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 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.

 

Bit early to blame Central Bank for house price fall

The CSO’s  residential property index   for February showed a fall in Dublin prices for the second month in a row, the 0.7% decline bringing the fall over three months to 2.4%. This still left the annual rise at over 21% but the market in the capital has clearly lost some momentum over recent months and some have claimed that the Central Bank’s new macro-prudential controls on mortgage lending are responsible. Prices excluding Dublin were flat in February but also fell on a three month basis, albeit by only 0.3%, so adding to the perception that there is a common factor at work across the country.

The evidence is not persuasive, however, at least not yet. The rules only came into operation in late January , for a start, and there does not appear to have been a significant shift in the recent pattern of mortgage approvals ahead of the decision. Mortgage approvals in the three months to January rose by an annual 55,5%, and as such not materially different from the 56.5% in the three months to December. Housing transactions in January were actually very strong, according to the Property Price Register(PPR), rising by an annual 68% . The available February data does show a marked deceleration in the pace of annual growth in transactions, to 35%, but that figure may be quite different when all the filings are included, which does take time.

The Central Bank’s own research (1) also suggests that the mortgage limits on Loan to Value and Loan to Income will have little impact on prices but a more significant  effect on mortgage lending and on the supply of housing, which they suggest will be some 2-3% lower per annum for a number of years ,resulting in a loss of some  2000  units  after 4 years relative  to an unchanged policy forecast. That  reduction in supply will put upward pressure on prices , so dampening any downward effect from tighter credit standards.

Any such simulation depends on the housing model used of course, and the ESRI (2) has just come out with some findings of its own. These also point to a significant effect from the new mortgage rules on house completions, with a supply fall of some 4%-5%, although they predict a larger effect than the Central Bank on prices, albeit  still a modest 4%-5%.

Another problem inherent in linking recent price trends in residential property to the Central Bank regulations is that not all housing is behaving the same way. Apartment prices nationally rose by 1.9% in February and by 2.5% on a three-month basis. Apartments in the capital also rose strongly on the month, by 2%, and by 1.8% over three months. The price series on apartments is extremely volatile but apartment prices in Dublin have now risen faster than houses over the past year (by 24.5% versus 21.1%).

Perhaps a better explanation for the most recent slowdown in house prices is simply that a market which appears to be primarily  driven by cash buyers is likely to lose momentum. That’s not to suggest that prices are likely to fall sharply but that annual house price growth in excess of 20% is unlikely to be repeated for long in the absence of excessive credit growth. New mortgage lending is picking up , and showing very strong percentage growth given the low base, but it is still accounting for less than 50% of housing transactions. Indeed, the latest PPR figures show transactions of over 15,600 in the final quarter of 2014, with the number of new mortgages drawn down for house purchase amounting to less than 7,000 , or 44% of the total.

(1) ‘Assessing the Impact of macro-prudential measures’ Central Bank of Ireland, Economic Letters , Vol. 2015, No.3

(2) ‘Quarterly Economic Commentary’, Spring 2015, ESRI