Population and migration data highlight pressure on resources.

Estimating the Irish population in the years between census counts is tricky. The birth rate is known, as is the death rate, but migration flows are notoriously difficult to measure, so estimates are often revised when the census data is available. That is the case following the 2016 census, with net migration now much lower than previously thought, which also means that the prevailing post-crash narrative has to be revised, along with an acceptance that the economy faces overheating and capacity issues,rather than large scale underutilisation of resources.

That narrative  envisaged very large emigrant flows dwarfing immigration, with a net outflow between 2011 and 2016 of just under 100,000. That figure has been revised down, to 31,000, with net immigration turning positive again in 2015. Immigration estimates for the period have been revised up, by a net 27,000, but the biggest change is on the emigration side, with a downward revision of 40,000.

So fewer people left than generally believed and more entered than initially thought. What about the trend post-census? The CSO estimate that net immigration rose to 20,000 in the year to April 2017, up from 16,000 in 2016, which alongside a natural population increase of 33,000 brought the total numbers in Ireland to 4.79 million. This represents a 1.1% annual increase, following a similar rise the previous year, and on that basis the population will hit 5 million  in another four years, which is  much earlier than the standard official projections.

Pressure on resources has been evident for a number of years now, and these migration and population figures bring some hard evidence on the need for a big increase in Ireland’s economic capacity, in health, education, transport, infrastructure and housing. On the latter, population growth implies the need for a net increase in the housing stock of 22,000 a year, implying a  completions requirement of  32,000 a year ( given obsolesence), just to maintain a constant population/ housing ratio, let alone account for a trend fall in the numbers per household. We are unlikely to hit that annual  figure for another three or four years, implying a very substantial backlog and hence  the need for an overshoot in the annual requirement.




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.

The Irish Economy has some serious Capacity Issues.

The Irish recession was long and extremely steep but it ended over six years ago and the economy is now growing rapidly; real GDP has risen by 25% from the cycle low and is now over 10% above the previous peak. Indeed, according to the Department of Finance, Ireland is now operating above full capacity. Others, including the ESRI and the Irish Fiscal Advisory Council have queried this but all agree that the degree of spare capacity in the aggregate has  diminished. It is also true that one does not have to look hard to observe capacity issues in specific sectors of the economy, particularly in and around the capital.

Take tourism, which is booming; last year the number of visitors to Ireland exceeded 8.6mn, having grown by 13.7%, and on the evidence of the first quarter the figure for 2016 will exceed 9.5mn. That has put pressure on accommodation, and the price of a hotel room rose by over 5% in May alone and is 9% up on the previous year. One could not give a hotel away not so long ago but now rooms are scarce and are 22% more expensive than in 2012. Housing in general is also scarce , of course, particularly in Dublin. Rents, nationally, are at record highs and on the CSO data there is no evidence of any significant change in trend, with the latest figure for May showing a 9.7% annual rise.

Irish residents are taking more foreign trips too ( up an annual 13% in the first quarter of 2016) and it is not surprising that Dublin Airport is now seeing record passenger numbers, with 2.5mn in  May alone , an 11% rise on the previous year, implying the 2016 figure will be well in excess of last year’s 25 million. The Airport is building a new runway to help cater for the increased demand, and it is instructive that the planning permission was initially granted in 2007 and then put on hold.

Car ownership is also growing strongly again, with sales up 31% last year following a 29% increase in 2014. The latest data for this year points to a 25% rise which would take the annual figure to over 150k for the first time since 2007. Hardly surprising then that record numbers are using the M50, with gridlock at peak times not uncommon.

The growth in the population as a whole is also putting pressure on schools and hospitals, although one could be forgiven for thinking the population is falling given some media coverage of emigration. The reality is that the population surged by over half a million in the six years to 2009, reaching 4.53mn, and by 2015 had risen to 4.64mn, as net migration has slowed to virtually zero and is anyway offset by the natural increase.

The conclusion has to be that Ireland needs to embark on a huge programme of capital investment in order to tackle capacity issues, particularly in and around Dublin. Borrowing costs for both corporates and Governments are at historically low levels and there has been some increase in building, both residential and commercial, although the former is still well below the annual demand, so exacerbating  the existing supply/demand imbalance. Unfortunately it is  a mark of the absurdity of the current fiscal rules imposed on euro members that capital spending  by the State  is not excluded from the expenditure constraint (  only some incremental spending is allowed) and so any amelioration in these capacity issues is unlikely to occur any time soon.