Notwithstanding continued increases in output, a severe shortage of accommodation remains the most pressing issue within the Irish housing market.
Last year some 19,271 houses and apartments were built across Ireland, representing growth of 29% y/y and the highest annual output since 2009. Other measures of activity also point to progress. Housing commencements, at 16,725 in the period to end-November, were up by a third on the outturn for the first 11 months of 2016. The CSO’s Production in Building and Construction Index shows that the volume of residential building activity in Q3 2017 was the highest since Q1 2009. CSO planning permissions data (a lead indicator for completions) show that 13,842 dwelling units were approved in the first nine months of 2017, representing a 15% improvement on the same period in 2016.
While the rate of increase in housing activity is welcome, this needs to be put into context. The range of estimates for annual new household formation stretches from c. 30,000 units (ESRI) to c. 50,000 units (Daft.ie). So last year’s 19,271 completions fall well below the low end of that range. The Central Bank of Ireland forecasts completions of 23,000 units this year and 27,000 in 2019, consistent with the Investec view that it will be some time in the 2020s before output rises to meet the flow of new demand.
The main factors influencing new household formation are:
(i) natural demographics;
(ii) average household size; and
(iii) migration flows. On natural demographics,
Ireland has a relatively youthful demographic profile and a fertility rate (number of births per female) that is one of the highest in the EU. Population growth is expected to be among the highest in Europe in the coming decades and the latest (based on the 2011 Census) CSO projections estimate that the population will grow by between 6% and 16% in the 15 years to 2026. With that being said, the 2016 Census showed population growth of 3.8% in the preceding five years – above even the most optimistic of the CSO’s scenarios for the period.
Elsewhere, looking at headship rates, the average number of people per household in Ireland has sharply declined over the past 50 years, from 4.0 in 1966 to 2016’s 2.7. Interestingly, however, the latest Census data show that the decline in the average household size stalled between 2011 and 2016. We suspect that this was only a temporary pause due to the lack of housing availability, as indicated by the 3pp increase in the proportion of people aged between 20 and 35 living with their parents between 2011 and 2016. If the rate declines over time to the European average of 2.3 people per household then an additional 330,000 housing units would be required (versus a current stock of 2.0m units).
Finally, migration flows can have a significant impact on housing demand. Net migration has had a greater impact on the change in Ireland’s population than natural factors in three of the six five-year Census periods since 1986. After a hiatus during the recession, Ireland saw a return to net inward migration in the year to April 2016 for the first time since 2009. The trend continued in the year to April 2017 with net migration totalling 20,000 in this period. Given the economic backdrop, it would not be a surprise to see a return to significant levels of immigration in the coming years. Net migration of 28,000 (the annual average in the 10 years to 2005) increases housing demand by 10,000 units, at the average household size of 2.75 persons.
Apart from new household formation, a number of other factors are underpinning the demand for housing. In GDP terms, Ireland has been the fastest growing economy in the EU28 in each of the past four years. The indications are that the economy entered 2018 with a very strong tailwind behind it.
The strengthening economic conditions have produced a marked improvement in the labour market, with unemployment currently at a nine-and-a-half year low of 6.1%, which in turn implies that total employment now stands at 2.2m, so back to within 1% of the previous (Celtic Tiger era) peak.
Tighter labour market conditions are having a positive impact on household incomes. CSO data show that average weekly earnings reached an all-time high of €721.47 in Q1 2017, while disposable incomes will have been further boosted by the modest income tax reductions unveiled in each of the past four Budgets in Ireland. Demand for residential property will also have been supported by reductions in mortgage lending rates.
In November the Central Bank of Ireland published a review of its macroprudential mortgage measures, which place restrictions on the borrowing capacity of home buyers.
The bulk of the existing measures were kept intact, with only minor changes to some of the ‘allowances’ for lending outside of the rules. Had the rule change been implemented from the start of 2017, it would have had a slight impact on c. 4% of the mortgages drawn down in the first nine months of 2017, so the revisions to the rules are unlikely to have a discernible effect on mortgage market activity.
Another factor influencing demand for housing is the government’s Help to Buy scheme. Since July 2016 first time buyers of new build residential properties have been able to avail of a tax rebate of up to €20,000. By the end of 2017 The Revenue Commissioners had paid out €68.9m to 4,824 approved buyers under the scheme.
Strong demand and muted new supply have had a predictable impact on both prices and rents. The CSO’s Residential Property Price Index (RPPI) has increased by a cumulative 72% since the March 2013 trough. Notwithstanding this improvement, prices are still 23% below their April 2007 peak. The latest RPPI data, for December 2017, show that prices were +12.3% y/y with relatively little variance in the annual growth rate between Dublin (+11.6% y/y) and the rest of Ireland (+13.3% y/y).
Turning to the rental market, the latest data from the country’s largest property website, Daft.ie, show that the average asking rent across Ireland was a record €1,239 in Q1 2018. This is 67% above the trough reached during the recession. In Dublin average asking rents were €1,842 in Q1 2018, also an all-time high, and 83% above the low point recorded during the downturn. The mismatch between demand and new build has severely constrained the availability of rental properties. Daft.ie data show that only 1,339 units were available to rent in Dublin in February, which is 60% below the average for the series (which dates back to January 2007). Outside of the capital, 3,143 units were available to rent in the same month, 80% below the series average.
In December 2016 the Irish government announced the imposition of a limit of 4% annual rental increases in designated ‘rent pressure zones’ (including all of Dublin) for an initial three year period. This ceiling does not apply to new build units or properties that have not been let out in the past two years within the rent pressure zones. The ‘rent caps’ have helped to cool the annual rate of growth in private rents from 9.6% in December 2016 to 5.6% in November 2017, as per the latest
The strong recovery in both prices and rents from their respective troughs means that residential rental yields remain quite elevated. Daft.ie estimates that the national average yield was 6.1% in Q4 2017, within the range of 5.9%-6.4% that has been recorded since capital values troughed in Q1 2013. With the rental yield well above the cost of funding for retail and institutional buyers alike, the Irish residential market should continue to attract interest from buy-to-let investors.
In summary, while housing output continues to increase, it remains well below the flow of new demand, contributing to ongoing growth in the stock of unmet housing need in Ireland. Until this gap is closed, it would seem that the path of least resistance for both prices and rents remains to the upside, with the latter tempered only by the rent inflation caps in the key urban markets.