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.

31/12/2014: Irish Ghost Estates: The March of Zombies

An interesting recent article from the Irish Independent on the sad state of Irish ghost estates: http://www.independent.ie/business/personal-finance/property-mortgages/work-stopped-on-226-ghost-estates-across-ireland-30856439.html?utm_content=bufferd7e17&utm_medium=social&utm_source=twitter.com&utm_campaign=buffer

Interesting, from my perspective, not just in the fact that 226 ghost estates saw no work activity in 2014, despite the uplift in property prices and Government prioritising completion of ghost estates. But interesting due to numbers it revealed.

Take a deep breath: seven years after the crisis set in, and nine years after building activity contraction set in, Ireland (a country of 4.8 million inhabitants) still has 992 estates (as in multiple dwellings developments) unfinished. And of these, 776 estates have people residing on the site of abandoned construction. But that is not all, 271 more (on top of 992 above) are not completed, but deemed to have been 'substantially completed' (which can mean pretty much anything).

Good news, 1,854 ghost estates have been completed. Bad news is that the Year Four of Our Government's Recover Turnaround, only 271 ghost estates have been completed, which means that at current rate we are looking at 2017 or later before we are rid of the ghost estates. That is a decade of physical scars reminding us about less than a decade of excesses. Of course, given growth in homelessness, the rising spectre of banks repossessions, the social housing lists explosion and other fine mess, non-physical scars will be with us much longer.

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'.

26/6/2014: You Might Need a Hubble to Spot That Bubble

In my analysis yesterday (here) I argued that Dublin residential property prices are simply showing signs of reversion to trend, not 'bubble' dynamics. Since then, numerous reports in the media produced opposite conclusions, with headlines forcibly putting forward an argument for 'bubble' formation in Dublin property markets.

Over long run, sustainable property prices appreciation should track closely inflation in the economy. So far is pretty much clear. While arbitrary, starting points for trend estimation for Dublin property should start from pre-bubble period of 1999-2001. This is also pretty clear.

So let us apply Consumer Price Index-measured inflation to Dublin residential property price indices and see where the trend is against current reading. The following chart, based on annual series 2000-2013 and May 2014 for current reading illustrates this exercise:

Here's a pesky problem for 'bubble'-maniacs out there:

1. If property prices expanded at the rate of inflation from 2000 on, current Dublin property prices index should read around 91.2.
2. If property prices expanded at the ECB policy-consistent inflation target of 2%, the index should read around 89.4
3. Current CSO index reading is 72.2

So we are somewhere 25-26% below 'sustainable' levels of house prices, if these are measured by inflation-linked price appreciation, or 24% below ECB-targeted rate of inflation.

You do need quite a powerful telescope to spot the bubble in Dublin markets from here. Which, of course, should not be read as 'there is no bubble', just as 'we can't yet tell anything about bubble being formed'.

Economics 06/04/2010: Return of the markets

Another 'Must Read' from WSJ - Gary Becker on Obamanomics, health care reform and why Americans will opt once again for Smaller Government with more checks and balances on the power of bureaucracy. Read it here.

Perhaps the most insightful - from our point of view here in Ireland - is Becker's arguments about interest groups-driven poor legislation that ossifies into innovation-choking regulatory diktat absent proper competition between interest groups acting as a (limited) check on the corrupting power of tax-and-spend politics.

having just returned from the Western sea board, I can testify to that corrupting power. Take a small town, popular with summer vacationers, I visited. Bungalows piled mile-high - crowding each other and older homes. Local county councilors own, per local paper expose, many of these, with some holding mortgages on 7-9 of such vacation properties, with section 30 tax breaks attached to make the deal sweeter. Scores of developments (not one-offs) were built in violation of planning permissions granted. And scores of planning permissions were granted in violation of the standard building codes.

As a friend of mine has described the countryside: 'You have D4 folks with homes, back then, worth some €4-5 million rushing to buy public-housing-styled vacation homes for a €1 million-plus with an illusion that these were to be their country retreats. And the Government was dishing out tax breaks...'

We clearly have no competing interest groups - just a Social partnership feeding party.

What if interest rates rise?

Just to stake some forward looking ground - here is a quick thought.

While we are preoccupied with the current crises, one has to wonder what the future might hold. Consider the following scenario.

Mid-2010 and German economy recovers slightly ahead of the rest of the Eurozone. Why? Because Germany is more exposed to global growth and thus will respond to renewed global demand for investment and consumer goods; and because German consumption has been suppressed since the mid 1990s, creating a significant domestic demand overhang. The ECB's response will be to immediately raise interest rates.

Of course, prior to German recovery, Manufacturing Purchasing Indices and other leading indicators will be flashing red for some time, prompting an earlier rise in interest rates in early 2010. So, say, Eurozone enters 2010 with 0.5-0.75% rate, goes to 1.0-1.25% by June 2010 and jumps to 2.0-2.25% by the end of 2010.

What happens then? Ireland, will by now have much higher taxes (three-tier rates structure of 25%, 48% and 52%), much lower standard deductions and standard rate ceiling, with higher PRSI and pensions tax relief at a standard rate. This will mean that before ECB rates hikes, our mortgages burden will be on par with those that prevailed at the onset of the crisis, but against a backdrop of lower disposable income. Now, as interest rates revert to rising, the burden of debt will start climbing up against decimated household incomes. Homeowners, with savings exhausted during the 2009-2010 downturn will be feeling more heat than they do today. Foreclosures will rise and personal insolvencies will go sky high. Consumption will remain suppressed, but this time, there will be no boost in savings. Ireland Inc might suffer a complete fall-out of the growth re-start.

An example
Here are some numbers. Assume we take a family with Q1 2008 after-tax income of €100 and a mortgage burden of €35 (35% of the after-tax income). By Q1 2009, due to falling interest rates, this family's mortgage costs will have fallen 26% (roughly 10% per each 1% fall in ECB rates). At the same time, the family income has declined to €91 due to increased taxation (Budget 2009) and recession. In Q1 2009, family mortgage burden was €26 or 28.5% of the disposable income.

Now, assume we are in Q4 2009 and recession continues and Mr Lenihan has stuck to his promises and raided the family income to 25-48-52% tax rates outlined above). The family after-tax disposable income now stands at €82, while the ECB has lowered the rate to 0.75% from current 1.50%. The family is now paying €24 in mortgage which constitutes a mortgage burden of 29.25% of the family income.

We go to Q1 2010 next. Recession and Mr Lenihan keep on robbing the family of income, so its after-tax take home pay is now €79.5. But due to advance leading indicators flashing recovery for Germany, the ECB tightens the rates a notch to 1.0%. Family mortgage burden jumps to 31% as the twin blades of higher taxes and interest rates inflict two simultaneous cuts to household's spending power.

On to Q4 2010. Things are going swimmingly in Berlin, so the ECB races with rates increases. We have three scenarios:

Scenario 1: relative stagnation in Ireland - so our income remains at €79, while German expansion drives rates to 1.75%. Irish family's mortgage burden jumps to 33.4% of the disposable income.

Scenario 2: recession in Ireland continues, with income falling to €76, while more mild German expansion drives the ECB to raise rates to 1.5%. Irish family's mortgage burden jumps to 34%.

Scenario 3: recovery shines upon Ireland and our income rises to €80, while rapid growth in Germany drives rates up to 2.25%. Our family's mortgage repayment burden is now at 36% of the disposable after-tax income.

Conclusion
May be Alan Ahearne, in his new capacity, can tell Minister Lenihan this much? Or anyone from a myriad of our vociferous social-democratic economists, begging the Government today to raise taxes. Little hope. His (and their) policy advice to date has been pretty much in line with the Government's efforts to demolish private sector workers in order to save public sector jobs. Then again, neither Ahearne, no Lenihan will be losing much sleep over ordinary families who will be unable to stay afloat in this WunderWorld of richly rewarded public sector and impoverished private sector workers that they are creating.

Recession? Raise taxes. Public finance busting at the seams? Raise taxes. Unemployment? Raise taxes. Public sector inefficiencies? Raise taxes. Exports plunging? Raise taxes. Banks falling off the cliff? Raise taxes. And always blame the outside world for any trouble we might land ourselves into. Classic economic problems with uniquely Irish responses.

"Pints!"