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.

UK housing market ; short term blip or steeper fall in prospect?

The UK economy defied the consensus expectation of a slowdown last year following the Brexit vote, and fears for the housing market were not realised.  The last few months have reignited concerns about both, however, and the news that the Bank of England is  now split on whether to raise interest rates ( a 5-3 vote to maintain the status quo)  won’t help.

House prices have certainly cooled. The Nationwide index for May showed annual house price inflation at 2.1%, the softest pace in four years, with a clear slowing trend; the index has now fallen for three consecutive months, by a total of 0.9%. The picture from the Halifax index is similar, with annual inflation slowing to 3.3% in May, from 6.5% in December. Both indices are based on mortgage lending and the Office for National Statistics (ONS) publishes a broader  but less timely measure, based on Land Registry transactions,  which shows an annual rise of 5.6% for April, albeit also pointing to a slowing trend.  The RICS data, based on a survey of chartered surveyers operating in the residential market.  also reveals a softer market. with a net 17% of respondents in May expecting prices to rise, the weakest reading since the summer of 2016. Buyer and seller inquiries were also seen to have cooled.

Are UK  house prices excessive? The average price in the UK is now £209,000 according to the Nationwide, or 48% above the cycle low in early 2009. Prices are also now well above the previous peak ( £186,000) and are 5.3 times the income of  First Time Buyers (FTB) against  a  long run average of 3.6.  However, interest rates are unusually low; the standard variable rate is over 4% but the effective rate on new mortgages is around 2% according to the BoE, reflecting discounts and lower fixed rates. Consequently , affordability measures do not suggest prices are overvalued; the Nationwide data, for example, shows mortgage payments at 33% of FTB income, bang in line with the long run average. Indeed, for most of the UK regions affordability is much better than the norm, the exception being London, although non-resident purchasers are  more significant in that market.

The supply of housing in the UK is widely thought to be persistently short of the demographic requirement, but completions also fell sharply after the crash, declining to 107,000 in England ( which has the most timely data)  from 170,000 in 2007. Completions have picked up again, in response to higher prices, rising to over 140,000 in England in 2016, and  the  housing starts data points to a higher total again this year. Yet few argue that supply is  still anywhere near demand.

Net mortgage lending  has been growing, in contrast to Ireland, although at a modest pace  relative to historical exerience, but  now also appears to be slowing, with annual growth at 2.8% in April against over 3% for most of the past year. Mortgage approvals for house purchase, a more forward looking indicator,  fell below 65,000 for the first time in six months in April.

This all may relate to uncertainty about Brexit and the short term economic outlook, with the election result also likely to weigh on sentiment. In our view the likelihood  of a more prolonged and sustained period of weakness depends upon the labour market, which to date has held up remarkably well;  the employment ratio is at an all-time high, while unemployment  is still making new cycle lows.  One suspects that UK  lenders and the Government  would only become seriously concerned about the housing market if cracks started to appear in employment.

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.