- The housing stock per head is still falling
Housing completions in 2021 amounted to 20,433 which is marginally down on the previous year and lower than the prepandemic figure of over 21,000 in 2019. This means that the housing stock is rising by around 1% a year and as such below the growth in population so the housing stock per head is falling, and has been declining since 2008.Planning permissions are running at around an annual pace of 40,000 and although not translating on a consistent basis into actual builds we expect completions to pick up strongly this year, to 25,000 and as such outpace the rise in population.
2.Employment growth is very strong
Housing demand is driven by household income growth , in turn strongly impacted by changes in employment. Ireland is again close to full employment with the vacancy rate at record levels .The Government’s fiscal support during the pandemic helped support the housing market by preventing a fall in household incomes, and employment in professional and other higher income occupations continued to rise.
3.House price growth is in line with fundamental models
There are various approaches to modelling house prices and we prefer a simple fundamental model comprising household income , the housing stock per head and real mortgage rates.The model tracks actual prices fairly well and does not point to a fundamental overvaluation (prices are actually modestly below fair value in the model ) and values should be rising given a combination of weak supply and rising employment and incomes. The predicted rise in 2021 was 6.7% (it is the annual average ) against the 8.3% outcome as per the CSO residential property price index . For 2022 the forecast is 10.0% which given that price inflation ended 2021 at 14.4% implies an end-2022 figure of around 6%, with the deceleration largely due to our expectation of a significant increase in housing supply.
4. Mortgages are still affordable relative to the long term trend.
The average new mortgage for house purchase in 2021 was just under €250,000 which assuming a 25-year term equates to €1150 a month given the average mortgage rate last year. That is actually well below the average monthly rent nationally and on our affordability model amounts to 26% of gross income. The long term average (going back to 1975) is 28.5% so on that basis affordability is by no means stretched, although the issue for many is accessing a mortgage and a property to buy. It is also noteworthy that the average loan to value appears to be falling, meaning higher deposits from buyers, no doubt reflecting the Help to Buy scheme and the scale of ‘forced’ savings during Lockdowns.
5. New Mortgage lending to rise to €13.6bn this year
Gross mortgage lending amounted to €10.5bn last year according to data from BPFI, which was over €2bn up on the previous year and the strongest annual figure since 2008.Switching has picked up but most lending is for house purchase, amounting to €8.6bn, with two-thirds of that going to First Time Buyers. In the coming year we expect the forecast rise in house completions to drive a significant increase in the number of mortgages for house purchase ( to 42,000 from 35,000 last year) which allied to higher house prices yields a figure of €11.4bn for house purchase. Total mortgage lending is projected at €13.6bn.
6. Net lending is positive again but weak
Perhaps the most striking aspect of the current house price boom is that it is not being driven by credit, as on past occasions.This in part reflects the impact on leverage from the Central Bank’s mortgage controls, with the average Loan to Income at 3.3 which is the lowest in the euro area. Institutional buying is also significant but households are repaying debt as mortgages from the previous boom mature. The result is that net mortgage lending last year rose by just €850m, or 1.2%, which is well below the euro average figure of 5.4%. The projected increase in gross lending should help to boost the net figure in 2022 and we expect an end-year increase of 3.5%.
7. Rent rises also unsurprising
Using data from the CSO on private rents actually paid, last year saw a marked change in the market; rents nationally were falling on an annual basis in the first few months of the year before picking up sharply to an 8.4% annual increase by December. Again this is in line with our fundamental model, driven by employment and the housing stock, although our projected rise in house completions does feed through into a slowdown in rental growth in 2022, to 4% by year-end. This may be an underestimate though, as it would appear that the supply of rental properties is being adversely impacted by rent controls
8. Mortgage rates may rise.
85% of new mortgages are on a fixed rate and that trend has been in place for some time now, so impacting the stock of outstanding mortgages and making the market less sensitive than it was to changes in ECB rates. Nonetheless , just over half the existing mortgage debt in Ireland is on a variable rate, with the majority of those loans on a Tracker rate, which moves with the ECB’s refinancing rate.The prospect of an increase in the latter has increased as the ECB now appears inclined to tighten monetary policy this year although any initial moves would be via the deposit rate, which would impact new variable rates and new fixed rates. Nothing is set in stone as yet but it is likely that borrowers will face higher rates for new loans by the autumn or earlier, with Tracker rates moving up in 2023.