New Mortgage lending stabilising after Central Bank controls

Mortgage lending is generally driven on the demand side by demographics, household income, mortgage rates and expectations about house prices, which implies that demand in Ireland should be growing strongly given that all these factors are supportive.  On the supply side, the number of institutions able and willing to supply  housing loans  in Ireland has fallen, but the remaining players are in much better shape than they were , and keen to offset debt repayment, which is putting ongoing downward pressure on their assets. So we have a ‘mortgage war’ of sorts, with strong competition among a  limited number of players.

The number of new loans for house purchase did rise strongly in 2014, albeit from very low levels, increasing by 50%, to just over 20,000. The BPFI has revised the 2015 data down but the year still saw another strong rise, to 23,664 , although there was a significant slowdown in the second half, culminating in a year over year fall in the final quarter. That change in trend presumably reflected the Central bank’s new controls on Loan to Value and Loan to Income, introduced in late January of that year, and the first quarter of 2016 saw a much sharper annual decline, of 9.4%. The approvals data then pointed to some recovery in the second quarter and the number of drawdowns for house purchase did indeed pick up on an annual basis, by 6%  to 5767, albeit flattered by the downward revision to 2015. However, the total for the first half of 2016, at 10,401,is still slightly down on the same period of 2015 (10,550) although indicating some stabilization. The lending data is seasonal so comparisons with the previous quarter are not that meaningful; indeed, on our seasonally adjusted model lending in q2 was actually weaker than in the first quarter.

One unusual feature of  mortgage lending in recent years is that it appears to account for only around 50% of housing transactions, and the available data shows that still to be the case in 2016. According to the Property Price Register there were  over 20,800 residential transactions to end-June, which given the mortgage figure of 10,401 still implies  only a 50% share for transactions funded by domestic mortgage providers.

The value of new lending  for house purchase showed much stronger growth in q2 ( 14%) and at €2.bn  for the half-year is actually slightly ahead of the same period in 2015. Even at a constant Loan to Value the average loan will rise in an environment of rising house prices and the second quarter saw the average new mortgage for house purchase rise by 7.7% to just under €198,000 , the highest figure in five years. Other forms of mortgage lending (top-ups and re-mortgaging) are growing again, with the result that the value of total mortgage lending rose by 18% in q2, and amounted to €2.3bn for the first half of the year. For 2016 as a whole we expect the latter to emerge at €5.2bn or some €400mn ahead of 2015, and the figure for house purchase at €4.7bn, with broadly flat numbers for house purchase offset by a rise in the average mortgage.

New Mortgage lending in Ireland likely to fall this year

Net mortgage lending in Ireland has been falling for  over six years now, with any new lending offset by debt repayments. The former, having collapsed from 2007, was given a brief fillip by changes to tax relief in 2012 , but only started to gain sustained momentum from 2014; over 20,000 mortgages for house purchase were drawn down that year, from 13,500 in 2013, with 2015 seeing another  advance, to over 24,000. The prospect of further growth this year looks doubtful, however, given the data just released for the first quarter, and we expect new mortgage lending to fall in 2016, in volume and value terms.

Figures on mortgage approvals, available monthly,  are a good leading indicator of actual lending, although the relationship is not exact from quarter to quarter as borrowers may delay drawing down the loan or even change their decision. Approvals started to fall on an annual basis last August, indicating that the Central Bank’s new mortgage controls were beginning to bite, and the pace of decline picked up momentum over the winter months, resulting in a 20% annual fall in the final quarter of 2015. The first quarter of this year has seen a marginal change in momentum, albeit still leaving approvals 17% below the same period a year earlier.

A decline in the actual number of drawdowns for house purchase was therefore likely in Q1 and that duly emerged, with a 9% annual fall to 4,664 . The next few quarters may see even larger percentage declines given the trend in approvals and we now expect a figure of around 20,000 for the year as a whole, or some 4,000 down on 2015.

The value of new lending for house purchase came in at just €900mn in the first quarter, a two-year low, but this was only 1.7% down on the previous year because the average new mortgage rose by 8%, to €193,600, but we suspect that lending will also fall in value terms through the year, with the volume effect offsetting a 5% rise in the average mortgage . Consequently, we forecast that the value of  new mortgage lending for house purchase in 2016 will fall to €3.8bn from €4.5bn last year.   The headline mortgage data also includes top-up loans and re-mortgages, which are both growing at a rapid pace . The  absolute figures are very small, however, and their inclusion increases the forecast  for total mortgage lending only modestly, to €4.4bn from €4.9bn in 2015.

A final point. One curiosity about the housing market in recent years is that the number of loans for house purchase has been remarkably stable relative to transactions, accounting for around 50%. That pattern was actually repeated in the first quarter, as transactions also fell sharply, based on the Property Price Register, such that mortgage  loans equated to 49% of total sales. Credit has certainly not been the main driver of the recovery in residential property prices so the implication is that weaker new lending may not have a huge impact on house prices , although it is clearly bad news for mortgage lenders.

Dublin property prices fall amid general market slowdown

The Irish housing market has slowed in recent months on a variety of metrics, including turnover, mortgage lending and prices. Research published by the Central Bank indicated that its mortgage controls, introduced in early 2015, would likely depress lending and dampen prices, albeit modestly in the latter case, and the evidence of late would indicate that the measures are indeed biting. The Dublin market has been most affected, with prices falling in four consecutive months, by a cumulative 3%, although the annual change is still positive, at 4%.

Turnover in the Irish market as a whole, as measured by the Property Price Register, picked up sharply in 2014,  with  the number of transactions rising to over 43,000 , and last year saw a further increase, to over 48,000. That masked a pronounced change in trend , however, with the final quarter witnessing a 12.7%  annual decline. In December alone transactions were some 27% below the same month a year earlier, and the available figures for January show a 24% annual fall. That figure is likely to improve somewhat as more January sales are added but the general picture is unlikely to be materially altered.

Credit has not played a defining role  in  the housing  market over the past few years ( mortgage drawdowns accounted for 47% of transactions in 2014 and 50% last year) but a significant change in lending would obviously have some impact. The number of mortgage loans for house purchase rose by 20% last year, to over 24,000, but again the later part of the year saw a marked slowdown, with the final quarter recording an annual decline. That fall was very modest but data on approvals points to a much sharper decline in the months ahead; approvals for house purchase fell by an annual 20% in the final quarter of 2015 and the data for January shows a similar pace of change.

House prices are still rising on an annual basis, but the more recent data points to a slowdown, and not just in Dublin. Prices excluding the capital rose very strongly in the latter part of 2015, by 4.8% in q3 and 3.6% in q4, perhaps indicating a switch  by prospective buyers from Dublin to outlying counties, but prices rose by just 0.2% in the first two months of 2016. Nevertheless, the gap between prices in the capital and the rest of the country is continuing to narrow; on our estimate, Dublin prices exceeded those elsewhere by over 70% in late 2014 but that premium has now fallen to 55%, which is still above the long term average (48%) but  converging.

The Central Bank may well welcome the slowdown in house price inflation but it might be concerned if  mortgage lending did indeed fall sharply, particularly as the ECB is now offering euro zone banks money at zero or even negative rates, so desperate has it become to generate credit growth.

Irish Mortgage Regulations impacting housing market

In late January the Irish Central Bank announced a set of macro-prudential controls on mortgage lending, Similar regulations have been introduced elsewhere, in line with the new orthodoxy in central banking, which  seeks measures to influence credit growth outside the traditional interest rate channel, particularly as rates are currently at historically low levels. The Irish version imposed a loan to value limit of 3.5 on Personal Dwelling Home (PDH) mortgages, but in the current Irish context the  second limit, on Loan to Value (LTV) was seen as a more binding constraint. A  maximum LTV of 80% is now in operation on PDH  mortgage loans, with first time buyers allowed 90% on properties up to €220k. Banks are allowed some discretion , but it is limited in that only 15% of loans can exceed these LTV ceilings.

Contrary to some commentary (and expectation), the controls were not seen as having a material impact on prices, and the Central Bank’s research showed that the  main effects would be on mortgage lending and the supply of new housing. Of course the controls would be pointless absent some effect on credit creation and in the Bank’s base case lending falls by 9% on the introduction of the new regulations and subsequently recovers some ground, although remaining below the benchmark case ( i.e. absent any controls) for over seven years.  In simple terms the new rules will require prospective buyers to save for longer, which also implies greater pressure on the rental market for any given level of housing demand.

Six months in, there is some evidence that the measures are having an impact across the housing market. Mortgage credit standards tightened appreciably in the first quarter and the latest Central Bank data shows that mortgage demand eased considerably in q2, from very buoyant levels over the past year.  That change is also evident in terms of mortgage approvals, with the annual increase slowing sharply in the three months to May, to 17%, from 41% in q1 and 56% in the final quarter of 2014 ( the latter  was probably affected by expectations ). Indeed, the annual rise in approvals in May alone was less than 8% and our own  mortgage models points to drawdowns for house purchase of 5.2k in q2, unchanged from the previous quarter.  New mortgage lending is still growing strongly on an annual basis but at a much slower pace.

Turnover in the housing market , which picked up very sharply in 2014, also appears to be slowing, based on data from the Property Price Register. Transactions amounted to 10.5k in the first quarter of 2015 and  also exceeded  10k in q2, but the annual rate of growth slowed to 13% from over 55%. The June figure was actually 7% down on the previous year and although late additions to the  Register are common the broad picture is unlikely to be seriously altered.

What about prices?  An unusual feature of the current upturn in residential values is the relatively high share of transactions (over 50%) driven by cash and so it would be surprising if the mortgage controls did have a very significant impact in that area. Dublin prices did fall in the first three months of the year, by 1.6%, but rose by 2% in q2, with a similar pattern evident in the rest of the country (a 2% rise following a 0.3% fall). The market has certainly cooled relative to the first half of 2014, but smaller price gains rather than outright falls appears to be the order of the day.

What about private sector rents?  Here, data from the CSO does point to an acceleration in what was already a buoyant market; rents rose by 1.7% in the three months to December but then picked up by 3% in the first quarter of 2015, followed by a 2.4% advance in q2. That means rents nationally are only 2% below the all-time highs recorded in 2008 and are therefore likely to surpass that figure by the final quarter of 2015.  As for housing supply it is too early to tell. although with only 2,600 completions in q1 the base figure is already very low by historical standards.

The central bank model predictions are therefore panning out in broad terms; mortgage demand has slowed, approvals have eased and transactions have  been affected , although  the impact on prices has not been dramatic.  In addition, the  upward trend in rents shows no signs of abating and that  perhaps  best illustrates  the real issue in the market- the shortage  of housing supply in the areas people want to live.

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

Irish mortgage lending picking up but still far from healthy market

New  Irish mortgage lending for house purchase peaked in 2006 at some €28bn, with over 110k mortgages drawn down, and subsequently fell, collapsing completely from 2008 onwards before bottoming out in 2011 with a value figure of just €2.1bn and a volume total of 11k. The ending of mortgage tax relief in 2012 prompted borrowers to bring forward their draw down which helped to boost lending to €2.5bn  in that year but the corollary was a weaker figure in 2013, with the value of lending slipping to €2.4bn alongside a fall in volume from the 14k  seen the previous year. Lending has picked up substantially this year, however, and the annual total may well rise to around €3bn, with perhaps over 16k new mortgages for house purchase likely to be  drawn down.

The past year has certainly seen some positive changes in terms of both the supply of credit and the demand for mortgages. The number of active lenders fell away sharply in the downturn and is still low but credit standards are back to more normal levels , having tightened considerably at the onset of the recession ( credit standards always tend to be pro-cyclical). On the demand side affordability is back to the benign levels seen in the latter part of the  1990’s and employment is rising which has helped to support household incomes,  the main driver of mortgage demand. Price expectations ,too, play a part, and  few now doubt that the market has bottomed, at least in the main cities, particularly the capital.

The latest  new lending figures from the Irish Banking Federation (IBF) show that 4337 mortgages for house purchase were drawn down in the second quarter, an increase of 52% on the same period last year and compared with 3126 in the first quarter. Buy-to-let mortgages account for less than 5% of the total compared with a quarter at the peak of the boom, although the rental yield is now higher than the mortgage rate which was certainly not the case in 2006 and 2007. First -time buyers now dominate, accounting for  well over half the total (from a third at the peak) with the balance made up by those moving house, a segment that has taken a much more stable proportion of lending.

The average new mortgage for house purchase is also rising, as one might expect given the rise in house prices nationally, increasing by over 5% at an annual rate in the second quarter, to just over €178k. As a result the total value of mortgage lending for house purchase in q2 was €773m or 60% up on the previous year, following a figure of €539m in the first quarter.

These annual growth figures are clearly very impressive but when put in context the housing market is still far from what might be considered  liquid and healthy. Total transactions amounted to over 8700 in the second quarter, for example, according to the Property Price Register , so the mortgage data implies that less than half of transactions are being funded by bank credit, which remains unusually low. In addition, mortgage repayments are still outpacing new lending so net mortgage lending is still contracting; net lending fell by a total of €1.5bn in the first six months of 2014, which implies repayments of €2.8bn given that new lending (as per the IBF data) was €1.3bn.

What level of mortgage lending would take place in a healthy market?. One approach is to assume that a 3%-4%  annual turnover in housing transactions is normal, implying transactions of 60k-80k (there are approximately 2m houses in Ireland)  compared with around 30k last year, Again, perhaps 80%-85% might be normally funded via a mortgage so that gives a mortgage volume figure in the region of say 50k-60k per annum. The 2014 outturn may well be around 16k so we are still a long way away from an equilibrium, although lending is clearly now finally  moving in the right direction.

Dublin House price inflation likely to slow this year

Irish residential property prices fell by 4.5% in 2012 according to the CSO index  and by 2.5% in Dublin, and although most commentators expected the market to pick up a little in 2013 few if any envisaged the pace of price appreciation that developed in the capital; Dublin prices rose by 15.7% last year with apartments outstripping houses, appreciating by 20.8% against 15.3% for the latter. Residential prices  in the capital have still fallen by some 49% from the peak but the strength of the recent rally has prompted some to forecast further double digit gains in 2014. That appears unlikely for a number of reasons.

The case for some further price appreciation nationally and in the capital  can certainly be made. A range of studies since 2012, including work from the Irish Central Bank, the IMF and the OECD, have signaled that Irish house prices probably fell too far in relation to housing fundamentals, such as income and rents. The latter has risen strongly now for a few years ( the latest CSO data for November puts the annual increase in national residential rents at 8.5%) and house prices relative to rents are now well below the long term average. That is the equivalent of stating that the average yield on residential property ( i.e the average rent divided by the current price ) is also well above the longer term trend and on my data base is just shy of 6%, the highest in a decade. Affordability is also a plus for the market; a new 25-year mortgage absorbs 24% of income in 2013 which is well below the 29% long term average on my affordability index and back to levels last seen in 1998. Employment is also rising and  price expectations have also probably shifted, with more people expecting prices to rise and hence helping to bring forward purchases. House building is also at record lows ( averaging around 2,000 a quarter in 2013), albeit bottoming out, and the vacancy rate in parts of the capital is low. There would not appear to be a significant supply shortage in apartments, however, yet apartment prices appreciated faster than house prices  last year both nationally and in Dublin, albeit from a lower base, which implies that supply is not the sole explanation for the trend in prices.The vacancy  rate outside the capital is much higher nonetheless, so in theory at least there is  more excess supply to meet the increase in demand, which helps to explain why prices outside Dublin were broadly flat last year, but having fallen by 6.1% in 2012.

Dublin property price inflation may well decelerate this year,  although still rising at a single digit rate. In part this expectation reflects the nature of the market last year, with  cash transactions  probably accounting for slightly over half the total recorded  by the Property Price register ( the IBF data on mortgage drawdowns is not yet available for the full year) although the proportion funded by credit did rise through the year and may have been around 54% in the final quarter. Ultimately housing is largely driven by credit and mortgage lending may well pick up this year but is still likely to be a a level which is not compatible with further price appreciation at the pace seen last year in Dublin. Repossessions are also on the rise which may dampen price pressures somewhat while the trend in the price  index itself  in 2013 is another factor arguing for deceleration; prices rose by 2.4% in the second quarter, by 9.5% in q3 and 3.9% in the final quarter and so  annual property price inflation in Dublin is likely to slow in the second half of 2014 as those base effects kick in.