Irish net mortgage lending falls again in Q1 and approvals also decline.

In the autumn of last year the flow of new mortgage lending  in Ireland started to offset repayments and redemptions for the first time since early 2010 and the annual rate of change turned (marginally) positive in January. Net bank lending to the non-financial corporate sector also began to pick up, although again the annual rate of growth was barely above zero, albeit adding to the view that the credit cycle was turning. The latest figures, to end-March, cast  doubt on that however, as net mortgage lending rose in the month but contracted by €28m in the first quarter. This still left the annual growth rate in positive territory , albeit at an unchanged 0.2%, but the annual change in corporate lending turned down again, at -0.3%, following a €365m decline over the first three months. Consumer credit, boosted by car purchases, had been growing strongly but has also softened, declining for four straight months in cash terms  reducing the annual  rate of growth to 2.4% in March.

New mortgage lending is still growing, of course, amounting to €1.7bn in Q1, with €1.4bn  of that used for house purchase, but the pace of growth in the latter is slowing. particularly in terms of the number of mortgages drawn down. That figure was 6,400 in the first quarter, which represents a 9.6% increase on the previous year , compard to a 14.7% rise in the previous quarter and 26% growth a year earlier. The latter pace is clearly unsustainable and some easing was to be expected but the approvals data paints a more disconcerting picture; approvals for house purchase in March fell by an annual 13.6% bringing the annual decline in q1 to 4%.

The shortage of houses for sale is no doubt impacting ( transactions fell marginally in the first two months of 2018 compared to a year earlier) while the Central Bank limits on lending may also be a factor, particularly the Loan to Income restriction which is particularly relevant for First Time Buyers.  The average mortgage for house purchase rose by 22% in the three years to end-2017, against just a 4.4% rise in average pay, with house prices rising by 31% over the same period.

There is clearly an affordability issue developing, exacerbated by the spending power of non-mortgage buyers,  who see housing as an attractive asset class in a QE world of expensive equities and historically low government bond yields. The weak credit environment is also an ongoing issue for the Irish headquartered banks; total loans continue to fall, declining to under €176bn in March,  a fresh cycle low, and exceeding deposits by some €8bn. The Central Bank has expressed some concern about the pace of new lending in recent months but the issue facing the economy and the banking sytem in terms of net credit is very different.

Irish new mortgage lending rises by 29% in 2017 but affordability is deteriorating

Irish mortgage providers lent €6.4bn for house purchase in 2017, the strongest figure since 2008, with top-ups and re-mortgaging bringing the total to €7.3bn, a 29% increase on the previous year The final quarter was particularly strong, when adjusted for the usual seasonal effects , and we expect further growth in 2018, although affordability is deteriorating and the Central Bank’s modifications to its mortgage controls will no doubt have some impact on First Time Buyers , as Loan to Income is the main constraint for that segment of the market. Indeed, there was a notable slowdown in approvals in the last few months of the year, perhaps indicating that lenders are already adjusting to the rule changes.

Drawdowns were very strong in the final quarter, nonetheless, with over 8,700 mortgages for house purchase including over 5,000 to FTB’s, some 60% of the total. For 2017 as a whole 29,400 mortgages for house purchase were drawn down, still a far cry from the boom figures in excess of 100,000 but significanttly above the low recorded in 2011 (11,000) and 18% above the total in 2016. The value of lending for house purchase implies an average mortgage of over €217,000, against €200,000 in 2016, and a cycle low of €174,000 five years ago.

Interest rates on new loan have not materially changed over that period and household incomes have risen but the increase in mortgage size is such that affordability, the ability to service a mortgage, has deteriorated. Our own model compares  the annual cost of a new , 25-year repayment mortgage to our estimate of gross  borrower income, and shows that the ratio rose to 30% in 2017, the highest since 2009 and above the long run average (back to 1975)  of  29.5. The ratio is still well below the heights recorded at the peak of the boom ( over 40%) but our forecast is for a further deterioration in 2018, to 31.2 , and this assumes no change in interst rates, so any rise in the latter  would indicate a greater deterioration.

At the moment a rate rise looks unlikely until 2019, at least, and the affordability change expected does not look material enough to have a significant impact on lending, given the prospect of further gains in employment, an acceleration in wage inflation and stronger house completions. Against that, the Central Bank’s changes to mortgage controls are undoubtedly a policy tightening, in our view, although not  sufficient to prevent further growth in new lending, and we anticipate a figure around €9bn in 2018. Net lending has also started to grow in recent months, so the coming year will probably see the first rise in Irish mortgage debt in a decade.