Investors main buyers of new houses

Data on most aspects of the Irish housing market are now available for the first quarter of 2017 and  generally supports the conventional view that supply is  below that required to cater for the growing demand, albeit  also implying that policies designed to influence the market may not be working as intended.

Take rents. There is now a 4% annual cap on rents in designated ‘pressure zones’ and rental inflation, as captured monthly in the Consumer Price Index, appears to be slowing, with the annual increase easing to 7.9%, the slowest pace in three and a half years. The CSO data, and that from the Residential Tenancies Board (RTB) , captures actual rents paid and both are closely correlated over time with the rent index published by Daft,ie, which is based on asking rents . The trend is similar on all three indices but the Daft index was weaker that the RTB during the recession, indicating that  landlords were having to offer lower rents to attract new tenants. The reverse is now the case, with Daft’s index rising at a double digit annual pace and therefore outstripping the RTB, implying that new tenants are having to pay a premium relative to those with existing leases.

House prices are still rising at a brisk annual pace, again supporting the excess demand thesis; the March figure for Dublin was 8.2% and for the rest of the country 11.8% . The CSO index is revised, however, and that pace is not as rapid as previously published. Indeed, prices ex Dublin rose by just 0.9% in the first quarter, implying a slowdown , although the March figure may be revised, this time upward.

The Government is seeking to support  the First Time Buyer (FTB) with the Help to Buy Scheme ( a tax rebate for FTBs purchasing a new home) and the Central Bank has eased its mortgage controls to allow greater leverage. Yet the  CSO Filings data on transactions for the first quarter show that  there was just 1445 new homes sold (defined as previously unoccupied) and that FTBs accounted for only 253 purchases or 17% of the total. In Dublin, FTBs secured just 80 of the 779 new homes sold, or 10%. Moreover, it is not Movers dominating this market; Investors ( non-household buyers) bought  two-thirds of new homes sold in Dublin, and 48% of the total nationally.

The mortgage data also indicates that  FTB’s and indeed Movers are finding it difficult to secure properties. Mortgage approvals for house purchase have been averaging over 8,000 in recent quarters yet the drawdown in q1 was only  5,853, an unusually low figure relative to approvals, again suggesting that buyers with mortgage approval may be being outbid by investors.  The ‘risk-free’ rate of return in Ireland,. as proxied by the 10-year Government bond yield, is less than 1% so FTBs are having to compete for a scarce commodity with those attracted by a rental yield in excess of  5.5%.   Total  mortgage drawdowns  appears to account for only 45% of first quarter transactions, so this is not a credit-driven market.

Irish Fiscal deficit may rise this year

Ireland’s GDP is unusually volatile, as is government revenue, which makes  for frequent forecasting errors in both. For the last three years the errors have proven positive, in that tax receipts have emerged ahead of Budget projections, resulting in lower than anticipated fiscal deficits as well as allowing the government of the day to augment spending in the latter months of the year.  Unfortunately that serendipitous trend appears to  be over, judging by the revenue figures available to end-April, and a tax undershoot for the year is looking more likely.

The 2017 Budget projected tax receipts of €50.6bn, and the Department of Finance still expects that to materialise, which requires a 5.8% increase on the 2016 outturn. Yet the annual increase over the first four months of the year is just 0.5%, with most headings actually down on last year, implying a serious risk of undershooting. Corporation tax has been the most difficult to forecast (exceeding the target by over €700m last year and by an extraordinary €2.3bn or 50% in 2015 ) and is currently some 23% down on 2016, with Stamp duty, Excise and Capital taxes also running well below the previous year in percentage terms.

The main exception is VAT, which is extremely strong, rising at an annual 14.5% or double the pace forecast in the Budget. This is curious given that retail sales grew by an annual  0.9% in the first quarter, but may reflect strong car imports and a rise in house completions. Income tax is also a puzzle, showing annual growth of just 1.2%, which appears at odds with other data implying a continuation of strong employment growth. The Budget forecast that Income tax receipts would end the year 5.6% above the 2016 outturn so , again, there is a lot of catching up to do if that target is to be hit.

The tax position against profile ( i.e. that expected on a monthly basis) is also  likely to be of concern to the Government, with a shortfall of €345m or 2.4%. VAT is running €257mn ahead but that has been more than offset by large shortfalls elsewhere, including €225mn in Corporation tax, €200mn in Income tax and  €120mn in Excise duty. The late Easter may be having an impact and Corporation tax is extremely lumpy on a monthy basis but the risk now is that the fiscal deficit will emerge above the current target of 0.4% of GDP. Moreover the 2016 outturn has now been revised down to just 0.5% so the 2017 figure may well be above this. A 2.4% shortfall in tax receipts at the end of the year, for example, equates to €1.2bn and all else equal would raise the deficit to 0.8% of GDP.

Does it matter?  The Exchequer’s cash position will  likely  be boosted by proceeds from the  sale of shares in AIB , so the debt ratio may well continue to fall. That transaction will not benefit the General Government balance, however, although Ireland has no longer to meet a  headline target for the latter under EU fiscal rules. In fact there are two, related constraints, which will come into play for 2018. One is that the deficit adjusted for the economic cycle  (the structural balance) has to fall by over 0.5% of GDP, and to aid in that process  a limit is put on government spending ( the famous Fiscal Space). The latter is already closing given an array of  spending commitments carried over into 2018 but the Government would not be able to use all the available space anyway if the  tax base emerged below forecast in 2017.