Showing posts with label building and construction. Show all posts
Showing posts with label building and construction. Show all posts

Thursday, September 10, 2015

10/9/15: Building & Construction: 2Q 2015


Production indices for Building & Construction sector in Ireland, covering 2Q 2015, were out yesterday. Here is the run through the numbers:

All building & construction sector activity by volume rose to 106.2 in 2Q 2015, up 5.46% q/q and 7.16% y/y (I am using seasonally-adjusted basis numbers here).

Much of this increase was down to a 8.78% rise in Building ex-Civil Engineering, which was itself primarily driven by a 14.6% q/q uplift in Residential Building.

Two charts, showing links to Construction sector PMIs:



Charts above illustrate continued decoupling in trends between PMIs-signalled growth and actual activity in the sector. While PMIs have signal strong expansion, the rate of growth in actual activity has been much more modest. As the result, negative correlation between PMIs and CSO index has moderated, but it remains negative on a historical basis.

Wednesday, March 11, 2015

11/3/15: Building & Construction Activity in Ireland: 2014




Irish Building and Construction industry production indices are out for Q4 2014 and full year 2014, so here is a quick look.

Quarterly data:


  • All building and construction activity rose 6% y/y in Q4 2014 by value and 4.5% y/y by volume.Compared to series low, value is up 55% and volume is up 51%. However, compared to historical peak, value is down 70.2% still and volume is down 71.8%. Thus, the annual rise is not impressive: single digit growth off the base that is so low, we are still 36.3% below Q4 2000 in value and 52.8% below Q4 2000 in volume. Worse, Q4 2014 marks the slowest annual growth in value and volume since Q1 2013.



  • Building ex-civil engineering index is up 9.8% y/y in Q4 2014 in value terms and is up 8.6% in volume terms. The series still trend 76% below historical peak in value terms and down 78 in volume terms. Compared to Q4 2000, the series are down 51.3% in value terms and 64% below in volume terms.
  • Residential building production is up massive 36.9% y/y in value terms and 35.2% in volume terms. Again, however, the base of activity is low: the series are still down 76.0% on peak in value terms and down 88.9% in volume terms. Compared to Q4 2000, residential building activity is down 70.6% in value terms and down 79.3% in volume terms.
  • Non-residential building activity fell 3.9% y/y in Q4 2014 in value terms and is down 5.17% in volume terms. The series are 15.3% below Q4 2000 levels of activity in value terms and are down 30.4% in volume terms.
  • Civil engineering activity - the only area of activity where we have been performing relatively better over recent years - posted a decline of 1.6% y/y in Q4 2014 in terms of value of activity and a drop of 2.88% y/y in terms of volume of activity. However, compared to Q4 2000, the series still run 64% ahead in terms of value and 20.6% up in terms of volume.


On annual basis, 2014 was a better year for value of activity compared to volume.

  • Across all building and construction sub-sectors, activity in 2014 was up 9.36% y/y in terms of value of production and up 8.29 in terms of volume. Both value and volume y/y growth rates were weaker in 2014 compared to 2013. Relative to annual averages for 2000-20002 period, activity across all sectors of construction is down 47% in value terms and down 58.7% in volume terms.
  • Residential building activity in 2014 rose 19.0% y/y in value terms (improving on 11.5% growth in 2013) and by 17.5% in volume terms (also improving on 10.8% growth in 2013). However, as with quarterly figures earlier, activity is growing of extremely low base. Compared to 2000-2002 annual averages, 2014 activity in this sub-sector is still down 78.3% in value terms and down 69.0% in volume terms.
  • Non-residential construction activity is up 8.3% y/y in value terms in 2014 (much worse than 19.4% rise recorded in 2013) and in volume terms activity is up 7.2% (also worse than 18.5% rise in 2013). Full year 2014 activity is still well below 2000-2002 annual averages (down 21.4% in value terms and down 31.7% in volume terms).




To conclude: 

  1. Some welcome improvements in the building and construction sector, driven primarily by residential construction activities, but coming off extremely low base of activity in 2013. 
  2. Key issue is how much of 2014 activity uplift was driven by planning permissions secured prior to major regulatory changes that are holding back current permissions activity. 
  3. Another key issue is the apparent significant slowdown in 2014 rates of growth in activity compared to 2013 rates of growth. 
  4. Third issue: despite still low levels of activity in the sector, builders appear to be chasing higher margins on price / value side, instead of lower cost projects.Thus value of activities is rising faster than volume for the second year in a row. If this scenario is sustained into 2015, we are unlikely to see construction sector gains translating into alleviating price appreciation pressures in the rental and house purchasing markets.


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?