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.

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.

 

Irish Consumer spending accelerating despite deleveraging

Following the  recent revisions to the Irish National Accounts it appears that  the recovery has been stronger and less volatile than previously reported, leaving real GDP in the first quarter of 2015 3.9% above the pre-crash high. Forecasts for economic growth this year are also moving up, including  revisions to estimates for consumer spending, but the latter may still be too low in our view as we expect real personal consumption to rise by 4.2%. This compares with the Department of Finance’s 2.4%, the Central Bank’s 2.3% and 2.0% from the ESRI, although all  these were made before the release of the  official Q1 data.

Forecasters have generally become cautious about consumer spending in the wake of previous projections which had proved optimistic, in part because of the uncertainty about the pace of debt repayment by Irish households.  Debt peaked in late 2008 and has fallen  by almost €50bn  to stand at €154.6bn in the first quarter of 2015. This is still high by international standards , at an estimated 166% of disposable income, but is a far cry from 211%, the debt burden at the peak of the cycle.

So debt reduction rather than debt accumulation has been a key feature of Irish household behaviour over the past seven years, which has acted to dampen consumer spending. A corollary is that the gross savings ratio has risen sharply. from 7%  of disposable income in 2007 to a peak of 16.7% in 2009  and  a 12%-13.5% range  in recent years.

The published data on consumer spending has also appeared at variance with that on retail sales, with the latter implying stronger spending than actually recorded in the national accounts. One factor here is the impact of tourism, which affects retail sales but is excluded from Irish consumption. Another issue is the price deflator used to adjust nominal spending to derive real personal consumption. That deflator has been much higher than either the deflator for retail sales or from the CPI, and probably reflects the inclusion of imputed rent in the personal consumption measure, as private sector rents have been rising at an annual 8%-10% for the past few years.

Yet recent developments still point to a strong pick up in consumer outlays. First, spending over the past few years has been revised up, and has risen consistently  for the past eight quarters, with an acceleration evident in the second half of last year. Second, spending grew by 1.2% in the first quarter of 2015 and at a 3.8% annual rate. Third, retail sales have been much stronger this year, boosted by a surge in car sales ( up some 31% in the first half of 2015) . Fourth, sales excluding cars, a better proxy for overall consumption, have also grown at a robust pace, with the annual increase accelerating to 6.6% in the second quarter from 5% in q1. This implies a stronger annual increase for personal consumption in q2, even allowing for the rental price effect.

A number of other factors also support the case for stronger consumption. Household income is now growing, expanding by 3.2% in 2014 following a 1.1% advance the previous year, and is likely to continue to grow at a faster pace this year , given the ongoing rise in employment and signs that wages are starting to pick up. Consumer prices are still falling, which also will help and household wealth is recovering, having risen by €154bn or 35% over the past two years. It is impossible to gauge when household deleveraging will end, but on the recent evidence the impact of debt reduction on personal consumption is being more than offset by a number of other developments, all  supporting stronger personal consumption .

Irish GDP surges, impressing the Government but not consumers

Ireland’s quarterly GDP figures are volatile and often surprise, with the latest no exception; the economy grew by a seasonally adjusted 1.5% in q2, following a 2.8% expansion in the first quarter, the latter revised up marginally from the initial release. That surge in Irish output left the annual growth in real GDP in q2 at an extraordinary 7.7% and means that in the absence of revisions the average growth rate for 2014 as a whole would average 5% even if GDP was to remain flat in the second half of the year. The consensus growth forecast has moved steadily higher as the year  has unfolded , from an initial 2% to around 3%, but this latest data will no doubt prompt a further substantial upgrade- the Finance Minister has already mentioned 4.5% and that requires a fall over the second half of the year. Some commentators prefer GNP as a better measure of economic activity in Ireland (it adjusts for net  external flows of profits, interest and dividends) but that tells a similar story-indeed, the annual GNP  growth rate in q2 was 9%, although base effects in the second half may mean that the annual  GNP growth rate in 2014 will also be around 5%.

The monthly external trade data had implied a strong  merchandise export performance in q2 (the Patent Cliff impact on chemicals appears to be over, at least for now) but the national accounts included  even stronger figures,  which alongside a better performance from service exports resulted in a 13% annual increase in export volume. Import growth was also very strong, at 11.8%, but such is the dominance of exports (now 117% of GDP)  that annual GDP growth would have been 4% even if the other components made no contribution.

In the event they all contributed. Investment rose by 18.5% on the year, adding 2.5 percentage points to GDP growth, following strong gains in construction output and spending on machinery and equipment. Government spending  also rose , and by a puzzling 7.9% in volume terms, which sits uneasily with the idea of spending cuts and fiscal austerity and may reflect problems with the price deflator. The third component of domestic  demand, personal consumption, also rose, but by a modest 1.8%, and even that was flattered by base effects from last year as the quarterly increase in q2  this year was just 0.3% following a meagre 0.2% rise in q1. It is clear from other data sources that Irish households are still  paying down debt at a steady clip and it is impossible to say when this deleveraging will end. Employment growth has also slowed sharply in 2014 and in the absence of a marked change in household  behaviour personal consumption growth in 2014 is likely to be nearer to 1% than the 2% many expected.

Such is the volatility  and unpredictability of exports and investment that real GDP  growth in 2014  could be over 6% or nearer 4%, but we currently expect  5%.Export prices are falling, as is the deflator of government spending, and for that reason the rise in nominal GDP this year may be less than that recorded for real GDP – we expect 4%.That would give a nominal GDP figure  in 2014 of €182bn but still substantially above the €171bn forecast in the 2014 Budget. Tax receipts are also  running well ahead of target and so we now expect the General Government deficit for the year to emerge at 3.4% of GDP compared with the 4.9% originally forecast by the Government. The implication is that a fiscal adjustment of the order of €2bn in 2015, as originally envisaged and still advocated by the Fiscal Advisory Council (although the Council’s latest paper did  not take account of the q2 GDP figures), would probably push the deficit well below 2% of GDP and therefore comfortably under  the 3% target set by the Excessive Deficit procedure. The  strength of tax receipts had moved the Government towards a much smaller adjustment in any case  but the latest GDP figures appear to have convinced them to abandon austerity and at worse go for a neutral budget, with tax cuts funded by higher taxes elsewhere, mainly the Water Charge.

Irish household wealth is rising but debt repayment ongoing

Mario Draghi may be doing his best to encourage European consumers to borrow and spend but the evidence in Ireland still points to ongoing deleveraging, despite rising household wealth. The debt burden is now falling steadily, however, in contrast to the situation over recent years, but is still extremely high by international standards and it is anyone’s guess when the deleveraging process will come to a close.

The Irish Central bank publishes financial accounts data which tracks each sector’s assets and liabilities and the figures for the first quarter have just been released. Loans to households fell by €1.9bn in q1, bringing the total decline since the peak in mid-2008 to over €39bn. That deleveraging has dwarfed any new lending, which explains why the outstanding amount of personal credit is still falling despite a pick up in new loans. The absolute debt figure is now back to the level last seen in mid-2006.

Of more significance is the debt burden, which is generally expressed relative to disposable income. On that metric the burden peaked at 218% in late 2009 but did not fall materially for some time after that despite deleveraging because household income, the denominator, was also falling, reflecting rising unemployment, falling wages and an increase in the tax burden. Income finally stabilized  in 2012, ( although it is still volatile even on the four quarter total used by the Central Bank ) and has started to inch higher, so the debt ratio has started to fall at a steady clip, declining to 182% in the first quarter of 2014 from 185% in the previous quarter and 198% a year earlier. The household debt burden is now also back at 2006 levels, although a long way above the 133% recorded a decade ago.

Households are reducing their liabilities but their financial assets are climbing, and indeed have been rising for the past five years, largely reflecting growth in the value of assets held in pension and insurance funds. Household’s financial assets amounted to €339bn in q1, leaving net financial worth of €165bn, a record, and some €100bn above that recorded at the nadir of the financial crash.

Most Irish household wealth is in the form of housing, however, and when that is added we arrive at a  total net worth figure of €509bn. The housing component actually fell in the quarter ( national house prices declined in q1) and wealth  is still some €200bn below the peak but it has recovered by €50bn over the past year.

House prices rose again in q2 so that alongside the pick up in house building ( up an annual 37% in h1) will have boosted wealth  in recent months. The data on bank lending implies that debt repayment has remained a feature as well so the net household wealth figure will probably record a further rise in q2. Rising wealth is generally seen as positive for consumer spending but we have never seen the pace of deleveraging evident in Ireland of late (households have been net lenders rather than borrowers for over five years now) and we do not know how long that will continue to dampen personal consumption.

Irish Consumer Spending continues to Disappoint

According to the CSO’s first estimate, the Irish economy, as measured by real GDP, contracted by 0.3% in 2013. This was well below the consensus , which envisaged modest growth, largely reflecting an unexpected plunge in activity in the final quarter, which left real GDP in q4 0.7% below the figure a year earlier. This in turn now makes it less likely that average growth in 2014 will be above 2% as the current consensus expects.

Much has been made of the impact from the Patent Cliff on Irish merchandise exports and hence GDP ( the corollary, a fall in multinational profits, helped to boost GNP, the income of Irish residents, by 3.4%) but a key concern for the Government must be the continued weakness of consumer spending. Personal consumption in volume terms fell by 1.1% last year against a Department of Finance expectation of -0.2%. Moreover, consumption fell in the final quarter and the annual change in q4 was also -1.1% which makes the Department’s forecast of 1.8% average growth in consumption this year look a little optimistic.

A number of indicators would point to stronger consumption than has emerged. Consumer confidence, for example, has risen sharply and is currently back at levels last seen in early 2007. Employment is also rising strongly, by  2.4% on average last year, which offset a 0.7% decline in average wage earnings implying a net increase in total wage income. The retail sales data has also been positive, with a volume  rise of 0.7% in 2013 or 0.8% if one excludes cars.

The value of retail sales fell last year, however, implying that retailers have to cut prices to boost sales, and spending by tourists is excluded from the personal consumption figure as it is meant to capture expenditure by Irish residents. In addition spending on services accounts for over half of personal consumption and that remains weak. One factor may relate to the nature of the employment gains, with some half due to a growth in self employment, and there is no guarantee that the self employed will make money. Indeed, income tax receipts are flat on the year, and weak self employed earnings may be responsible, at least in part. The CSO also believes that the disposable income of Irish households fell over the first nine months of last year (that measure includes transfers and other sources of income alongside wages and adjusts for taxes on income). Households are also continuing with the deleveraging trend evident since 2008, with the repayment of another €5bn  of  debt in the first three quarters of 2013 bringing the total over the five years to €35bn. We do not have figures for recent months but net lending by banks and outstanding credit card debt is still falling, with  a decline of €416bn in net mortgage lending in January the highest monthly fall on record.

The trend in employment. if maintained, does provide the main argument supporting the expected pick up in consumer spending and buoyant car sales have given retail sales a strong start to the year but the trend in wages and deleveraging may also continue as drags on spending and hence GDP, with household’s attitude to debt a particular area of uncertainty.