New supply data implies housebuilding consensus may be too optimistic.

Annual house price inflation accelerated  to 13% in April, the strongest pace for three years, bringing the increase from the cycle low to 76%, albeit still leaving prices nationally some 20% below the previous peak. Credit does not appear to have played a significant role in this recovery, at least to date ( net mortgage lending has only recently stopped falling and new lending appears to account for only half of transactions) and analysts have emphasisied more fundamental factors on the demand and supply side of the housing market.

In that model  housing demand has exceeded supply for some time now with the implication that prices will continue to rise ( absent a shock to employment or a steep rise in interest rates) until housing supply has picked up to a level which brings balance to the market. Supply, as in new housing completions, is picking up from historically low levels and in time is generally expected to approach and then meet estimates of annual housing demand. For example, the ESRI expect completions to exceed 23,000 this year and to reach 37,000 by 2020.

That expectation was based on completions data from ESB connections which put the annual figure at over 19,000 last year, although some thought that overstated the actual flow of new properties. Fortunately, the CSO has now started to publish completion figures on a quarterly basis, based on a range of sources , and they imply that completions may be much lower than generally expected over the next few years. The new figures, dating back to the first quarter of 2011, show completions of  57,000 over the past seven years, against an ESB total of over 90,000, a difference of 33,000. Last year’s total is now put at under 14,500, or 5,000 less than the ESB figure, and for this year the CSO figure  for q1 is 3,500. The latter may have been adversely affected by the weather but a full year figure of 17,000 or so seems much more likely than  anything approaching 25,000.

The implication is that the housing stock has been growing at a slower pace than previously thought  and that the stock  per head of population , a key variable in many demand/supply models, is still falling ( it started to decline in 2011) and will continue to decline for the next few years. Indeed, new population projections by the CSO highlight that demographic pressures will remain a feature of the Irish market; the population is projected to grow by over 300,000 by 2021 on a high net migration scenario or by 1.3% per annum, against a housing stock still growing by  well under 1%.



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.



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.












Mortgage market sags and Dublin price inflation slows

It is now nine months since the Central Bank introduced limits on mortgage lending, designed to prevent the re-emergence of another housing bubble. Controls on Loan to Value and Loan to Income ratios make sense , in our view, but not in an environment where net mortgage lending has been contracting for over six years and where the supply of new housing is running far below estimates of medium term demand. The Bank’s research on the topic concluded that the policy would dampen credit growth , have a limited impact on prices and a negative effect on housing supply and that indeed appears to be the case. An unintended consequence is that the pressure on rented accommodation has grown, pushing private sector rents  to an all -time high. It would be foolish to blame the Central Bank for  all the rental growth  but if there is excess demand for housing it will emerge in either house prices or rents  and measures to put a lid on the former will merely spill over to  the latter.

According to the CSO, residential rents rose by an annual 10.3% in the third quarter and the increase in the three months to September was 3.2% so pressure is clearly upwards. The CSO figure is national  and the data on, which broadly tracks  that of the CSO, shows that rents are rising faster in the Capital, with a 10% annual increase in Dublin City in q2, against an 8.6% figure nationally.

Calls for rent controls in Dublin have been heard (and indeed are not uncommon in cities elsewhere, including New York) but that would be equivalent to dealing with the symptom rather than the underlying cause. The demand for housing is growing, reflecting rising employment, a resumption of growth in disposable incomes, and a sharp fall in net emigration(in fact migration may be turning positive again) with an annual requirement of some 25k seen as a reasonable estimate, including up to 8k in the Capital. On the supply side the collapse in completions bottomed out in 2013, at 8.3k and 2014 saw a pick up, to 11k. Over the first nine months of this year the national figure was 8.9k, including just over 2k in Dublin (city and county) , consistent in our view with an annual total of around 3.2k in Dublin and under 13k for the whole country.

The low base of completions means that modest absolute levels of house building still translate into impressive percentage gains and that is the case with  gross mortgage lending for house purchase, with the number of loans rising by 50% last year. The pace of growth has slowed this year, to 29% in the second quarter, following a tightening of credit standards, and the latest approvals data shows a very rapid change in trend; approvals in the three months to August  were just  1.1% above the same period in 2014 while the figure for August alone was  4% down on the previous year. The average new mortgage , at €191k, is also virtually unchanged on a year earlier and our earlier estimate of 23k new mortgage loans in 2015  and lending of €4.3bn may be too high.

One would expect the Central Bank’s controls to have a bigger impact  on credit and  house prices in Dublin  than elsewhere, given the large price differential in favour of the capital. That does seem to the case; Dublin prices rose by over 22% last year, more than double the pace in the rest of the country, but this year has seen a marked deceleration, with the annual increase slowing to 6.5% in September, the weakest pace  in over two years. In contrast, house price inflation ex Dublin has picked up , rising to  11.4% on the CSO figures.

The Central Bank has therefore precipitated a slowdown in mortgage lending and  helped to dampen house price inflation in the Capital but given the rate of house completion there is little prospect of a change in the trend for residential rents, absent a severe demand shock to employment.

Irish House Building appears to have bottomed

The Department of the Environment publishes  official figures on house completions in Ireland, based on connections to the ESB network,  and puts the 2013 total at 8,300 which is modestly below the 2012 figure of 8,488 and as such marks a new low in the house building cycle. Indeed the figure is the lowest since records began in the early 1970s in absolute terms and implies a 0.4% addition to the housing stock (estimated at around 2 million)  which is also less than the obsolescence rate commonly assumed for the Irish housing market. Last year’s outturn also stands in  contrast to the 93,000 completed at the peak of the cycle in 2006 and alongside the plunge in prices and mortgage lending is a stark commentary on the scale of the  housing bust in Ireland.

Evidence that the cycle is turning is apparent from last year’s data on house prices and the recent trend in completions also supports the view that the supply side of the market has bottomed out, despite a  further fall in annual completions last year. That reflected a weak first half of the year, with 3,700 completions, but the second half saw a pick up, with over 4,600 units built. My own model of completions now points to a figure around 9,500 for 2014, although any forecast is subject to event risk.

Some readers may even  view the  completions total as high given the scale of vacant houses revealed in the 2011 census ( 230,000 nationally excluding holiday homes) and one clue as to the reason is revealed by a composition breakdown of the total, as 57% were single houses, presumably built to demand, and this type of completion amounted to only a quarter of the total six years ago. The share taken by apartments has halved, to around 11%, with less than 1,000 completed last year , and housing schemes make up the residual, accounted for 32% of the total from a peak of over 50%. Consequently the amount of what one might term speculative building is still extremely low , albeit having risen slightly as a share of the total last year, and may tick up further this year assuming that prices do not resume their fall.

The trend in completions  is  also not uniform across the country, with half of the 34 counties and city councils recording some gains. These increases were generally very small in absolute terms, nonetheless,  with the largest being in Dun Laoghaire-Rathdown, where 260 units were completed, a rise of 85 from 2012. That figure was around 2,500 a year at the peak of the boom with building in South Dublin even higher at over 3,300 , but completions in that area amounted to only 203 last year and that was marginally down on 2012. Completions in the City of Dublin  were broadly unchanged around 500 units but rose marginally in the cities of Waterford, Limerick and Galway, albeit from very low levels.

A number of studies on the Irish housing collapse concluded that prices probably overshot on the downside  and although it is less obvious that the same can be said for house building there is a big difference between where people want to live and where there is an excess supply of housing, and so 2013 may  also  mark a turning point in terms of house completions.