €2.1bn , so leaving a borrowing requirement of €1.6bn. Current spending was projected to rise modestly, by 1.6%, and tax receipts were forecast to increase by 3.6%: Corporation tax had spectacularly exceeded the target in the previous year , by 50%, and was now expected to decline modestly. but offset by stronger tax headings elsewhere, notably from VAT, which was projected to grow by 7.7%.

As the year unfolded  it became clear that tax receipts were running well above profile and by end-June were €740m or 3.4% above expectations, with corporation tax again well ahead of target, accompanied by excise duties. VAT was running behind profile but over the summer the Department of Finance projected a new tax outturn for the year, with receipts now expected to be €900m above the original figure,  partly offset by higher current spending. These new projections were again reiterated in October, with the current budget surplus now expected to emerge modestly higher at €0.7bn , with the overall deficit slightly lower than originally projected, at €1.4bn.

That earlier tax buoyancy fell away in the latter part of 2016, however, and tax receipts came in over €600m ahead of the original target but well shy of the €900m overshoot pencilled in. Indeed,  by end- December, most tax headings fell short of the forecasts made only a few months earler, including VAT (-210m) and Corporation tax (-€150m). Furthermore, current spending actually finished the year below the original target and a full €550m below the higher figure announced over the summer, so the government could not spend all it hoped.

Non-tax revenue also emerged well away for the revised target, this time to the upside, and the net effect was a current budget surplus of €1.3bn, some €0.8bn above the original Budget target and €0.6bn ahead of the forecast made a few months ago. The capital deficit was slighly higher than forecast, leaving an overall deficit of €1bn.

So the forecast errors in 2016, as in 2015, came in on the ‘right side’ , resulting in a smaller than expected deficit, but  implying that the Government could have spent more than it had initially thought, while  still hitting the fiscal targets. The forecast errors can also be on the ‘wrong side’ of course,  and the 2016 outturn   now means that tax receipts have to grow by 5.8% to reach the 2017 target, instead of 5.2%, with the required rise in VAT now 7.7% ( was 5.9%) and 5.0% for Corporation tax ( was 2.9%). The 2017 fiscal arithmetic therefore looks more challenging than it did when the Minister presented the Budget just a few months ago.