QE is fuelling Irish House Prices

Irish residential property prices have risen 60% since the lows of early 2013 but  this cycle is investor rather than credit driven. Gross mortgage lending for house purchase has picked but the average new loan has risen by just 28% over the past four years, implying a fall the average loan to value ratio, while data on transactions (recently revised up by the CSO) indicates that mortgage loans  still appear to be accounting for less than half of turnover in the market. New lending is also now constrained by the Central Bank’s mortgage controls.Moreover, net mortgage lending ( i.e new lending minus repayments) has been falling now for over seven years, although there are recent signs that it may finally be bottoming out.

Nothing here then to indicate that credit is playing a strong role in driving prices and it is curious that little attention has been paid to the impact of the ECB’s monetary policy  on the housing market, and, more specifically, its  non-standard measures including the asset purchase programme. The latter, QE, is designed to boost bond prices and hence lower yields so that ‘ investors may choose to take the funds they receive in exchange for assets sold to the ECB and invest them in other assets. By increasing demand for assets more broadly, this mechanism … pushes prices up and yields down, even for assets that are not directly targeted by the APP’.

QE is generally perceived as having a significant impact on equity markets and it would be odd if it did not therefore impact other  asset markets, including property, and we  can readily  see this at play in the Irish data on transactions. In 2011, investors (here defined as Buy to Let individuals  plus non-household buyers) accounted for 16% of residential transactions rising to 24% by 2012 and averaging a third of the market or more since 2014.

The yield on ‘risk-free’ assets , such as Government bonds, plays a big role in investment decisions and so the plunge in Irish Bond yields has been  a very significant backdrop for the Irish residential and indeed commercial property market : 10-year Irish yields peaked at double digit rates in mid 2011 but really started to fall sharply following Draghi’s ‘whatever it takes’ speech in 2012, and fell below 1% , where they still reside, following the commencement of QE in early 2015.

In contrast, the gross yield on residential property ( average rent/ house price) has not declined significantly in our rental model, and is still at 4.8%, having peaked at 5.4% in 2013. The rental yield fell to  a low of 2.75% during the last cycle, and is still well above the post EMU average (4.25%) and of course extraordinarily high relative to the ‘risk free’ rate available on Irish bonds, let alone Bunds.

The scale of investor interest in Irish property is therefore not surprising given the yield on offer and  is unlikely to disappear any time soon. Higher bond yields would make a difference, no doubt, and in that context the future of QE plays a part; the ECB will soon decide whether to scale back its asset purchases or indeed cease any additional buying. Yet it is likely to reinvest the proceeds of maturing bonds for a while at least, therefore maintaining the stock of QE, so absent an inflation shock bond yields may well stay low by historical standards. If so investor interest in Irish property will continue to be a big driver of the market.

Irish Mortgage Lending crimped by supply and competition from non-debt buyers.

The latest data from the BPFI on  Irish new mortgage lending shows that 6,781 loans  for house purchase were drawn down in the second quarter, with the annual increase at 17.6%, providing further evidence that the year as a whole is likely to see a substantial increase on the 2016 total of some 25,000. Yet the annual pace is slowing, following a 26% increase in q1, and on our seasonally adjusted model  lending actually fell on the quarter. What is more striking though is the unusually large divergence between mortgage approvals and actual drawdowns ; approvals for house purchase in the second quarter amounted to 10,250. Looking at the picture over the first six months, approvals stood at 18,576 against a drawdown total of 12,634 , which is a wide gap even allowing for the usual lags between approval and purchase.

Buyers with approval may delay purchase if they are nervous about the market but survey’s suggest that price expectations have risen of late so that would normally bring forward the timing of transactions. The alternative explanation is that buyers with approval are being squeezed by the limited supply of property for sale and the prevalence of would-be purchasers not reliant on debt finance. The ECB’s QE is compressing yields on financial assets, making residential property a more attractive alternative. Judging by the CSO figures on transactions (executions) in the first quarter, mortgage loans are still  only accounting for around 50% of the total ( the q2  transaction data have  yet to be published).

The BPFI data also reveals that the average mortgage for house purchase is now just under €214,000. 8.1% above the previous year and at levels last seen in early 2010. In cash terms mortgage lending for house purchase  in the quarter amounted to €1.45bn and overall lending rose to €1.65bn when top-ups and re-mortgaging is included, bringing the total for the half-year to some €3bn. Our forecast for the full year is currently €7.2bn but we are likely to revise that down, given the  slowing momentum in the numbers drawdown.

Nonetheless, new mortgage lending is growing and it now appears is finally close to offsetting repayments, with the latest Central Bank data on net lending showing  that the  monthly decline in that series is now extremely small. Irish household deleveraging started  in mid-2008 and one doubts if few or any thought it would last this long.

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.

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.

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.

Update on the Irish housing market

The Irish housing market has been characterised for some time now by excess demand, rising prices and  a record level in rents, although against a backdrop of contracting mortgage debt . Supply is increasing but  at a pace which is lagging the annual growth in demand, so it is difficult to see any change in the existing pattern, at least in the shorter term.

Indeed, house price inflation is now re-accelerating after a slowdown earlier in the year, according to the CSO’s new index. This is now based on all housing transactions, as opposed to those funded by mortgages alone, and showed a marked softening in the market over the winter months including a modest decline in prices in the three months to March. Momentum picked up again over the summer, however, with a 5.2% increase in prices in the three months to end-August, pulling the annual increase up to 7.2%. The earlier slowdown was most pronounced in Dublin and although prices have picked up again in the capital (the annual increase is now 4.5% from 2.6% in June) the re-acceleration has been clearly driven by developments in the rest of the country: prices ex  Dublin rose by 7.1% in the three months to end-August, taking the annual increase to 11.4%. That 3-month change is the strongest recorded on the index ( which goes back to 2005) and is reminiscent of the kind of price changes seen in the late 1990’s.It now seems likely that by December the annual increase in prices nationally  will be around 10%, which is stronger than many expected and compares with 4.6% in 2015.

Demand for housing would appear to be strengthening: net migration turned positive again  in the year to April, employment is rising by around 50,000 a year and wages are increasing again in the private sector, so helping to boost household income. In addition, mortgage rates are falling and our affordability model indicates that the cost of servicing a new mortgage relative to income is at levels last seen in the late 1990’s. New mortgage lending is indeed picking up, after a softer period post the introdution of the Central Bank’s macroprudential controls, but the increase is modest; some 17,300 loans for house purchase were drawn down in the first nine months of 2016, against 16,900 in the same period of 2015. For this year as a whole we expect a total of around 24,500 or 3% above the previous year. In value terms that equates to €4.8bn, and €5.3bn for total mortgage lending ( which includes top-ups and re-mortaging, with the latter rising rapidly in percentage terms, albeit from a very low base).

New lending is still being offset by debt repayment and this deleveraging has been evident now for six and a half years, although the most recent data does indicate that the pace of credit contraction is slowing. Another unusual feature of the market has been the preponderance of non-mortgage buyers , accounting for 50% or more of transactions. The third quarter data  currently  indicates that mortgage loans accounted for over 56% of transactions as recorded in the Property Price Register, perhaps indicating a slight change, although it is too early to say as the numbers on the Register are continually updated.

Residential rents have been growing at a steady 8%-10% annual pace for some three years now and the latest CSO  data, for September, shows little change, with an annual 9.6% increase  despite the Government’s rent controls.

What about supply, which is universally recognised as inadequate. Completions in the first eight months of the year amounted to just over 9,100, with the full-year figure likely to be around 14,500 or less than 2,000 above the previous year. Forward looking indicators do not signal any dramatic change, with  planning permissions for 6,200 units granted in the first 6 months of 2016.

Housing supply may well respond to higher prices in time but there is no quick fix to the current position of excess demand. In that context the announcement of a Help to Buy scheme in the recent Budget is hard to fathom, as it offers First Time Buyers a tax rebate towards their deposit. so presumably boosting demand further.The Finance Minister suggested that this would help to stimulate new builds  but it’s hard to argue that demand is the issue, rather than supply.












New House Price Index showing wide regional variations.

The CSO has just released a new residential property price index, which is based on total transactions from Stamp duty returns, as opposed to data from mortgage lenders. The latter was only capturing around half of total transactions, so the new index is more representative of the housing market  as a whole as well as providing a host of additional information , including price and turnover  trends at a  regional and localised level.

The  inclusion of cash buyers ( or more precisely, buyers who are not being funded by Irish mortgage lenders) has not greatly altered the  perceived picture of the  housing cycle, although there are some modest differences revealed. Prices are now seen to have peaked nationally in April 2007, five months earlier than previously thought, although still bottoming in March 2013. The decline is now a little steeper, however, at 54.4% againt 50.9%, primarily due to a bigger fall in prices ex-Dublin; the crash there is now put at over 56% against 49% on the old index.

Cash buyers appear to pay less than  buyers with mortgages and the new index shows that the recovery has been a little weaker than previously perceived, albeit not dramatically so;  national prices in July 2016 were 3% below the index based on mortgage data alone. The divergence is not material in Dublin (less than 1% in June) but is pronounced elsewhere in the country, with the new index 8.4% below the old.

What about the recent trend, now that the Central Bank’s mortgage controls have bedded in? What is apparent is that prices in the Capital have slowed appreciably since last December and were flat in the first six months of this year, with monthly falls alternating with modest gains. Prices did rise in June and July, by a cumulative 2%, so boosting the annual change to 3.8%. Dun Laoghaire/Rathdown has fared the worst ( +1.1% over the past year) with Fingal ouperforming (+6.4%).

Elsewhere, the market is more buoyant. Prices ex-Dublin were broadly unchanged over the Winter and early Spring but then accelerated, rising by 6.7% in the three months to July, boosting the annual increase to  11.3%. There is a regional divergence however, with prices rising by just under 19% in the Midlands and by some 15% in the South West against 6% in the South East and 4% in the Mid East.

Prices in the Capital are still well above the national norm, of course, at an average €385,000 versus €236,000 according to the CSO, which is common feature in many economies. Dublin also significantly outperformed the rest of the country in the early years of the recovery but that now appears to have ended, with some modest catch-up underway.


New Mortgage lending stabilising after Central Bank controls

Mortgage lending is generally driven on the demand side by demographics, household income, mortgage rates and expectations about house prices, which implies that demand in Ireland should be growing strongly given that all these factors are supportive.  On the supply side, the number of institutions able and willing to supply  housing loans  in Ireland has fallen, but the remaining players are in much better shape than they were , and keen to offset debt repayment, which is putting ongoing downward pressure on their assets. So we have a ‘mortgage war’ of sorts, with strong competition among a  limited number of players.

The number of new loans for house purchase did rise strongly in 2014, albeit from very low levels, increasing by 50%, to just over 20,000. The BPFI has revised the 2015 data down but the year still saw another strong rise, to 23,664 , although there was a significant slowdown in the second half, culminating in a year over year fall in the final quarter. That change in trend presumably reflected the Central bank’s new controls on Loan to Value and Loan to Income, introduced in late January of that year, and the first quarter of 2016 saw a much sharper annual decline, of 9.4%. The approvals data then pointed to some recovery in the second quarter and the number of drawdowns for house purchase did indeed pick up on an annual basis, by 6%  to 5767, albeit flattered by the downward revision to 2015. However, the total for the first half of 2016, at 10,401,is still slightly down on the same period of 2015 (10,550) although indicating some stabilization. The lending data is seasonal so comparisons with the previous quarter are not that meaningful; indeed, on our seasonally adjusted model lending in q2 was actually weaker than in the first quarter.

One unusual feature of  mortgage lending in recent years is that it appears to account for only around 50% of housing transactions, and the available data shows that still to be the case in 2016. According to the Property Price Register there were  over 20,800 residential transactions to end-June, which given the mortgage figure of 10,401 still implies  only a 50% share for transactions funded by domestic mortgage providers.

The value of new lending  for house purchase showed much stronger growth in q2 ( 14%) and at €2.bn  for the half-year is actually slightly ahead of the same period in 2015. Even at a constant Loan to Value the average loan will rise in an environment of rising house prices and the second quarter saw the average new mortgage for house purchase rise by 7.7% to just under €198,000 , the highest figure in five years. Other forms of mortgage lending (top-ups and re-mortgaging) are growing again, with the result that the value of total mortgage lending rose by 18% in q2, and amounted to €2.3bn for the first half of the year. For 2016 as a whole we expect the latter to emerge at €5.2bn or some €400mn ahead of 2015, and the figure for house purchase at €4.7bn, with broadly flat numbers for house purchase offset by a rise in the average mortgage.

Dublin property prices fall amid general market slowdown

The Irish housing market has slowed in recent months on a variety of metrics, including turnover, mortgage lending and prices. Research published by the Central Bank indicated that its mortgage controls, introduced in early 2015, would likely depress lending and dampen prices, albeit modestly in the latter case, and the evidence of late would indicate that the measures are indeed biting. The Dublin market has been most affected, with prices falling in four consecutive months, by a cumulative 3%, although the annual change is still positive, at 4%.

Turnover in the Irish market as a whole, as measured by the Property Price Register, picked up sharply in 2014,  with  the number of transactions rising to over 43,000 , and last year saw a further increase, to over 48,000. That masked a pronounced change in trend , however, with the final quarter witnessing a 12.7%  annual decline. In December alone transactions were some 27% below the same month a year earlier, and the available figures for January show a 24% annual fall. That figure is likely to improve somewhat as more January sales are added but the general picture is unlikely to be materially altered.

Credit has not played a defining role  in  the housing  market over the past few years ( mortgage drawdowns accounted for 47% of transactions in 2014 and 50% last year) but a significant change in lending would obviously have some impact. The number of mortgage loans for house purchase rose by 20% last year, to over 24,000, but again the later part of the year saw a marked slowdown, with the final quarter recording an annual decline. That fall was very modest but data on approvals points to a much sharper decline in the months ahead; approvals for house purchase fell by an annual 20% in the final quarter of 2015 and the data for January shows a similar pace of change.

House prices are still rising on an annual basis, but the more recent data points to a slowdown, and not just in Dublin. Prices excluding the capital rose very strongly in the latter part of 2015, by 4.8% in q3 and 3.6% in q4, perhaps indicating a switch  by prospective buyers from Dublin to outlying counties, but prices rose by just 0.2% in the first two months of 2016. Nevertheless, the gap between prices in the capital and the rest of the country is continuing to narrow; on our estimate, Dublin prices exceeded those elsewhere by over 70% in late 2014 but that premium has now fallen to 55%, which is still above the long term average (48%) but  converging.

The Central Bank may well welcome the slowdown in house price inflation but it might be concerned if  mortgage lending did indeed fall sharply, particularly as the ECB is now offering euro zone banks money at zero or even negative rates, so desperate has it become to generate credit growth.