The strange improvement in Irish mortgage affordability

The Irish housing market has developed a number of unusual features of  late , one being the trend in mortgage affordability. That concept  captures the monthly payment on a new mortgage relative to the borrowers income and will generally deteriorate as the housing cycle unfolds; rising house prices  will push up the average size of a new mortgage and more often than not interest rates will also increase, offsetting the positive impact of rising incomes. For example. the average new mortgage for house purchase in 2008 was €270,000 against €172,000 in 2004 , with the  mortgage rate rising to 5.1% from 3.4%. As a result the monthly payment for a new borrower almost doubled, from €850 to €1600, dwarfing the rise in income over the period.

One big difference in the current cycle is that mortgage rates have not risen, and indeed  have actually fallen a little since the cycle turned in 2013; the new mortgage rate was  3.0% last year versus 3.25% five years  earlier and if anything is likely to be marginally lower still in 2019. Against that, rising house prices have pushed up the average new mortgage and affordability deteriorated from 2012 to 2017, albeit at a modest pace and still leaving the monthly payment relative to income below the long run average.

Another difference in this cycle is the controls on  mortgage leverage brought in by the Central Bank in 2015, including a  3.5 LTI limit. 20% of lending to FTB’s is allowed to exceed the limit but one might expect that the average new mortgage would now be tied more closely to average incomes in the economy, but what is curious is that the the growth in the average new mortgage for house purchase is now lagging the growth in incomes, so on the face of it affordability is improving again.

In 2018 household disposable income rose by 6.2%, but the average new mortgage for house purchase rose by only 4%, to €226,000. Employment growth and wage inflation have both acclerated in 2019 and according to the CSO household incomes rose by over 8% in the first quarter, so it seems likely that the full year will see another  very strong rise in incomes. Yet data on mortgage drawdowns from the BPFI show that the average new mortgage  for house purchase over the first half of the year was €230,6000 and just 2.5% up on the same period in 2018, so again substantially lagging income growth.Of course mortgages in Dublin and the surrounding counties will be higher, and affordability correspondingly worse, but it remains a puzzle as to why the national picture shows a booming economy and yet very limited growth in the average new  mortgage. In fact it is hard to explain the recent slowdown in house price inflation in fundamental terms, given the affordability improvement and the relatively slow increase in housing supply, which is still far short of what is generally deemed to be required. Price  expectations from both buyers and builders may be the most significant factor.



Strong growth in first quarter following large upward revision to 2018 GDP

The Irish economy, as measued by real GDP, is now deemed to have grown by 8.2% in 2018, as against the initial 6.7% estimate. Growth in 2017 was also revised up, by around 1% to 8.1%, according to the latest National Accounts. The most interesting change came in the personal consumption component, which had seemed puzzlingly soft given the buoyancy of household income. It now transpires that consumption last year was  €107bn, or €3bn higher than the initial estimate, and real  consumption growth over the past three  years is now put at 12% instead of 8.8%, Government consumption growth, in contrast, was revised down and is now 2% lower than initially recorded over the past three years, albeit still at a robust 11.9%.

GDP in 2018 is now put at €324bn, some €6bn higher than the initial estimate, which means that the General Government debt ratio is now about one percentage point lower at 63.6%. The CSO also produced the first estimate of modified national incomein 2018, which some prefer to use as the debt denominator, and this came in at €197bn giving a ratio of  104.4%, down from 109.5% in 2017.

Turning to 2019, recent higher frequency data , notably employment and industrial production,  had implied strong GDP growth in the first quarter  and that duly emerged, at 2.4%. Exports and personal consumption both grew by around 1%, with government consumption expanding by 0.5%. A strong stock build was also evident but these positives were offset by a 25% plunge in  capital formation,  reflecting similar falls in both spending on machinery and equipment and Intangibles. The latter is largely due to multinational activity and is also captured in the national accounts as a service import, so is GDP neutral (imports fell by 2.8%) but of more significance was the underlying decline in machinery and equipment spending when adjusted for aircraft leasing, meaning that modifed capital formation ( designed to better capture domestic investment) actually fell by 2.4%.

The first quarter advance  boosted the annual growth rate  of GDP to  6.3% and the  consensus for the full year is under 4% (our own estimate is 5%). However, analysts may in general hold fire on any material changes to forecasts given the evident weakness  over recent months in the UK and EA economies, alongside softer growth in the US. Brexit remains the biggest specific risk, of course, and the fall in domestic business investment may well reflect the uncertainty about  the shape  and timing of an eventual resolution.