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.

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...

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.

2/9/15: House prices, rents and Irish demographics

Based on latest data from CSO, Dublin has gained disproportionately in population compared to the rest of the country in 12 months through April 2015. At the top level, Dublin population rose 30,700 in 2015 compared to overall state population rise of 25,800, which implies that ex-Dublin, the country lost population at the rate of 4,900. Dublin v rest of the state population changes were even more dramatic when one considers age distribution.

• Population aged 0-19 years rose in Dublin by 15,700 in 2015. The same group numbers increased state-wide by 19,600. Which means ex-Dublin, younger population rose only 3,900 against Dublin's 15,700. This highlights family formation dynamics in Dublin as opposed to the rest of the country.
• Younger working-age population (age 20-29) fell in Dublin by 5,700 in 2015. Across the country, the decline was 25,400. Which means that ex-Dublin, younger working-age population has declined by 19,700.
• The main cohort of working-age population (30-64 years old) has risen in Dublin by 15,700 in 2015 compared to 2014. Across the country the increase was 14,100, which implies that ex-Dublin, the state lost 1,600 adults in the main working age cohort.
• Older population dynamics were also in favour of Dublin. In 12 months through April 2015, population aged 65 and older rose in Dublin by 4,900 and it was up nationwide by 25,800. Which means that ex-Dublin, older age population rose 20,900.

The above dynamics suggest demographic support for rising property prices and rents in Dublin, as was suggested by some analysts. This may or may not be so, since population dynamics work over years, not in simple y/y terms. So let's take a look at relative changes in Dublin population compared to the rest of the state:

Dublin population, as % of state-wide population of core home ownership demographic that transacts on the purchasing side of the market (30-64 year olds) has been rising overall since falling to 27.5% in 2010 and is currently standing at 28.9%, still below 29.6% high in 1996. But the rental demographic of 20-29 year olds has shown different dynamics, reaching period trough in 2013 (at 32.3%) and rising since then to 33.1% in 2015, a level consistent with 2011. Neither suggests huge uplift in demand for rentals or owner-occupied homes.

Of course, these are cohorts of 2015. Back in 2007, when house loans were last available in plentiful supply, large share of purchasers demographic today was… err… renters. And absent credit for house purchases, as this demographic moved into purchasing age, they stayed renters.  This would suggest increased pressures on rents. But the picture is more messed up by the losses of population share in 20-29 years old group, most likely due to emigration. Longer tenure for children staying in parents' homes also should have held rents back. In other words, our traditional view of demographic distribution of buyers v renters has been messed up by the sheer duration of the current crisis.

Take 2010-2015 period. Over that time, Dublin population of 20-29 year olds fell 61,000 and across the rest of the country, this cohort numbers fell 123,000. But cohort of 30-64 year olds rose in Dublin by 60,900 against a rise of 47,600 in the rest of the country. Demand based on demographics, therefore, suggests swing from renting toward purchasing. Similar picture repeats if we take 2011-2015 cumulative changes and 2012-2015 and 2013-2015. And, still, rents were rising.

What is more mysterious is that overall working age population has been relatively mildly altered in recent years. In Dublin, working age cohort (20-64 year olds) has grown by just 10,000 in 2014-2015 period and it is up only 8,000 on 2012. The cohort is still down 13,300 on 2008. Across the country, ex-Dublin, things were much worse: since 2008 the cohort fell 62,200 and compared to 2014 it is now down 21,300. In simple terms, unless children and retirees are buying homes, there shouldn't be any dramatic uplifts in demand for property in Dublin, and most certainly outside Dublin.

Which goes to say that any claims about actual demand (based on numbers of potential renters and buyers) are a bit strained. In 2008, there were 821,200 people of age 20-64 living in Dublin. Today there are 807,900. Unemployment rose over that time too. So where is that tremendous growth in demand coming from to push property prices up? Property prices in Dublin hit a period trough in 2012. Since then, there has been a net increase of just 8,000 in 20-64 year olds cohort living in Dublin. Again, where is that spiking in demand coming from?

In my view, simple demographics do not explain Irish property prices uptick from crisis lows. Speculation and latent surplus of savings in a relatively small category of Irish residents (and ex-past), plus re-distribution within cohorts between renters and buyers are the main drivers on demand side of the equation. Supply side also contributes significantly to prices uptick. And beyond that, there has to be significant behavioural component: our addiction to property - despite all the hopes of Dublin 'planners' for an Amsterdam on the Liffey - has not gone away over the years of the crisis. The first, initial shock to the economy has had an effect of scaring us put of the markets for property. Negative equity contributed more downward momentum. But once we learned to live with our fears, we simply decided o turn back to our old model of family investment: bricks and mortar. 

16/7/15: Nama: The Gift of Giving That Keeps on Giving...

While Greece is limping to its Bailout 3.0, our national heroes at Nama are busy fighting massive (California-sized) forest fires.

The Northern Ireland story (covered on this blog here) is refusing to go away:

1. An academic legal eagle exposition from the U.S. It's in NYTimes, which is on the 'radar' of all our development agencies (the folks that do have Good Minister's ear to whisper into).
2. And Irish News is covering the statement issued by Mr. Ian Coulter, the former managing partner of Belfast law firm Tughans. Sluggerotool.com covers same with extra details. Same covered in the Journal.ie piece here.
3. A good article from the Irish Times on Cerberus (the fund in the middle of Nama's Northern Ireland's case) and its use of Irish companies as vehicles for purchasing some EUR19 billion worth of assets. "Each of the Irish companies owns hundreds of millions, or in some cases billions, of euro in assets but has no employees in Ireland and in some instances, pays no corporation tax here. Cerberus has established at least 10 such companies in Ireland since it started its European property loan shopping spree in 2013, all of which appear to be owned by Promontoria, a Dutch fund that is 100 per cent owned by Cerberus Capital Management." 
4. Another person in the middle of Norther Irish deal - Mr. Frank Cushnahan was, it appears, a 'serial director' in "over 30 companies" according to this article in the Irish Times. Which, obviously, qualified him to advise Nama.
5. Deputy Mick Wallace went on to add to the story, claiming that Nama was aware of the suspicious aspects of transaction in the North, 'since January'. Nama categorically denied this.
6. The UK National Crime Agency will investigate Deputy Wallace's claims.

Meanwhile, back at the foot of this mountain of proverbial... err... at home in Dublin, revelations that our Government appointments to Nama posts could have been... surprise-surprise... political. Who would have thought this much?

There is a documentary trail now to prove that Nama was a party to Government-related discussions about 'fixing' the land market in the Republic. In this, the State's objective of attempting to control the supply of land for development and improve saleability of assets is uncovered and Nama cooperation is identified. Nothing like manipulating the markets as a direct policy objective, folks. We had, of course, back in June this year, Deputy Mick Wallace's allegations that Nama has some unorthodox dealings with the rental sector in Ireland, allegedly "a “cartel” of big property owners had driven up rental costs in Dublin" as “A small group of players now control a large chunk of the rental market in Dublin"... He also said Nama likes to sell properties in big blocks “that only investment funds, vulture funds, mostly from America, have the money to be buying”.

A good old article from Bloomberg archives covering another Nama deal fiasco. The deal was a dodo: Morgan Stanley bought about 220 million pounds of loans to West Properties for "about 65 million pounds ($103 million), or a 70 percent discount". Nama does not sell properties to parties connected to original developers... you know...

And to top it all, we have a new load of revelations from Mick Wallace, TD on further fun-under-the-sun relating to the Holy Grail of Irish Solutions to Irish Problems: the claim made under "Dáil privilege, ... a person in construction who wanted to exit NAMA and was asked to pay €15,000 “in a bag – in cash.”

Wallace also referenced recently the Chicago Spire case (covered earlier here in my compendium of 10 worst deals on Nama's record). A quote: "I would like NAMA to explain its approach when a bidder went to buy not the loans but the debt of the Chicago Spire, which was at $78 million plus costs which brought it to approximately $93 million. An investor sought to buy the debt, and this was every penny that was owed to the bank. This was not the reduced value, but the par value. In other words, this investor was prepared to pay the debt in full but NAMA gave it to Jones Lang LaSalle in New York to sell. This was a site in Chicago. Even if NAMA thought it could get more for it, it was not in New York that it would have got it. It would have been interesting if it had marketed it in Chicago. Why could NAMA not accept the debt being bought out? It is estimated that it was sold for $35 million. NAMA refused $78 million, plus the cost, and it accepted a figure in the region of €35 million. That was claimed to be in the interests of the taxpayer."

It is worth repeating that Nama has denied any wrongdoing in any of the above cases and has now requested that Gardai investigate Deputy Wallace's claims. All other players in the Northern Ireland saga also denied allegations.

Of course, when it comes to Nama asking Gardai to investigate N. Irish deal allegations and denying any knowledge of wrongdoing, without putting their intent and their denial into question, one might recall that Nama is fully aware of another wrongdoing relating to IBRC interest rate overcharging (as detailed and documented here: http://trueeconomics.blogspot.ie/2015/06/11615-full-letter-concerning-ibrc.html). But so far, Nama is in no rush to address the matter it has been notified about some ages ago (see details here: http://trueeconomics.blogspot.ie/2015/06/12615-anglo-overcharging-saga-ganley.html). Lest we forget, NAMA was the biggest buyer of the IBRC loans to which the interest overcharging applied, and, it is alleged (see here: http://trueeconomics.blogspot.ie/2015/06/1062015-bombshell-goes-off-on-anglo.html), this overcharging continued for loans transferred to Nama and still continues, despite the High Court Ruling of October 2014.

2/1/2014: 'Rip-off Ireland' and Local Authorities' Rents

H/T to @SeamusCoffey for flagging the following chart from the CSO:

Two things of note:

1. The 'deleveraging' of costs in Ireland (remember the 'competitiveness gains' meme?) is obviously not touching state-controlled rents that remain at the levels compatible to those in early 2008, while private rents index is running around early 2006 levels; and
2. Since 2011 - when the current Government (led by the 'rip-off Ireland' opponents from the FG) came to power - Local Authority Rents are back on the rising trend.

Here is the same CSO data charted in its full glory and rebased to 100 = average for 2003

• Actual Rentals (Housing and Mortgage Interest inclusive) down 8.28% in Q4 2013 compared to Q1 2007 average
• Actual Rents Paid by Tenants are down 2.32%
• Private Rents are down 6.61%
• Local Authority Rents are up 25.97%

You know... 'protecting the worst-off' thingy etc, etc, etc...

Economics 25/05/2010: Daft rental report

Update below: stabilization or not?

Daft rental report is out today. Some interesting reading of the numbers. As predicted by me on the foot of January data - when the prevailing media song was about 'stabilizing' rental markets - rents are continuing their Southward trajectory.

Relative to peak rent:
So no relief in sight. Remember, in this country we call things 'stabilizing' when the rate of fall slows down... Pardon my foreign language skills, but I'd say things are stabilizing when we reach the bottom. In other words, when the numbers above stop increasing in absolute value.

Let me reproduce for you the seasonality chart I did back on the foot of January data:
You can see what I meant by January rally back then, and you can see that things have fizzled out since then. When one realizes that since 2008 we virtually had no new units coming into the rental market, this figure looks even more depressing. We are experiencing a real decline in demand as jobless families are dropping out not out of the property market, but out of the rental market! Emigration is, no doubt, also playing its part. All of which means that those first time buyers... well, are rapidly becoming first time lodgers in their moms homes.

What about the dynamics going forward?

Well, neither levels of rents, nor rates of change in rents are showing any stabilization. Both series are trending in the negative territory, suggesting that pressure on rents might remain, adjusting for seasonality, for some time. That said, positive monthly territory for now remain in sight, both in moving average terms and in rate of change terms. So expect shallow moves, with a risk to some downside.

Update: Since earlier today, there have been some debates going on as to whether Daft data shows any stabilization in rents. As I asserted earlier, relative to peak, monthly march downward continues (see table above) uninterrupted (once seasonality is factored in for January) and in absolute terms for all 4 months. But what about year on year changes? Table below shows the results:
So per annual changes, 2 conclusions are warranted:

• While the rate of decline has moderated across 2010 relative to 2009, the declines continued in double digits in February, March and April. Only in March and April have the declines been lower than a year ago.
• Probability wise, this was to be expected given seasonal variations, with likelihood of more positive moves in March and April being twice higher than in February.

On the net, I do not see any stabilization so far. Oh, and just in case you wondered - Daft data also shows uptick in properties available for rent... Hmmm...