1 in 5 new mortgage loans now not for house purchase

House price inflation in Dublin is slowing according to the recent CSO data; values rose by just 0.9% in the three months to May and actually fell in South Dublin, by 1.0%. An increase in supply is widely expected to dampen price pressures but new house sales year to date  in the Capital are marginally down on the same period last year, as are total transactions, so demand factors may be playing a part. London and Dublin prices have been highly correlated in recent years and the price falls seen in the former may be having an impact on investor interest in the Dublin market. For buyers with Irish mortgages the latest data  from the BPFI, on approvals and drawdowns, indicates that the recent tightening of mortgage controls is impacting and that affordability is becoming more important as a constraining factor.

Mortgage approvals for house purchase fell by an annual 4.6% in June and  rose marginally in the second quarter as a whole ( by 0.8%) . FTB approvals fell in q2, however, by 0.8%, and have been weak since the the first few months of the year; 10,882 mortgages were approved for first time buyers in the first half of 2018, against over 11,000 in the same period last year. A quarter of mortgage loans to FTB’s exceeded the 3.5 LTI limit last year and the permitted excess was reduced to 20% in 2018, so one might expect that to dampen lending for house purchase, particularly as affordability ( the annual payment on a new mortgage relative to income) has deteriorated given the rise in house prices and associated increase in the value of an average new mortgage. Indeed, it is noteworthy that the average new mortgage for house purchase in q2 of €225,500 was broadly unchanged on q1 and 5% higher than a year earlier, as against a 9% increase in 2017.

The number of mortgages for house purchase  actually drawn down in q2 amounted to 7,381 or 9.2% above the same period in 2017, a slower pace of  growth than the 9.6% increase in q1 and the 14.7% recorded in q4 last year. The value figure was €1.7bn, up an annual 14.7%, against an 18.5% annual rise in q1. The growth in total mortgage lending ( i.e including top-ups and re-mortgaging/ switching) was unchanged at 22%, however, amounting to €2bn in q2 , driven by  a doubling of re-mortgaging/ switching over the year. Indeed, the latter amounts to 14% of total loans in q2 and one in five mortgage loans are now not for house purchase, the highest share since 2011.

In sum, the growth in mortgage lending for house purchase is slowing, and the average new mortgage is also growing at a more modest pace , with FTBs squeezed by affordability and tighter mortgage controls. The steady stream of lower mortgage rate announcements indicates banks are responding, and that competition is more intense in re-mortgaging and switching.

Irish economy contracts in Q1 but annual growth increases to 9.1%

The Irish economy contacted in the first quarter of 2018 according to preliminary data from the CSO. Real GDP declined by 0.6% , largely due to a sharp  5.8% fall in exports, including both goods and services. Trade data  indicated that exports leaving Ireland had risen substantially so the weaker figure was due to a fall in contract manufacturing (offshore exports credited to Irish based firms).  Final domestic demand was broadly flat, with modest increases in investment (0.6%) and government spending (0.4%) offsetting a 0.3% contraction in consumer spending. Surprisingly, perhaps, construction spending actually fell, by 0.4%, but this was offset by a 9% rise in spending on machinery and equipment. The big negative contribution from exports was in contrast to a very large stock build which added over 3 percentage points to GDP growth.

Looking at the annual change, real GDP growth in q1 was 9.1%, largely driven by the external sector ( export growth of 6.1% against a 1.1% fall in imports) and the strong stock build. The weakness in imports partly reflected a fall in investment spending of 3.8%, with growth in construction and machinery and equipment offset by a plunge in R&D expenditure, which largely relates to multinationals and deemed a service import.

The CSO release incorporated revisons to past data, including  reductions in the level of GDP; the 2017 figure is now  some €2bn lower at €294bn. Real growth last year is also now lower, at 7.2% versus an initial 7.8%. Last year’s quarterly figures have also changed, although the previously published pattern- weak growth in the first half of the year followed by a surge in the second half- is still intact. That  still implies that the anual growth rate will slow as the rest of the year unfolds, which of course is required if the consensus growth figure of around 5.5% is achieved.

The revisions also impacted Modified National Income, the concept developed by the CSO to adjust GDP for the effect of multinationals on profits, R&D expenditure and aircraft leasing. The 2016 figure is now put at €176bn, from an initial €189bn, with the 2017 estimate at €181bn, or less than 62% of published GDP. The CSO believes that this modified figure is a better indicator of Irish income although in 2017 it grew by just 3% and that is in nominal terms, which sits uneasily with other indicators such as  the growth in employment , tax receipts and household incomes .

Full Employment in Ireland-are we there yet?

The Irish unemployment rate fell to a fresh cycle low of 5.1% in June, from 5.6% in March and 6.6% a year earlier. The monthly estimate is subject to revision but on the face of it implies that  employment growth has accelerated from an already strong pace and that Ireland is approaching full employment. The  speed of the decline has  certainly surprised most analysts; the Department of Finance   anticipated unemployment bottoming out next year at 5.3% from an average 5.8% in 2018. In fact, Government budgetary projections are predicated on the view that the economy is already operating above is potential, although one rarely hears that articulated by Ministers.

Full employment does not mean a zero unemployment rate; there will always be churn in the labour market (frictional unemployment) and some workers may not have the skills, education or aptitude to take up the available jobs (structural unemployment). The scale of the latter, in particualr, is hard to gauge so estimates of what unemployment rate is consistent with full employment often vary and can change over time; the unemployment rate has surprised to the downside of late in both the US and the UK, for example. Ireland has also experienced  lower unemployment in the past, with a rate under 4% in the early noughties and a sub 5% reading  in the years before the 2008 crash.

That perhaps argues that the unemployment rate could certainly fall further, and particularly as the participation rate ( that proportion of the population over 15 in the labour force) is still much lower than it was a decade ago, averaging 62% over the past year as against well over 66% in 2007. A return to the latter level would equate to an additional 170,000 joining the labour force, equivalent to three years  employment growth given the current pace of job gains.

That kind of a move in the participation rate seems highly unlikely, however, given the modest level of net immigration currently seen relative to the pre-crash period. Nonetheless, the pool of available labour is bigger than captured in the labour force data, as the figures also record those who are seeking work , but not immediately, as well as those available for work but not yet seeking it. The CSO defines these two groups as the Potential Additional Labour Force (PALF) and this figure is sizeable, amounting to 120,000 in the first quarter. The unemployment rate adjusted for the PALF is therefore much higher, at 10%, although it is problematical to compare this with the historical experience as there was a step jump following the switch to a new survey methodology in the latter part of 2017.

Employment is now marginally above the pre-crash peak  and if labour is getting scarcer one might expect to see an acceleration in wage growth as firms bid for workers. That has not been evident, however, at least as yet. Average weekly earnings in the private sector rose by an annual  1.8% in the first quarter of 2018 following a 1.7% rise in 2017, but that followed  a 2.3% increase in 2016. Low consumer price inflation may be a factor but wage inflation is surprisingly soft in some areas where there is perceived to be a scarcity premium, notably construction, with average earnings growth of 1.1 % in the first quarter and only  0.3% last year.

It is also worth noting that although total employment is again  around the pre-crash peak  the composition  is more evenly distributed across sectors. Then, 10.5% of jobs were in construction alone but that proportion in 2018 is only 6%, with the total employed some 100,000 below the peak. Employment in industry too is 20,000 below the pre-crash level  and also lower in retail (36,000) and financial services (4,000) Indeed, although some private sector areas have seen job gains, notably Hotels and Restaurants (30,000 ) and Professional and Scientific (12,000), most of the increase has occurred in areas dominatd by the public sector, including Education (30,000) and Health (40,000).

Ultimately, the clearest sign that the economy has reached full employment is when the unemployment rate stops falling and that is only observed ex-post. However, the current distribution of employment, the absence of aggregate pay pressure and the relatively low participation rate all point to the likelihood of unemployment falling further in the absence of a demand shock. The latter is always a risk, of course, be it from Brexit or from a broader global slowdown.