Irish Household deleveraging may be over

The last few years have seen some recovery in new mortgage lending in Ireland, although  it has not been strong enough to offset debt repayments, with the result that the outstanding stock of household debt has been falling now for almost seven years. That may be about to change, however, reflecting stronger growth in new lending.

New loans for house purchase have been on an upward trend over recent years, albeit from a very low base, but  actually fell by an annual 9% in the first quarter of 2016 , to well under 5,000,  no doubt impacted by the Central Bank’s mortgage controls, before returning to growth again  in the following months, with the final quarter showing a 12% annual rise, to 7,600. This brought the full year  figure to 24,891, or 5.2% above the 2015 total. To put this in context, the cycle low was around 11,000 in 2011, with the cycle high in 2006  at over 110,000.

The average new mortgage for house purchase also rose in 2016, by 6.8% to just under €200,000 , bringing the value of new lending  for house purchase to €5bn. First Time Buyers accounted for just over half that total, with most of the remainder down to Movers, as Buy to Let lending is still extermely low, at just €159m. On the non-purchase side,Top-up loans are also around €160m, albeit rising strongly in percentage terms, as is remortgaging, which increased by 80% to over €500m. The latter figure is less than a tenth of  the sums recorded at the peak of the boom but the pick up implies a stronger degree of competition in the mortgage market.

In sum, then, total mortgage lending ( including top-ups and remortgaging)   amounted to €5.7bn in 2016, or €900m more than the previous year and the strongest reading since 2009. Moreover, the pace of growth is accelerating, with the fourth quarter of 2016 at €1.8bn, a 26% annual increase. We expect this pattern to continue. with  new lending set  to rise to €7.2bn in 2017, driven by double digit growth in house prices, a rise in new housing supply and greater leverage as a result of the Central Bank’s decison to ease mortgage controls.

New lending on that scale may well be enough to offset ongoing mortgage debt repayments, particularly as the final three months of 2016 showed flat net  lending , although the annual change was still negative, at -1.4%. Non-mortgage lending to households has already turned positive again, reflecting PCP funding of new cars, so on a further recovery in new mortgage lending  Ireland  in 2017 could experience the first growth in net  household debt since 2009.


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 €  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.