Davy Research Irish economy September 3 215 MyHome Property Report, Q3 215: Slowdown continues DAVY VIEW The MyHome.ie asking price data for Q3 suggest that the slowdown in Irish house price inflation will continue into the final months of 215. Asking prices on new instructions rose by 1.8% nationally but fell marginally, by.1%, in Dublin. This is the first decline in Dublin asking prices since early 212 pointing to a weak end to the year. Nonetheless, we still expect Irish house price inflation to slow to 5% by December 215 and register 4-5% gains per annum over the medium term. Slowdown in house price inflation continues; declines in Dublin The MyHome.ie asking price data for Q3 suggest that the slowdown in Irish house price inflation will continue into the final months of 215. Asking prices on the entire stock of properties listed for sale on MyHome.ie rose by 1.6% in Q3, up 6.3% on the year. There was a 1.5% increase in Dublin, with asking prices up 8.8% on the year. However, the best leading indicator of actual transaction prices is the movement in asking prices on new instructions. Asking prices on new instructions rose by a reasonably robust 1.8% nationally but fell marginally, by.1%, in Dublin. This is the first quarterly decline in Dublin asking prices since early 212 pointing to a weak end to 215. It is possible that sellers in the capital have been slow to recognise changing market conditions. So actual transaction prices could fall by more than.1% in Dublin in the final quarter of 215. The stock of properties for sale on the MyHome.ie website in Dublin is still up 45% year-on-year, with the average time to sale agreed rising marginally to three months. The emergence of wage growth and rising incomes should support Irish house prices over the medium term Affordability has become most stretched in Dublin at 6x average incomes, compared with 3.5-5x in other areas. Also, the Central Bank s mortgage lending rules that only apply to first-time buyers purchasing over 225, were always more likely to bite in the capital. Indeed, the CSO s Residential Property Price Index (RPPI) indicated that price inflation was stronger outside the capital in July for the first time since 28. So there may be more room for catch-up in prices outside Dublin. Conall Mac Coille conall.maccoille@davy.ie / +353 1 614877 Economics Team Conall Mac Coille, David McNamara research@davy.ie MyHome asking prices yoy % 3 25 2 15 1 5-5 -1-15 -2-25 26 27 28 29 21 211 212 213 214 215 National ask. prices (New instruct.) National ask. prices (Stock) Dublin ask. prices (Stock) Dublin ask. prices (New instruct.) MyHome asking prices, % changes Qoq Yoy National mix-adjusted (stock) +1.6% +6.3% Dublin mix-adjusted (stock) +1.5% +8.8% National mix-adjusted (new instructions) Dublin mix-adjusted (new instructions) +1.8% +6.% -.1% +4.8% Source:MyHome.ie Overall, house prices have increased by.6% on average over the past five months. So we are broadly on track to see house price inflation slow towards 5% by December. Looking forward, positive wage growth coupled with tax cuts in Budget 216 will support house prices, as will the lack of housing supply and strong rental inflation. See the end of this report for important disclosures and analyst certification. All authors are Research Analysts unless otherwise stated.
Irish economy September 3 215 Irish house price inflation set to slow to 5% The MyHome.ie asking price data for Q3 suggest that the slowdown in Irish house price inflation will continue into the final months of 215. Asking prices on the entire stock of properties listed for sale on MyHome.ie rose by 1.6% in Q3, up 6.3% on the year. There was a 1.5% increase in Dublin, with asking prices up 8.8% on the year. Asking prices on new instructions to sell fell.1% in Dublin, their first quarterly decline since 212 However, the best leading indicator of actual transaction prices is the movement in asking prices on new instructions. Asking prices on new instructions rose by 1.8% nationally but fell marginally, by.1%, in Dublin. This is the first decline in Dublin asking prices since early 212 pointing to a weak end to the year. The big picture is that stretched affordability, the Central Bank s mortgage lending rules and an improving stock of homes available for sale are cooling price rises, particularly in Dublin. However, as we suggested in previous reports, Irish house price inflation is slowing but sustained declines seem unlikely. Looking forward, wage growth coupled with tax cuts in Budget 216 will help to support house price inflation. The on-going lack of housing supply and strong rental inflation will also support transaction prices. We still expect house price inflation to slow to 5% by December, with a similar gain likely in 216. Table 1: MyHome asking prices, Dublin and national We still expect Irish house price inflation to slow towards 5% by the end of 215 Price ( ) % change quarteron-quarter % change yearon-year National mix-adjusted (stock) 25, 1.6 6.3 Dublin mix-adjusted (stock) 286,1 1.5 8.8 National mix-adjusted (new instructions) 216,8 1.8 6 Dublin mix-adjusted (new instructions) 312,6 -.1 4.8 Figure 1: MyHome asking prices, Dublin and national yoy % 3 25 2 15 1 5-5 -1-15 -2-25 26 27 28 29 21 211 212 213 214 215 National Asking Prices (New Instructions) National Asking Prices (Stock) Dublin Asking Prices (Stock) Dublin Asking Prices (New Instructions) 2 Davy Research
Q1 1 Q2 1 Q3 1 Q4 1 Q1 11 Q2 11 Q3 11 Q4 11 Q1 12 Q2 12 Q3 12 Q4 12 Q1 13 Q2 13 Q3 13 Q4 13 Q1 14 Q2 14 Q3 14 Q4 14 Q1 15 Q2 15 Irish economy September 3 215 Figure 2: Stock of properties listed for sale on MyHome.ie, Dublin and national 8 7 6 5 4 3 2 1 211 212 213 214 215 5, 45, 4, 35, 3, 25, 2, 15, 1, 5, Dublin (LHS) National (RHS) Ex-Dublin (RHS) Cash buyers still account for close to 5% of transaction despite the end of capital gains tax exemptions in 214 Momentum in housing transactions and mortgage lending falling back There were 21,876 residential property market transactions, worth 4.6bn, in the first half of 215. Over the same period, there were 1,729 mortgage loans for house purchase, worth 1.9bn. Cash buyers are clearly still an important part of the market, accounting for 5% of transactions. Figure 3: Property market transactions: cash versus mortgages 18 16 14 12 1 8 6 4 2 Mortgages Cash Having recorded exceptionally strong growth in 214 and early 215, activity levels in the residential property market are now slowing down. The number of residential property market transactions grew by 52% in 214 but were up by 31% in the year to Q2 215 and by only.7% in July. Similarly, mortgage approvals were up just 2.5% in July, a sharp slowdown from the 6% expansion in the year to Q1 215. 3 Davy Research
Irish economy September 3 215 Table 2: Property market activity levels, annual % changes Mortgage approvals for house purchase Mortgage lending for house purchase Residential property transactions 213 6.1% -4.9% 25.3% 214 49.5% 49.6% 51.9% Q1 215 4.6% 63.9% 65.9% Q2 215 7.5% 29.2% 3.9% July 215 2.5% n/a.7% Source: Property Price Register; Banking and Payments Federation The stock of properties on the MyHome.ie website available for sale was 24,265 in September. This is actually down 12% on the year. In Dublin, however, there were 5,196 properties, up 45% from the 3,586 recorded last year. This loosening of the supply-demand balance in the capital has helped to slow house prices. Nonetheless, the average time for homes to move to sale agreed has halved since 212 and had fallen to five months in Q3. Given stretched affordability, the slowdown has been concentrated in Dublin In July, the Residential Property Price Index (RPPI) index showed that house price inflation was 8.4% in Dublin but 9.4% outside the capital. Excluding the period when prices were falling rapidly, this is the first time that Dublin house price inflation has been weaker than the rest of the country since 28. Of course, the recovery in Dublin house prices began earlier so that affordability has become stretched. But there may be more room for recovery in other areas. Affordability has become most stretched in the capital, but there may be more room for catch-up in the rest of the country The table below compares affordability across Ireland. In Dublin, the median asking price on a 3-bed, semi-detached house is 28, now a 6.1x multiple of average incomes of 45,643. However, the house price to income multiple is 3-4x in the border, midwest, west and south-east regions. Not surprisingly, the mid-east is the second most expensive region at 5.x average incomes followed by the south-west at 4.9x. Table 3: House price to earnings ratio across Ireland Median asking price ( ) Wages per head employed ( ) House price to income ratio (x) Midlands 95, 33,429 2.8 Border 115, 34,52 3.4 Mid-west 129, 37,21 3.5 West 115, 32,84 3.6 South-east 125, 32,33 3.9 South-west 17, 34,977 4.9 Mid-east 193,5 38,544 5. Dublin 28, 45,643 6.1 State 195, 36,9 5.3 Source: Davy calculations; CSO; MyHome.ie Constraints on mortgage lending are also holding back price inflation in the capital. Although first-time buyers purchasing homes below 225, are excluded from the new limits, this is far less likely in Dublin. That said, these first-time buyers are likely to have faced only a small reduction of 1-2 percentage points in their Loan-to-Value (LTV) ratio. 4 Davy Research
Irish economy September 3 215 Anecdotal evidence and media reports suggest that banks have now largely utilised their 15% allocation of loans allowed to breach the new limits and are now rationing higher LTV loans in the remainder of 215. This development could hold back price inflation in the second half of the year. However, the bigger point is that first-time buyers in Dublin are not being allowed to respond to the lack of supply and stretched affordability by taking out ever higher mortgage loans. This is a positive development. Instead, government action to address the lack of supply of new homes in Dublin is sorely needed. Homebuilding will struggle to exceed 13, units in 215 a disappointing response to strong demand Homebuilding still struggling to pick up There were 6,745 housing completions in the first seven months of 215, up 15.8% from the same period of 214. While homebuilding is clearly expanding at a rapid pace, it is doing so from a very low base. Housing completions will probably struggle to exceed 13, this year, up from 11, in 214 but still well short of the 25, required to satiate household formation. The big picture remains that construction activity has been slow to react to clear latent demand for housing. The medium-term outlook for housing supply will depend on concrete action by government to address constraints on homebuilding such as planning, land availability, inappropriate levies and charges on residential development. For example, the Organisation for Economic Co-operation and Development (OECD) recently recommended that the government should avoid subsidies for first-time buyers that merely stoke house price inflation and should instead focus on liberalising planning requirements such as building heights in Dublin. Buoyant rental growth makes it attractive to buy The Consumer Price Index data show that private rents rose by 1.5% in the year to August. Moreover, the Central Statistics Office (CSO) index suggests that private rents are now just.5% below their previous peak in February 28. The alternative Private Residential Tenancies Board (PRTB) measure paints a similar picture, indicating that rents rose by 7.1% in the year to Q2 215 and by 9.3% in Dublin. With residential rent inflation exceeding 1%, it is increasingly making sense to buy rather than rent The re-emergence of positive wage growth should support house prices over the medium-term. With transaction prices broadly flat through the first half of 215, but rents rising, rental yields have staged a small recovery. For many investors, rental yields will appear attractive relative to government bonds or current bank deposit rates close to zero. According to the PRTB, the average rent is now 878 nationally and 1,262 in Dublin. In this context, buying is becoming increasingly attractive to renting. The figures above imply annual rent payments of 1,536 and 15,144 respectively. In contrast, the annual interest on a 18, mortgage with a 4% rate would equal 7,2. Moreover, the fixed rate on new mortgage lending had declined to 3.99% in Q1 215 and will fall further through the year. House prices will be driven by higher incomes in 216 It now seems clear that the summer of 214 was something of a high watermark for the Irish housing market, with 2%+ rates of inflation in Dublin and transactions rushed ahead of the expiry of capital gains tax. Although the Central Bank mortgage lending rules have led to expectations for indefinite double-digit house price inflation being reined in, they also appear to have resulted in a surge in mortgage approvals in early 215 ahead of their implementation. The growth in activity and prices has cooled as some of the froth at the turn of the year has subsided. 5 Davy Research
Irish economy September 3 215 We expect the annual RPPI inflation rate to slow towards 5% by the end of 215 and a similar gain is likely in 216. Affordability has become stretched and the Central Bank rules have stopped first-time buyers responding by taking out ever higher mortgage loans. So the market will not be driven by leverage. Instead, a key development for the housing market this year has been the re-emergence of wage growth. Private sector earnings grew by 2.4% in the year to Q2 215. Moreover, Budget 216 looks set to implement a 1.2-1.5bn giveaway, split equally between spending increases and tax rises. These measures could boost disposable incomes by 1%. Irish house price inflation in 216 now looks set to be driven by rising incomes. 6 Davy Research
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