Census confirms Irish Housing stock per head is falling

The Irish housing market seems to lurch from feast to famine, often prompting Government intervention, in turn exacerbating rather than ameliorating the volatility. For some time now it has been clear that the market has moved from one of excess supply to one of excess demand, and the 2016 Census data confirms that annual supply  fell to such a low level over the past five years that it was barely offsetting the obsolesence rate , with the result that the housing stock has only marginally increased, against a background of  a rising population and a recovery in household income.

The stock stood at 1.995 million according to the 2011 census and some of this will become obsolete over time. A commonly used figure in Ireland is 0.5% annually, implying the loss of around 10,000 housing units a year. Yet completions ( itself a less than perfect proxy for actual new supply)  fell well below this in 2012 and 2013 and although  they have picked up the figure for 2016 was  less than 15,000.  Indeed, total completions between the 2011 census and  April 2016  amounted to some 51,000, implying little or no change  in the net stock. In the event the Census revealed a figure of just over 2 million,  a rise of less than 9,000 over the five year period.

The population was not static, of course, rising by 174,000 or 3.8% over the five years , with the result that the housing stock per head of population actually fell, a reversal of the normal trend.The number of households also rose substantially, by over 48,000, which alongside the absence of any meaningful increase in housing supply resulted in a 47,000 fall in the number of vacant properties ( excluding holiday homes). The latter figure stands at 143,000 nationally, or 9.1% of the housing stock, although this masks huge variations across the country, with the ratio being much lower in and around Dublin, including 4.7% in Fingal and only 3.6% in South Dublin.

One ‘solution’  to the supply issue is to simply wait and rely on the market to function, on the basis that rising prices will bring forward new builds. The evidence does point to this happening, although it may well take a few years for supply to match annual demand, let alone eat in to the cumulative excess that has arisen over recent years. There is also  a case for the State to fund housing on a much larger scale, on the basis that large numbers will never afford their own home, although euro fiscal rules are a constraint. Unfortunately, the policy response has been to either address the symptoms of excess demand ( by seeking to control rents for example) or to boost demand further by giving subsidies to certain types of buyers. The former does seem to be having an effect in that data from the CSO shows rents rising by just 1.5% in the three months to March. Moreover,Dublin apartment prices  actually fell in the three months to February, which if maintained is unlikley to encourage supply.



Irish Commercial property market may need Brexit inflow

Commercial property markets are heavily cyclical, which is usually the case when there is a long lag on the supply side- rising rents and prices prompt new construction but by the time this hits the market demand may have cooled. Ireland provides a good  recent example of what that means for the sector; commercial property generated a 75% investment  return in the three years to end-2007, according to the MSCI index, but returns then fell by 34% in 2008 alone and by over 60% in the four years to end-2011.

The  global financial crisis and plunge in Irish economic activity precipitated a collapse in property demand, with the result that the  vacancy rate soared- by 2010 it had reached 24%  in the Dublin office market. Bank lending , the  main source of commercial property funding at the time, also collapsed, contributing to the effective absence of any commercial construction activity for four years, with 2014 seeing the first tentative signs of a pick up in supply.

By that time demand has recovered, particularly for Office space, and investors, largely foreign and non-bank, had been buying property, seeing it as cheap following a peak to trough fall in capital value of 68%. Investment returns on Irish commercial property turned positive again in 2013 (12.7%) followed by some spectacular gains in the next two years (40% and 25%). Commercial rents also started to pick up appreciably from 2013, according to the Lisney index, led by the Dublin Office market, which saw rents almost double in the three years to end-2015.

The Dublin Office market also provides a clear picture of the impact of stronger demand and little or no supply, with  the level of vacant  office space falling from around 9 million sq.ft  in 2010 to around 3.2 million at present, according to JLL, with the vacancy rate falling below 10% for the first time in 2015.

Yet there are signs that the boom is over, at least in investment terms. 2016  returns eased to just over 12% and the Lisney index shows a sharp slowdown in Office rents in the second half of 2016, albeit less so in terms of retail , with the annual rise in the former slowing to  6% in the final quarter, from 28% in 2015. The take-up of Office space in the capital was strong, at an estimated 2.7 million sq.ft in 2016, but  supply is once again responding to the price signals. Estimates vary , but it is clear that there is now a  very substantial increase in construction activity in the Office sector in and around the capital. Savills, for example,  put the amount of potential supply at some 10 million sq.ft. over the next three years.  Some of that is pre-let, of course, and not all that is planned sees the light of day, but with a longer term average demand  of less than 2 million sq.ft the potential for a supply overhang is certainly there. Demand could well be stronger, of course, and indeed may well be if Brexit results in an appreciable increase in demand for Office space in the capital. In that sense it may well be that the Irish commercial propety market now requires that boost to maintain strong returns.

Euro rate rise expectations overdone

Just over a year ago the ECB cut its main refinancing rate to zero and its deposit rate to -0.4%, having first shifted the latter into negative territory in June 2014. As a result money market rates have also been negative for some time while longer dated  rates only turn positive at a maturity above 3 years. Yet March saw a change in the market view with regard to the ECB’s monetary policy and the possible timing of an interest rate rise, reflecting  both incoming data and  what were perceived as less dovish comments from Frankfurt.

The  euro composite PMI has  certainly continued to strengthen, reaching a six-year high in March,  and points to 0.6% rise in GDP in the first quarter given the past relationship between the two series, with the prospect of even stronger growth in q2. That, in turn, would point to a significant  upward revison to the current consensus growth  forecast for 2017 of 1.7%. Headline inflation also surprised to the upside, reaching 2% in February,  slighly above the ECB’s target.

The market also reacted to President Draghi’s comments that the ‘risks  of deflation have largely disappeared‘. The Governing Council still expects rates to remain ‘at present or lower levels for an extended period’  but Draghi also said that there was a ‘cursory’ discussion  at the March policy meeting about removing the prospect of a further rate cut while also stating that no Council member favoured any additional long term lending to the banking system . The market responded by giving a much higher probability  of a 0.1% rise in the deposit rate  this year and certainly by mid-2018.

The  ECB later let it be known that it felt the reaction excessive relative to the message it was seeking to deliver and rate rise expectations have been pared back somewhat, with a rise of 0.05% priced in by March 2018. The data has also been less suppotive and indeed worrisome for the ECB. The flash estimate for March inflation was much lower than expected, at 1.5%, and if one excludes food and energy the rate fell back to cycle low of 0.7%. Moreover, the modest uptick in credit growth that had been apparent appears to have stalled, with the annual rise in loans to the private sector easing in February, to 2.3%. These figures  impacted the euro, which is now trading back at $1.065 having spiked to over $1.08. The ECB also puts some store on the 5 yr 5 yr inflation swap as a measure of inflation expectations ( albeit less so now than in the past) and that has fallen back below 1.6%.

Some claim the March inflation data owes a lot to the timing of Easter ( in March last year ) and that there will be a seasonal rebound in April, including the core measures.  Unemployment in the euro area is also falling steadily, which might be expected to push up wage inflation ( although the latter has continually disappointed  forecasters) and that view is reflected in ECB projections, which envisage core inflation picking up to average 1.8% in 2019.

On market rates themselves, the level of excess liquidity ensures that short rates do not stray too far from the deposit rate , which is -0.4%. That excess, which tops €1,500bn, is the amount the ECB is pumping into the banking system, via QE and the TLTRO, over and above the liquidity  banks need to meet normal requirements. The Governing Council hopes this will be used to boost bank lending but so far the impact is limited, and one wonders what the ECB would do if credit growth slows in a material way. That issue may not arise but unless core inflation picks up appreciably any rate rise speculation is premature.