26/9/2012: Residential Property Price Index for Ireland, August 2012

Residential Property Price Index for Ireland (RPPI) for August 2012 is out today, triggering a torrent of usual commentary - some optimistic, some more bleak, depending on the focus of the analysis reported. Here are the facts:

Overall RPPI:

• Index for all properties nationwide has risen marginally to 65.2 in August against July reading of 64.9 and this represents second consecutive monthly rise. M/m index rose 0.46% in August after posting a 0.15% rise in July. 
• However, index reading remains below May when it stood at 65.5 and marks the third lowest reading in history of the series. 
• 3mo MA for the overall index is now 64.97 in August and that is below 3mo MA ever recorded in the history of the series.
• Y/y index fell 11.77% in August, which is an improvement on the fall of 13.58% in July and the shallowest annual rate of decline in any month since February 2011.
• Overall residential properties prices are now 50.04% below their peak which is an improvement on the absolute bottom level of -50.34% on the peak, albeit statistically-speaking there is no discernable difference.
• YTD average monthly change in the index is -0.68% and 12mo MA change is -1.03%. In other words, however you spin annual or monthly date, from September 2011 through August 2012 prices have fallen on average at a monthly rate of 1.03%.

Chart to illustrate:

Note, not a factual, but 'interpretative observation, we are seeing some attempts in the market to 'bottom out'. This does not mean that the market will bottom out here, but it does represent a first such instance of an attempt in the market.

Houses prices:

• Safe as houses stuff prices rose to 68 in August from 67.8 in July marking second consecutive month of increases (in July prices rose 0.296% m/m and in August the rise was 0.295% - both statistically indistinguishable from zero).
• However, as with overall residential prices, house prices through August failed to regain levels registered in May (68.2).
• Y/y house prices are down 11.69% in August - slowest rate of annual drop since March 2011.
• Relative to peak house prices are now down 48.48%
• YTD average monthly drop is at 0.66% and 12mo MA monthly drop is at 1.03% so the same analysis for dynamics stands as for the overall RPPI above.

Chart on this below (after Apartments analysis).

Apartments prices:

• Apartments prices firmed up to 46.9 in August from 45.8 in July and are still below the levels attained in June (47.6), implying the index is at the second lowest point in its history.
• M/m prices rose 2.40% posting the first rise since April 2012. Y/y apartments prices are down 14.57% - the slowest rate of annual decline since February 2011.
• Relative to peak, shoe boxes (err.. apartments) are now trading at a discount of 62.15%.
• 12moMA of monthly deflation is at -1.53% and YTD average monthly price drop is -1.59%. Good luck if you are taking any solace from the one month blip.

Dublin prices:

• Unlike the rest of the country (where I suspect prices changes are driven primarily by thin and selection-biased markets), Dublin property prices have continued steady decline dropping 0.52% m/m in August after 0.35% drop in July. 
• August thus marks the second consecutive month since prices posted shallow increases in March-May 2012.
• August also marks the month in which Dublin property prices have hit another record low at 57.3, with the previous record low attained in July (57.6) and in February 2012.
• Dublin prices are now 57.40% below their peak.

I will be blogging later tonight on my forecasts for 2012 prices and on impact of these prices changes on Nama balancesheet, so stay tuned.

25/9/2012: Some questions on foot of latest ESM statement

From today's Joint Statement of the Ministers of Finance of Germany, the Netherlands and Finland (link here):
"Specifically, we discussed the governance, independence, decision making and accountability of the new Single Supervisory Mechanism involving the ECB. The new framework has to ensure that the ECB can continue to conduct effectively and independently its current tasks, and it has to take into account the concerns of non euro area Member States regarding governance of the new supervision. This requires appropriate governance structures and a clear division of responsibilities between a new ECB Supervisory Council, which may include representatives from all Members States, and the Governing Council of the ECB. To ensure the accountability of the new Supervisory Council, it should report on the stability situation and its decisions to European Finance Ministers (Ecofin Council or Eurogroup ) as well as provide reports to the European Parliament and national Parliaments."

Key points in my view are:

• Core problem is the coordination of regulatory systems for euro area banks and non euro area banks is now further fractionalized into the space of 'supervised Euro area banks', 'non-supervised Euro area banks' (assuming the new Single Supervisory Mechanism (SSM) applies only to systemically important banks), 'non-Euro area banks in countries under mechanism', 'non-Euro area banks outside mechanism but inside the mechanism-covered countries', 'non-Euro area banks in countries outside the mechanism'.
• The role of the Supervisory Council vis-a-vis the Governing Council of the ECB
• The extent and nature of reporting by the Supervisory Council as well as the extent of the Ecofin / Eurogroup and EU Parliament oversight (if any) over the Supervisory Council activities.

"Regarding longer term issues, we discussed basic principles for enabling direct ESM bank recapitalisation, which can only take place once the single supervisory mechanism is established and its effectiveness has been determined. Principles that should be incorporated in design of the instrument for direct recapitalization include: 
1) direct recapitalisation decisions need to be taken by a regular decision of the ESM to be accompanied with a MoU; 
2) the ESM can take direct responsibility of problems that occur under the new supervision, but legacy assets should be under the responsibility of national authorities; 
3) the recapitalisation should always occur using estimated real economic values; 
4) direct bank recapitalisation by the ESM should take place based on an approach that adheres to the basic order of first using private capital, then national public capital and only as a last resort the ESM."

Points of note here are:

• ESM recapitalization of the banks can only take place after the SSM is both established and proven in its effectiveness. Time scale for this? Anyone's guess. While time scale for Spanish economic meltdown is pretty well in front of our eyes.
• Full and formal MoU will be required - a political no-go territory for some countries, though in fact the EU can fudge this requirement by simply re-printing as an MoU already ongoing 'reforms' processes.
• Legacy assets should remain under the responsibility of national authorities, which means there is no coverage under the ESM for crisis-related assets. One can interpret this, possibly, as a de facto no to any removal of the Irish banks assets off the hands of the Irish state. One can also read this as a potential for restructuring some of the Irish Government liabilities relating to banks, but only to the extent of altering the cost of funding these liabilities (e.g. ESM loan with no change in actual liability risk, so that Irish banks-related debts will remain Irish Government liability).
• Point (3) implies no 'future economic value' in computing ESM-available funding. In other words, losses incurred will not be covered. Which opens the question - who will cover the losses?
• Point (4) is clear with respect to equity holders (these take the hit first, then the state owned equity is wiped out, only after that - ESM), but what about lenders to the banks (private bondholders and official lenders, including ECB)?

25/9/2012: One hell of a mess...

A quick quote from the recent Citi report on euro area economics, relating to ESM (emphasis is mine):

"Of the €500bn, €100bn is earmarked for future Spanish bank recapitalisation. If Ireland retroactively gets full mutualisation of sovereign debt issued to recapitalise its banks, that would require another €64bn. Equivalent treatment for Greece would cost €45bn and for Portugal €8.5bn. That would leave €282.5bn, a pittance compared with the likely future funding needs of Spain and Italy, unless the ECB
does most of the heavy lifting through the OMT."

Puts matters into perspective: Irish banking mess would cost EZ more funds than Greece and Portugal combined. Put alternatively, Irish taxpayers have done more to underwrite risks within the EZ banking system than Greek and Portuguese taxpayers combined. Take your pick of the option for interpreting...

To wet your appetite for explicatives further, here's another quote:

"We are still likely to see multiple sovereign debt restructurings of EA periphery sovereigns, starting possibly with Greece and probably lasting into 2015.

• We expect Portugal will likely require sovereign debt restructuring, possibly in 2014-15, but could happen even earlier, both through OSI and through PSI (Private sector involvement). 
• Unless Ireland benefits from major OSI, say in the form of a mutualisation through the ESM of up to €64bn worth of sovereign debt – the counterpart of the capital injection into its banking system provided by the Irish authorities between 2008 and 2010 – we believe it too is likely to see sovereign debt restructuring.
• The Spanish sovereign and banking sector taken together are most likely insolvent. The relevant question then becomes what combination of mutualisation, bank debt restructuring and sovereign debt restructuring will occur...
• Italy should never suffer a sovereign default due to inability to pay in our view. It is a rich country with massive private wealth and, by the standards of the periphery, is in a relatively good economic shape, although massive structural reforms are required to get out of the swamp the country now finds itself in."

25/9/2012: Some thoughts on US Government debt

There's much of a debate going on about which US President has added most to the US Government debt stockpile. The question is far from trivial.

Here's the chart plotting overall evolution of the US debt since 1980 with presidential tenures super-imposed onto it:

So far, it appears the contest is between Ronald Reagan, George W. Bush and Barack Obama. The tables below summarizes the presidential administrations' performance in terms of the US debt first in terms of absolute current US dollars and then in terms of debt to GDP ratios:

The problem is, of course, two-fold:

1. Presidential tenure starts in year 1, for which some of the budgetary dimensions are already Pre-set by the previous administration, and the tenure ends in year 4, when the outgoing President sets out some of the legacy measures for the incoming one;
2. Presidential tenures range between 4 and 8 years in the above period.

Controlling for the (1) is hard, so let's assume that the incoming President shares the burden of fiscal regime setting in year 1 with his predecessor. Tables below show this analysis:

The last two columns in the above summarize overall rates of change per year in office and this makes it clear:

• Current administration leads in terms of overall rate of increasing the US Government debt by a factor of 5 times that of the Reagan administration;
• The above does not account for inflation, as figures stated are in current US Dollars, but to match Barack Obama's rate of increasing public debt in real terms to that achieved by the Reagan administration we need annual inflation in excess of 6.5% pa. Meanwhile, over the period GDP deflator averaged 3.56%pa, while CPI averaged between 2.95% and 2.96% (depending on annual metric chosen);
• Obama administration also leads, by a massive margin, every other administration in the rates of debt increases relative to GDP.

24/9/2012: Irish Building & Construction decline v EU27

Last post on Irish Building & Construction sector data for Q2 2012. Here are the comparatives for EU member states based on current activity (through Q1-Q2 2012) compared to 2006-2007 peak levels:

No need to comment on the above...

24/9/2012: Irish Building & Construction Sector Activity Q2 2012

And in another post prompted by @stephenkinsella tweet, here's an update on CSO data for Irish Building & Construction sector activity:

Ex-Civil Engineering:

• Value index fell to 17.6 in Q2 2012 from 18.7 in Q1 2012, marking 5.88% decline q/q and down 15% y/y.
• H1 2012 Value index is down 12.11% on H2 2011 and down 13.78% on H1 2011.
• Value index fell to 15.5% relative to the peak and volume index declined to 14.66% of the peak level
• Volume index dropped to 15.6 in Q2 2012 down on 16.7 in Q1 2012, marking a 6.59% decline q/q and 16.6% decline y/y. 
• H1 2012 volume index was down 13.17% on H2 2011 and down 14.55% on H1 2011.
• Both Value and Volume indices are now down on an annual basis for 22 consecutive quarters.

Civil Engineering:

• Value of Civil Engineering activity rose from 58.4 in Q1 2012 to 62.7 in Q2 2012 (+7.36% q/q) and advanced 11/4% y/y, registering the first annual rate of increase after 15 quarters of contraction.
• H1 2012 value index rose +1.68% on H2 2011 and is up 5.21% on H1 2011.
• Volume of activity also grew from 52.3 in Q1 2012 to 55.8 in Q2 2012 (+6.69% q/q and +9.8% y/y) also breaking for the first time annualized contraction period of 18 quarters.
• H1 2012 volume index rose 0.93% on H2 2011 and is up 4.75% on H1 2011.

Residential and non-residential:

• Residential construction value index fell from 9.1 in Q1 2012 to 8.6 in Q2 2012 (-15.7% y/y and -5.49% q/q). H1 2012 index was down 9.69% on H2 2011 and down 16.51% on H1 2011. Relative to peak, the index is now down 92.45%.
• Residential construction volume index fell to 7.7 in Q2 2012 from 8.3 in Q1 2012 (decline of 7.23% q/q and down 17.2% y/y). The index is now down 92.53% on peak.
• Non-residential construction value index fell from 55.4 in Q1 2012 to 51.5 in Q2 2012 (-14.7% y/y and -7.04% q/q). H1 2012 index was down 14.41% on H2 2011 and down 12.23% on H1 2011. Relative to peak, the index is now down 58.23%.
• Non-residential construction volume index fell from 49.4 in Q1 2012 to 46.0 in Q2 2012 (-15.8% y/y and -6.88% q/q). H1 2012 index was down 15.12% on H2 2011 and down 12.48% on H1 2011. Relative to peak, the index is now down 58.89%.

To sum up: rates of decline are (annually) in double digits and/or accelerating in Q2 2012 in Residential (value and volume), Non-residential (value and volume) and ex-Civil Engineering (value and volume). Residential construction is now at 8.6% of 2005 levels in value terms and 7.7% of 2005 levels in volume terms. Non-residential construction is now at 51.5% of 2005 levels in value terms and 46% in volume terms. Civil Engineering activity is now at 62.7% of 2005 levels in value terms and at 55.8% in volume terms. All activity ex-civil engineering is now down to 17.6% of 2005 levels in value terms and 15.6% in volume terms.