Showing posts with label Irish property. Show all posts
Showing posts with label Irish property. Show all posts

Thursday, August 8, 2019

8/8/19: Irish New Housing Markets Continue to Underperform


New stats for new dwelling completions in Ireland are out today and the reading press releases on the subject starts sounding like things are getting boomier. Year on year, single dwellings completions are up 15.5% in 2Q 2019, scheme units completions up 2.6%, apartments up 55.6% and all units numbers are up 11.8%. Happy times, as some would say. Alas, sayin ain't doin. And there is a lot of the latter left ahead.

Annualised (seasonally-adjusted) data suggests 2019 full year output will be around 18,000-18,050 units, which is below the unambitious (conservative) target of 25,000. And this adds to the already massive shortage of new completions over the last eleven years. Using data from CSO (2011-present), cumulated shortfall of new dwellings completions through December 2018 was 125,800-153,500 units (depending on target for annual completions set, with the first number representing 25K units per annum target, and the second number referencing target of 25K in 2011, rising to 30K in 2016 and staying at 30K through 2019). By the end of this year, based on annualised estimates, the shortfall will be 132,400-162,250 units. Taking occupancy at 2.1 persons per dwelling, this means some 278,000-341,000 people will be shortchanged out of purchasing or renting accommodation at the start of 2020.

Here is a chart summarising the stats:

Let's put the headline numbers into perspective: at the current 'improved' construction supply levels (using annualised 2019 figure), it will take us between 6.3 and 7.7 years to erase the already accumulated gap in demand. If output of new dwellings continues to grow at 11.8% per annum indefinitely, Irish construction sector will be able to close the cumulative gap between supply and demand by around 2029 in case of the targeted output at 25K units per annum, or worse, by 2031 for the output target of 30K units per annum.

Wednesday, May 29, 2019

28/5/19: Why some long trend estimates start looking shaky for Ireland's property markets


There are many ways for analysing the long-term trends in real estate prices. One way is to use dynamics for the periods when price appreciation was consistent with underlying economic growth fundamentals and project price levels forward at the rates, on average, compatible with these periods.

And some exercises in assessing Irish house prices relative to trend are starting to sound like an early alarm bell going off.

In Ireland's case, organic growth-based period of the Celtic Tiger can be traced to, roughly, 1992/1993 through 1998. In terms of real estate prices (housing), this period corresponds to the post-1987 recovery of 1988-1990, followed by a house price 'recession' of 1991-1993 and onto the period of recovery and economic growth-aligned appreciation of 1994-1996. During this period, average price inflation in Irish house prices was 3.94% per annum.

Using the data from 1970 through 2018 based on the time series from the BIS and CSO, we can compare current price indices to those that would have prevailed were the 1988-1996 trend growth to continue through 2018. Chart below shows the results:


Several things worth noting:

  1.  At the end of 2018, Irish house price index stood some 5.7 percent below where it would have been if the longer term trend prevailed from 1997 on.
  2. Taking into the account moderating house price growth of 2016-2018 and projecting house prices forward from 2018 levels onto 2022 shows that by the end of 1Q 2020, Irish house prices can be expected to catch up with the longer-term trend.
  3. The longer-term trend does capture quite well the effect of the massive price bubble of 1998-2007: the trend line hits almost exactly the 2009-2018 index average at 2010-2011. 
  4. The pre-crisis peak levels of house prices can be expected to reach (on-trend) by 2022 implying that the house price bubble of 1998-2007 has, in effect, accelerated house price inflation by roughly 15 years, or 50-62 percent of the 25-30 year mortgage duration, which is consistent with the peak-to-trough decline in Irish house prices (53.3 percent) during the crisis.
  5. The drop in Irish house prices during the crisis overshot the long-term trend by roughly 31 percent - a steep price to pay for massive excesses of the Celtic Garfield era of 2003-2007.
  6. At the start of 2004, Irish house prices were 50 percent above their long term trend line, which is pretty much bang on with my estimate back in 2004 that I published here: https://trueeconomics.blogspot.com/2016/01/10116-my-2004-article-on-irish-property.html as a warning to Irish policymakers - a warning, as we all know well - that was ignored.
  7. Referencing 2018 data, while the price dynamics so far appear to be catching up with the longer run trend, there is an increasing risk of a new price bubble forming, should price inflation continue unabated. For example, at an average rate of house price inflation of 11.34 percent (2014-2018 average), by the end of 2022, Irish house prices can exceed long-term trend by more than 15 percent.
Of course, a warning is due: this exercise is just one of many way to assess longer term sustainability trends in house price dynamics.  

For example, historical average rate of growth in house prices across 24 countries reported by BIS for 1970-2006 period is 2.34 percent per annum. Were we to take this rate of growth from 1998 through 2018 as the longer term trend indicator, Irish house prices would stand 32.7 percent above the long-run trend levels in 2018, implying that 
  • Irish house prices reached long run equilibrium around 1Q 2015, and
  • At the end of 2018, we were close more than 1/4 of the way toward the next bubble peak, in which case, by the end of 2021 we should be half way there.
Numbers are not simple. But numbers are starting to warrant some concerns. 

Tuesday, August 8, 2017

8/8/17: Irish Taxpayers Face a New Nama Bill


Ireland has spent tens of billions to prop up schemes, like Nama and IBRC. These organisations pursued developers with a sole purpose: to bring them down, irrespective of the optimal return strategy from the taxpayers perspective and regardless of optimal recovery strategies for asset recovery. We know as much because we have plenty of evidence - that runs contrary to Nama and IBRC relentless push for secrecy on their assets sales - that value has been destroyed during their workout and asset sales phases. We know as much, because leaders of Nama have gone on the record claiming that developers are, effectively speculators, 'good for nothing else, but attending Galway races', and add no value to construction projects.

Now, having demolished experienced developers and their professional teams, having dumped land and development sites into the hands of vulture investors, who have no expertise nor incentives to develop these sites, the State has unrolled a massive subsidy scheme to aid vultures in developing the sites they bought on the State-sponsored firesales.

As an aside, this June, Nama officially acknowledged the fact that majority of its sales of land resulted in no subsequent development. What Nama did not say is that the 'developers' hoarding land are the vulture funds that bought that land from Nama, just as Nama continued to insist that its operations are helping the construction and development markets.

Why? Because Nama was set up with an explicit mandate to 'help the economy recover' and to drive 'markets to restart functioning again', and to aid social housing crisis (remember when in 2012 - five years ago - Nama decided to 'get serious' about social housing?). And Nama has achieved its objectives so spectacularly, Ireland is now in the grips of a housing crisis, a rental market crisis and a cost-of-living crisis.

Read and weep: http://www.independent.ie/business/personal-finance/property-mortgages/taxpayer-to-fund-developers-with-no-guarantees-on-prices-36009844.html?utm_content=buffer39407&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer.
Irish taxpayers are now paying the third round of costs of the very same crisis: first round of payments went to Nama et al, second to the banks, and now to the 'developers' who were hand-picked by Nama and IBRC to do the job they failed to do, for which Nama was created in the first place.

Oh, and because you will ask me when the fourth round of payments by taxpayers will come due, why, it is already in works. That round of payments will cover emergency housing provision for people bankrupted by the banks and Nama-supported vultures. That too is on taxpayers shoulders, folks...


Tuesday, December 8, 2015

8/12/15: Irish Rents: A Longer Term View


Much has been written about the plight of renters in Ireland. Much of it is correct - there have been some atrocious rises in rents, primarily private rents, in recent years. Year on year, in the last 3 months (though October 2015), private rents rose 10.35% against local authority rents falling 1.11% and mortgage interest declining 8.88%. A year ago - over 3mo through October 2014, private rents inflation was running at 8.95% against local authorities rents rising 1.06% and mortgage interest falling 10.26%.

Which makes for a depressing reading for the renters. Actual rents paid by tenants were up 8.83% in 3mo period through October 2015 and they rose 7.93% y/y in the 3mo period through October 2014. So inflation rate in rents is going up.

However, rents inflation has to be taken over the longer period of time. And here, things are not as clear cut as in the short run. Comparable CSO data goes only back to January 2003. So we have no reliable benchmark for earlier periods, albeit some bootstrapped comparatives are possible. As the result, let’s consider 1Q 2003 as the starting point for inflation - with a host of caveats attached.

Setting 1Q 2003 average level of price indices at 100, inflation in overall Housing, water, electricity, gas and other fuels category that includes rents, mortgages and other housing costs stood at 55.94% in October 2015. Actual rentals paid by tenants over the same period of time were up 26.93%. Private rents rose over 1Q 2003 to October 2015 by 18.62% while local authority rents rose 73.36% and mortgages rose 24.33%.

In other words, cumulated inflation since 1Q 2003 was higher in Local authority rents and mortgage interest than in private rents. Chart below illustrates:



Pretty much the same picture emerges if we take the entire 2003 average (not just 1Q 2003) as a benchmark. In fact, compared to 2003 levels, mortgage interest inflation is just above actual rents paid and is still higher than private rents inflation.

Setting levels aside, let’s take a look at inflation rates (y/y changes in indices). Historical average y/y inflation in Housing, Water, Electricity, Gas & Other fuels category is 4.50% against historical mortgages interest costs inflation of 5.29%, historical private rents inflation of 1.56%, historical local authorities rents inflation of 4.56% and historical inflation in actual rentals paid by tenants of 2.00%.


Once again, timing is everything: given low level of transactions in the purchasing markets for property over the current crisis, majority of mortgage payees today have lived through the period of pre-crisis spike in mortgage costs. Their current savings (reduced cost of mortgages interest) are simply lagged off-sets to this high cost reality of the past. On the other hand, renters faced far lower volatility in rents than mortgagees in mortgage interest. Their current pain is a delayed cost uplift on past moderation in inflation.

Which is, of course, not to say there is less pain because of this or that Irish rental markets are somehow functioning well in terms of pricing. Just to point out that timing of comparatives is important and that one should be careful pitching the (real) pain of Irish renters against the allegedly easy-times for other participants in the markets.

Tuesday, November 17, 2015

17/11/15: Irish Rents: Welcome to More Consumer Whacking by Government


In efficient market, pre-announced policy changes get priced into market valuations before the policy change takes place. This was the case with the Gazprom's Nord Stream pipeline (working paper on this is forthcoming) and this is also true for much more liquid markets for rents.

Behold, Irish Government's latest stab at creating policies-driven evidence (or in other words, screw ups): http://www.independent.ie/business/personal-finance/property-mortgages/landlords-pile-on-rises-ahead-of-new-rent-controls-34206919.html.

As expected, Irish landlords were quick to price in future freezes in rents in advance of such freezes coming into force. Which means that already beleaguered Irish renters can now pay even more in rents over an even longer time horizon. Double whacking of consumers by the incompetent policy designers continues unabated...

Friday, November 13, 2015

13/11/15: Dublin: Overpriced Office Space is Back... Any Wonder?


A neat set of charts from Knight Frank report showing commercial real estate mapping of Dublin relative to other European cities

To start with: returns over 10 years to December 2014:




Here are some more charts





The key point from the above is that historical valuations for Dublin property have been distorted to the upside by the pre-2008 boom, whilst subsequent collapse has driven prices back to below their fundamentals-determined valuations. However, forward expectations by the markets participants are now pricing in a significant medium- to long-term rebound in commercial property rents and values that are implying fundamentals well ahead of anything consistent with the ‘normal’ 4.5-5 percent yields. In other words, we are heading toward 2-2.5 percent yields, assuming current trends persist, or into another correction downward.

Absent robust supply increases, the former is more likely than the latter. With rates normalisation still some time away, the former is also more likely than the latter. And the longer the former goes on, the bigger will be the latter, eventually.

These dynamics, in return, underpin also residential markets, where credit supply tightness in house purchasing sector is pushing rents up to stratospheric levels, with rents currently in excess of October 2008 levels.

Welcome to the economy where largest land-owner - Nama - thinks developers are only good to attend horse races.

Wednesday, March 25, 2015

25/3/15: Irish Residential Property Prices Fell Marginally in February


The residential property price index from CSO covering Irish property markets has posted second monthly contraction in February, falling from 80.3 in January to 80.0 last month. With that, y/y on growth rate in Irish residential property prices has slowed from 15.54% in January to 14.94% in February, the first sub-15% reading since September 2014. In effect, property prices in Ireland have now fallen back to the levels between September and October 2014. Cumulated gains in property prices over the last 24 months are now totalling 24.22% or an annualised gain of 11.46%, outpacing growth in the economy by roughly 5-fold.

Based on Nama valuations formula, residential property prices are now somewhere 18.5% below Nama business model expectations.



Prices of all residential properties excluding Dublin  remained static in February at 74.8, same as in January and up 8.25% y/y, marking a slowdown in the y/y growth from 9.20% recorded in January.


The decline in national prices was driven by Dublin prices, which fell for the second month in a row from 82.2 in January to 81.6 in February. This is the lowest index reading since September 2014 and marks a slowdown in y/y growth rates to 21.43% - the slowest rate of growth since April 2014. Still, cumulated expansion in Dublin residential property prices over the last 24 months is blistering 37.6% (annualised rate of 17.3%).

Within Dublin segment:

  • Houses were the driver to the downside in overall property prices, with houses price index for Dublin standing at 86.0 in February 2015, down from 86.9 in January 2015 and back to the levels of September 2014. Y/y rate of growth in Dublin house prices fell from 21.7% in January to 21.1% in February, although over the last 24 months hose prices in Dublin are still up cumulatively 37.6% (+17.3% annualised). 
  • Apartments prices in Dublin rose in index terms to 72.2 in February from 70.8 in January, erasing the declines that took place during Q3-Q4 2014. Cumulated gains in Dublin apartments prices over the last 24 months stand at 37.5% (+17.3% annualised) and y/y prices are up 24.5% - the fastest growth rate in 3 months.
Few charts to illustrate the above trends:




 Lastly, summary of price changes on pre-crisis peak and y/y:


Despite all the talk about the new bubble in house prices in Ireland, three themes remain true:
  1. Property prices are still far below fundamentals-justified levels. In Dublin, undershooting of long-run (inflation-linked) prices is around 26-27%.
  2. Property price increases are worryingly high, especially in the Dublin segment, warranting some ongoing concern; and
  3. Moderation in property prices and downward correction over the last two months, driven by Dublin (but likely to translate into similar outside Dublin with a lag), predicted on this blog before, is a welcome change. However, I suspect we will see renewed increases in property prices later this year, albeit at rates more sustainable in the longer run.

Sunday, December 21, 2014

21/12/2014: Planning Permissions Q3 2014: Being Un-dead ≠ Being Alive


This week, there were some champagne-popping media headlines about planning permissions print for Q3 2014 released by the CSO. So what's the hype was about, folks?

Starting from the top, total number of new planning permissions granted in Q3 2014 stood at 4,238. This represents a rise of 9.37% y/y and follows a decline of 4.25% y/y in Q2 2014. Sounds pretty solid, except when you look at the levels of activity involved. Which is so abysmally low, that a 9.37% rise is hardly an uptick worth boasting about.

Take a look at the chart:

Firstly, the uptick is still within the range of activity between H2 2011 and present. Secondly, current level of activity is still below any quarter on record between Q1 1975 and Q3 2011. In summary, then, current print is worse than any quarter of the dreaded 1980s recession. And activity is still down 75.6% on pre-crisis peak. It is 29.4% above the current crisis trough, but Q3 2014 number of planning permissions is still 2.37% below the lowest point between Q1 1975 and Q3 2011.

Total area covered by planning permissions in Q3 2014 was up 18.35% y/y having posted a decline of 6.16% in Q2 2014. This sound great. But, again, levels of activity are too low to interpret these increases as much more than 'bouncing at the bottom'. Outside the current crisis, you'd have to go back to Q1 1989 to find comparable level of activity as measured by the square meters permitted.


Worse, as the chart above shows, there is no life in the house-building sector. Area covered by new permissions when it comes to Dwellings is basically flat at the bottom of what already constitutes extremely poor activity. Q3 2014 still reads less than any other quarter from mid 1988 through Q4 2011.

In line with the above, number of new planning permissions for dwellings is itself trending in a narrow range at the bottom of historical records chart:


What is truly amazing is that seven (!) years after the start of the crisis and with property prices surging, there is absolutely no signs of life in the construction sector, when it comes to new planning permissions. None. Nada. And yet, Irish media is going off the rails spinning the small percentage increases as signs of upcoming 'boom'.

Thursday, October 23, 2014

23/10/2014: Irish Residential Property Prices: Q3 2014 data


Latest data for residential properties price index for Ireland is out, covering September. Instead of repeating all the analysis provided elsewhere, here is a look at quarterly data series and longer-term comparatives.

Firstly, on quarterly basis, Q3 2014 ended with index averaging at:

  • 79.1 in Dublin, up strongly on Q2 2014 reading of 72.0. This brings property prices to the levels of Q2 2010 or on pre-crisis comparative basis close to Q4 2002 (80.8).  Year on year prices in Q3 2014 stood 23.9% above Q3 2013 reading, which is a modest increase on Q2 2014 y/y increase of 21.2%.
  • Outside Dublin, index read 71.4 in Q3 2014, marking a rise of 5.8% y/y. In Q2 2014, y/y increase was 2.2%. Outside Dublin prices are currently trending at the levels comparable to Q1 2012 (71.2) and on pre-crisis basis - at the levels between Q2-Q3 2001
  • National prices index is at 76.9, up 14.4% y/y and this compares to a rise y/y of 10.6% in Q2 2014. National prices levels are around Q2-Q3 2011 averages and on pre-crisis basis these are up at the levels of Q2-Q3 2002.
Chart to illustrate:


Rates of growth in prices are worrying, as they were for some time now. Chart below shows y/y increases in price indices for quarterly averages:


The chart above clearly shows that Dublin price increases have been running well above the historical averages for the main periods since Q1 2000. Q3 2014 marks full year since price appreciation in Dublin market has risen above sub-period (2013-present) average and this now becoming a serious issue.

At the same time, long-term level indices suggest that prices remain below historical trends:


So once again, data is showing troubling developments in the rate of price increases in Dublin and below-trend price levels. Based on historical evidence, real price bubble concerns are still outside the scope of index readings by some 25-30 percent. But we are closing that gap very fast.

Thursday, September 25, 2014

25/9/2014: Irish Property Prices: Scary Dynamics in Dublin, Relative Slumber Elsewhere

Latest Residential Property Prices Index for August 2014 continues to point to the same trends and risks as in previous months.

Firstly, historical level of current price levels: Measured in quarterly terms, Q3 2014 data through August 2014 points to Dublin index reading of 77.95 against 72 in Q2 2014 which brings index to the levels last seen in Q3 2010.



As dramatic as the increase from crisis period trough might appear, the series still well below where long-term activity should be, as seen in the chart below:



However, rate of price increases remains of concern in Dublin market. In August 2014, residential property prices across the nation rose 14.93% y/y, the fastest y/y growth rate since October 2006. Nationally, house prices rose 14.61% y/y in August, marking the fastest rate of increase since March 2007. Apartments prices rose 24% y/y in August 2014, marking the fastest rate of increase on record and beating previous historical high attained in July 2014.

All of this activity was down to Dublin price hikes. Excluding Dublin, property prices rose more modest 5.63% y/y in August. House prices rose 5.80% once Dublin is excluded.

Meanwhile, Dublin property prices were up 25.08% y/y in August, marking thirteenth consecutive month of double-digit y/y inflation. Dublin house prices rose 24.7% y/y in August 2014, also marking thirteenth consecutive month of double-digit y/y prices growth. Dublin apartments posted price growth of 32.63% y/y in August, for the fourteenth consecutive month of double-digit expansion.


Compare the above chart for Dublin with the same for ex-Dublin:



Over the last 24 months, cumulated growth in national residential property prices was 16.02%, with house prices rising cumulatively by 15.34% and apartments prices up 32.2%. Outside Dublin, all properties prices were up more modest 2.89% in cumulative terms over the last 24 months and house prices were up 3.11%. In Dublin, residential property prices were up 38.39% over the last 24 months, which is 13.3 times faster than ex-Dublin. Dublin house prices grew 12.2 times faster than ex-Dublin house prices, at a 24 months cumulative rate of 37.83%. Dublin apartments prices rose 46.09% in 24 months through August 2014.

So as before: there are very worrying signs in price increases in Dublin, albeit levels of prices still remain subdued compared to both historical trend and inflation-driven trend. In other words, be scared of the speed of price increases, but not of the levels of prices so far.

Thursday, June 5, 2014

5/6/2014: Irish Commercial Property Values Forward...


Lost decade in Irish non-residential property? 

Based on IPD quarterly index, here is an exercise in basic forecasting (take it as just a stab in the dark - things can go all over the shop in a small economy, like Ireland) for capital values returns for 4 asset classes of Irish non-residential property.

The forecast is based on 'better case' scenario that assumes rates of growth from Q2 2014 on that reflect:
  • Last 3 quarters growth rates in Retail, Office and All Property indices, which are respectively: Retail 1.9% q/q (4 quarters growth rate is less benign at 1.0%); Office 4.3% (4 quarters rate is 3.5%); All Property 3.1% (4 quarters rate is 2.3%); and
  • Last 4 quarters growth rate of 2.3% for All Property taken as growth rate for Industrial class (own Industrial Class 3 quarters growth rate is 0% and own 4 quarters growth rate is negative - 0.2%).



And the 'lost decade' in capital values is:
  • For Retail sector: 19 years
  • For Office sector: 13 years
  • For Industrial sector: 23 years
  • For All Property sector: 16 years 



Some 'decade' that is… and the numbers are not out to the peak-to-peak levels, as peak valuations took place around Q3 2007 and the exercise is from Q4 2006, when all above asset classes capital valuations were below the peak by between 9.2 and 10.5 percent. The exercise does not cover explicit outlook for interest rates or credit flows associated with it. Nor does it account for the overhang of land held by Nama. The key point here is really to show three things:
  1. It will take a long, very long time for the markets to come around; and
  2. So far, turnaround was not miraculous or dramatic, as some agents would led you to believe...
  3. Finally, in one segment - Offices - we do have some rays of hope - both uplift and dynamics of that uplift are supportive of the stronger case than what I expected back in the days of 2010, when Nama was unloading properties off the banks balancesheets.

Tuesday, May 13, 2014

13/5/2014: Q1 2014 Mortgages Approvals Data: There Is a Rise, But...


Undoubtedly, you heard much about the latest IBF data on mortgages approvals showing huge increases in lending in March 2014 compared to March 2013. But are these increases as dramatic as the IBF claims?

Well, let's take a look at the data:

  • In Q1 2014, total number of mortgages approved for house purchase as opposed to remortgaging was 4,357 which represents a large increase of 55% y/y. Remortgages approved rose to 334, up 18% y/y. And total number of mortgages approved is up 51% to 4,691. Sounds impressive, until your remember that November 2012-April 2013 was the period of huge volatility due to changes in tax breaks on house purchases. But more on this point below.
  • By value, total mortgages approved in Q1 2014 rose to EUR782 million, or 56% up on Q1 2013. House purchases mortgages value was at EUR750 million, up 58% y/y and remortgaging was up at EUR32 million or +19% y/y.
  • Average mortgage issued for house purchase purpose stood at EUR172,027 which is up 3% y/y, average re-mortgaging loan was EUR93,954 or down 1% y/y. So average mortgage issued for both purposes was EUR136,854 which is up 3% y/y.
Two charts to illustrate above numbers:


Note two things from above chart:

  1. With such a large jump in March, number of mortgages approved is still barely above the trend line. Which might be a sign of solid technical support for further upside.
  2. Average mortgage value, having risen slightly above the trend line is still consistent with downward pressure on mortgages issued. Things are still solidly trending downside here.


Note to the above chart: we are bang-on the trend line in March, so nothing surprising in the rise - it is in line with longer term trend. The series continue to show support to the upside, which is a good news.

But here is the kicker. Coming back to that problem period of November 2012 - April 2013, we have a pesky little problem: how do we compensate for the one-off change in mortgages issuance that took place due to changes in taxation. One way (pretty much the only way) is to compute trend and use it to replace the actual outruns in these 'troublesome' months. I've done this before, so you will be familiar with the chart below:


Here's the thing: in IBF data we have a 53% rise in house purchase mortgages approved in March 2014 y/y. Adjusting for the one-off tax changes yields a much shallower rise - of 8.2%. Ditto for value data: IBF data shows 50.3% rise, but adjusting for volatility induced by tax changes, we have a 5.4% rise.

Still, nice bit - there is a rise...

Friday, March 28, 2014

28/3/2014: 'Recovery' in Mortgages Lending... Back to 1995...


In previous post I have shown that IBF mortgages approvals data is primarily driven by the excessive volatility recorded at the end of 2012 - beginning of 2013, thus skewing the entire result for February 2014. The details here: http://trueeconomics.blogspot.ie/2014/03/2832014-irish-mortgages-approvals.html

However, we can also look at quarterly data and extend the series to cover periods before IBF data became available. Based on CSO's heavily lagging (the latest we have is Q3 2013) series for House Loans Approved and Paid and extending it with IBF data for Q4 2013, we have data on the issue of number of loans approved and their value from Q1 1975 through Q4 2013. We can also use January-February 2014 data from IBF to estimate Q1 2014 with relative accuracy.

Here are the results:


The argument is that January-February data and indeed data for the later part of 2013 shows improvement in the markets, and even recovery in the markets.

In the last 2 quarters, based on IBF data, there were around 4,510-4,530 house loans approved. This represents 8th lowest quarterly result for the entire history. This also represents lower levels of lending than in Q2 and Q3 2013. Prior to the onset of the crisis, there is not a single quarter on record when there were fewer new loans issued by numbers.

In terms of volumes of lending, without adjusting for inflation, things are only marginally better. Volume of lending over Q4 2013-Q1 2014 averaged at EUR809 million per quarter. This is comparable (but slightly lower) than levels of lending attained in Q4 1995-Q1 1996.

As you can see from the chart, you need to have pretty vivid imagination to spot any recovery in the above series.

28/3/2014: Irish Mortgages Approvals: February 2014


There were some boisterous reports in the media today about the latest IBF data on mortgages approvals in Ireland, covering February 2014.

Here are the facts, some of uncomfortable nature for the 'property markets are back' crowd.


  1. Year on year, mortgages approved for house purchases rose 49.5% which, on the surface, is a massive nearly 50% jump, suggesting huge improvement in the markets (see below on this).
  2. However, 3mo average approvals through February 2014 are down 16.2% on 3mo average approvals through November 2013. Which suggests that things are still running slower in recent months than they did before.
  3. Top-up mortgages approvals have declined: down 6.6% y/y and down 27.3% on 3mo average basis compared to previous 3mo period.
  4. Average value of mortgage approved for house purchase is up 6.5% y/y, but it is down 5.4% for 3mo average through February, compared to 3mo average through November 2013. So mortgages being approved do not support price increases in recent months. Or put differently, mortgages being approved afford lesser LTVs on homes.
Chart to illustrate:

Key takeaways from the chart above:

  • Number of new mortgages approved is running well below the trend, so improvement in February is driven by something other than market growth. Instead, it is driven (as argued below) by extraordinary volatility in approvals around the end of 2012 - beginning of 2013, which was down to expiration of tax breaks at the end of 2012. 
  • Average mortgage approved is on-trend and the trend is down not up. So things are getting worse, not better.

Next, volume of lending:

  1. Total volume of loans issued for house purchase went up 59.1% y/y in February 2014, but
  2. 3mo average through February 2014 was down 20.9% on 3mo average through November 2013. In fact, February 2014 lending was the second lowest level over 10 months, with the worst recorded in January 2014. The start of this year is worse than any 2 months period since January-February 2013, which were distorted by end of tax break in 2012 and stripping these out, this years first two months are the worst since May 2012.


Key takeaways from the chart above:
  • February 'improvement' puts us below trend and within the general trend direction, so the reading is weak, but consistent with upward trend.
Now on to the main bit: What happened to drive February figures so dramatically up in y/y terms? The next chart explains in full (click on the chart to enlarge):


Key takeaways from the chart above:
  • Statistically-speaking, all of the massive increase y/y in lending for house purchases in Ireland recorded this February is down to huge distortion generated in the data by the end of tax breaks in December 2012. There is no other story to tell.

Thursday, March 6, 2014

6/3/2014: A New Property Building Boom for Dublin? Not So Fast...


This is an unedited version of my Sunday Times column from March 2, 2014.


Much has been written about the alleged turnaround in the Irish house prices and property markets fortunes. With first-time buyers reportedly priced out of the market by the cash-rich investors, the commentary has been focusing on the need to deliver new supply of properties to the markets. Enter the wave of recent calls on the Government to create incentives to restart a new building boom.

Alas, new construction can do preciously little to alleviate the property markets pressures. Instead of calling for more construction permits, those interested in delivering a sustainable long-term recovery should be focusing on the resale markets. Given the causes of the current under-supply of and uneven distribution of demand for second-hand properties, it is hardly surprising that this requires dealing with the problems of legacy debts and the structure of the Irish mortgages pool.


The latest data published this month shows that the overall levels of new mortgages issued to the first-time and mover purchasers in 2013 came in at a disappointingly low level of EUR2.3 billion – the second lowest since the records began in 2005. This is almost nine times lower than at the pre-crisis peak, and around half the average levels of lending recorded in 2008-2012.

Yet, by all accounts, there is a build up of demand for properties within the first-time buyer segment of our population. This assertion is supported by empirical evidence.

In 2005-2008 average number of first-time buyer mortgages issued in Ireland stood at 7,062 per annum. In 2011-2013 the number was 1,202.  Even if we accept that half of the pre-crisis mortgages were issued to households with unsuitable risk and financial profiles, since the onset of the crisis, penned up demand for FTB mortgages has cumulated to some 9,342 or EUR 1.65 billion.

As the result of the penned up demand, rents are up, especially in Dublin and major urban areas, where jobs are now being created and where jobs destruction during the crisis peak was less pronounced. The most recent Daft.ie data showed that Dublin rents were rising at 11% a year at the end of 2013, the fastest rate of inflation since mid-2007. This implies that Dublin rents are now almost 18% above the crisis period trough. Meanwhile, outside the urban areas, jobs remain scarce and long-term unemployment is running at higher levels. Thus, excluding Dublin, rents are either stagnant or growing at significantly slower rates.

Property prices are also confirming the ongoing bifurcation in the markets between Dublin and the rest of the country. Dublin residential property prices are now 18 percent higher than at the crisis period trough. Excluding Dublin, property prices are up just 2.6 percent compared to crisis period low.

However, looking at the peak-to-present changes, residential property prices in Dublin are 49.2 percent below their peak. Excluding Dublin, the figure is 46.8 percent.



Thus, data on rents, property prices and volumes of transactions, suggest that to-date, Dublin property market has been driven by the delayed convergence to national trends. Beyond the on-going catching up, however, the property market in Ireland will remain dysfunctional.

This mis-match between demand and supply drivers will likely push the property prices even higher in Dublin over the next 24-36 months. However, absent any significant improvement in the underlying household finances, this price inflation will start flattening out in years ahead.

The reason for this conclusion is the presence of two concurrent drivers of the market.

Firstly, Dublin's demographic and economic fundamentals suggests that equilibrium prices should be somewhere around 30 percent below their pre-crisis peak. This would require prices for Dublin houses to rise by roughly a third on their current averages. Apartments prices should gain some 25 percent over the next 2-3 years to deliver equilibrium level pricing at around 45 percent below the pre-crisis peak.

Secondly, we are also witnessing separation of prices from underlying household incomes and credit supply. Ongoing long-term changes in employment and earnings push purchasing power toward urban centres and are turning rural communities into focal points of emigration for younger and more skilled workers. At the same time, the financial position of established and middle-age Irish households remains severely constrained. The overhang of legacy mortgages debts, lower after-tax earnings and continued jobs insecurity are all weighing on the credit supply, depressing the funding available for house purchases.

Parallel to these trends, we are witnessing gradual increases in the cost of funding mortgages. Based on the data from the Central Bank, retail rates on loans for house purchases over 1 year fixation in Q4 2013 averaged 4.5 percent, or almost 1 percentage point above their Q4 2009 levels. Were the ECB return its policy rates to their historical averages, current lending margins would require new mortgages interest costs in 6.5-7 percent range

Mean-reversion in the interest rates will mean that the majority of the first-time buyers in the market will not be able to secure a mortgage sufficient to cover house purchases without relying on large (ca 30 percent of the property value) down payments. Another problem is that with the cost of funding rising disproportionately for adjustable rate mortgages, keeping legacy tracker mortgages becomes more attractive to current homeowners. This, in turn, implies reduced willingness to trade up or down, depressing supply of existent properties to the market.

Supply of properties in the market is further adversely impacted by the nature of banks' solutions to the arrears crisis. Irish banks 'permanent' restructurings of arrears predominantly involve increasing the levels of debt carried by the households.

The cost of suppressing foreclosures and debt write-downs in the existent mortgages pool is the severely constrained ability of households to trade in the property markets. On the demand side, the knock-on effect is that younger households cannot rely on their parents to fund their down payments for FTB purchases.


The above problems also contribute to tighter supply of new homes to the market, especially in Dublin.

In 2013, new dwellings completions and commencements were running below those recorded in 2011-2012, based on data through Q3 2013. The overall weakness in the residential construction activity is confirmed by the CSO-reported indices. With data covering the period through Q3 2013, both value and volume of residential buildings construction and the number of planning permissions granted in Ireland are down year on year.  Estimates suggest that since the onset of the crisis penned up demand for first-time and mover purchasers has totaled around 25,000-32,000 dwellings. At current rate of new buildings completion, this is equivalent to up to 15 years of new construction supply.

Lack of funding from the zombified banks means that developers and builders cannot launch new projects. In addition, uncertainty about the future tax status of vacant sites and completed properties, as well as the dominant position of Nama in controlling access to land and development finance, are weighing heavily on potential new supply.

But beyond these supply constraints lies an even bigger problem: we simply cannot expect to build any meaningful quantity of new family homes in the areas where we need them.

In Dublin, new construction implies either building apartments blocks or redeveloping existent neighborhoods to increase density. Apartments are hardly in demand by the growing families beyond serving as a first step on the property ladder. In other words, no matter how much our planners dream about building a mini-Manhattan on the Liffey, Dublin property buyers still want individual homes with own gardens. Just as they did so at the times when property prices were double their current levels.

Demographics also stack up against us in the hope of significantly expanding apartments ownership. After 6 years of depressed volume of transactions, the new generation of First-Time Buyers is older and has larger families than their predecessors in the early 2000s. The one- and two-bedroom apartments developments that we used to produce in the past are no longer suitable for them. Furthermore, the city infrastructure – schools, crèches, shopping and family amenities – that accompanies these developments is not fit for purpose in Dublin City.

On the other hand, redevelopment of existent tracks of housing is a costly proposition that requires rapid inflation in selling prices for new homes. Crucially, it demands high turnover in the market to secure suitable redevelopment sites – something that we are unlikely to witness anytime soon. The very same constraints that hold back supply of second hand homes to the market are also holding hostage large-scale redevelopment projects.


This means that for Ireland to generate significant enough uplift in buildings supply we need to incentivise developers to build suitable apartments and for buyers to opt for these apartments. Even assuming we are successful, the resulting uplift in supply will be unlikely to enough downward pressure on property prices inflation in Dublin. In contrast, to support non-speculative demand and to free the supply of properties, we need to restructure our pool of mortgages away from tracker loans, reduce overall debt levels for current borrowers and improve after-tax incomes across the workforce. Until we do, the polarization of Irish property markets between Dublin and the rest of the country will continue.

Calling for more new construction is a naïve exercise in seeking a quick panacea to a very complex and dynamic malaise permeating every corner of our property markets.





BOX-OUT

In recent written answers to questions by Michael McGrath, TD, Minister for Finance, Michael Noonan, TD stated that the Irish State has received €10.24 billion in various proceeds from the banks since 2008. At the same time, the State shares in AIB, Bank of Ireland and Permanent TSB are currently valued at €13.35 billion. These numbers prompted some commentators to suggest that the net cost to the State of rescuing banks currently stands at EUR40.5 billion down from the originally paid-in EUR64.1 billion. Alas, this accounting misses some major points. Firstly, there is cost of funding. Based on current interest rates, the total costs of funds made available for banks recapitalisations is some EUR1.5 billion annually, with full expenditure at the peak of the capital injections running at more than double that. Tallying up these costs cuts the gross receipts by around EUR7.2 billion. Secondly, the EUR13.35 billion estimated value of the banks shares held by the Exchequer is nothing more than an estimate. Selling AIB and Ptsb shares will be an uphill battle. Even realising the value of the Bank of Ireland equity without destroying the bank's balance sheet is a hard task. Adding insult to the injury, the 'repayments' by banks claimed by Minister Noonan came at the expense of the economy at large. Instead of writing down unsustainable mortgages, restricting viable businesses' loans and supplying credit to the economy, the banks were tasked by the State to sell non-core assets to pay down state funds. Any wonder why the credit keeps shrinking, while Minister Noonan keeps talking about the need for banks to support the economy?



Thursday, October 24, 2013

24/10/2013: SCSI/IPD Ireland Property Index Q3 2013

SCSI/IPD Ireland Q3 2013 report is out for commercial property markets and the data is returning some interesting news.

  • Irish commercial property (down 65% since the pre-crisis peak) rose 0.3% in Q3 2013 - the first time capital values were up in 23 quarters.
  • Per SCSI/IPD, the drivers were: improving sentiment relating to the value of discounted properties (bottom fishing is on) and "gradually increasing occupier demand". 
  • Total quarterly return on commercial real estate were at 2.6% - highest since the end of Q3 2007.
  • Per release: "Demand for offices in central Dublin, from both investors and tenants, are driving returns, while recovery across the retail and industrial sectors is slower." So things are very much compressed into few sub-zones of Dublin and the 'bottom-fishing' ain't that good in the rest of the nation. 
  • Office capital values rose 0.9%, while capital returns to industrial and retail property were still down at -0.5% and -0.3% respectively.
  • All property annual income returns were 9.7% in September 2013, the highest measured globally by IPD and much higher than 6% in the UK.
  • Annual income returns were 10.2% for offices, 12.2% for industrial properties and 8.5% for retail.
  • Alas, rental values fell 0.4% overall on weak retail demand (down 1.9%), offices rents were up 0.5% nationwide and 1.0% in central Dublin. Industrial rents are up 0.3%.


Summary: