Irish Housing: Goodbody economists say today that Ireland has "a number of demographic features that make it rather unique in a European context" which will boost housing demand long-term but supply shortages are set to increase in the short-term.
Jean-Baptiste Say (1767-1832), a businessman who was the first professor of political economy in France, who like Richard Cantillon (1680-1734), the Irish-French economist, promoted the use of the word entrepreneur (’l'entrepreneur d’industrie’), had bubble-time economist adherents in Ireland for what is known as Say's Law: supply creates its own demand.
Irish mortgage approvals in 2014 at 36-year low; Exceed paid loans - includes ESRI forecast of housing needs by 2021.
In 2006, economists at NCB Stockbrokers in a report 'Ireland's Demographic Dividend' [pdf] said: "We expect the underlying demand for housing to be about 65,000 per annum until 2015, subsiding thereafter to about 55,000 per annum until 2020."
2006 was the crazy year when 93,000 housing units were completed and in today's report Dermot O'Leary and Juliet Tennent say that housing completions grew for the first time in eight years in 2014." However, at 11,000 units, supply remains 88% below peak levels and, more importantly, is well below our c.30,000 medium-term demand forecast. It may take until the end of the decade for supply to match expected household demand, given development and planning lags, construction sector capacity constraints and limited financing. The supply shortages are most acute in the Greater Dublin Area."
The Goodbody report [pdf] says that Ireland has a number of demographic features that make it rather unique in a European context. These include: (i) the youngest population, as measured by the median age; (ii) the highest birth rate; (iii) the lowest death rate; (iv) large migration flows relative to the total population, and; (v) an expectation of continued population growth over the coming two decades. These will continue to be supportive to housing demand over the medium-term.
"While there has been significant migration outflows over recent years, Ireland's population did not fall and the number of households has continued to increase. Our estimates suggest that household formation will continue to grow over the next decade. Under a low migration scenario, household formation is expected to grow to 21,000 per annum over the 2016-2021 period, while under a high migration scenario, household formation will be 26,000 per annum. This is up significantly on growth of recent years (c.13,000). Beyond 2016 and allowing for replacement stock, we believe that annual housing demand will grow to between 27,000 and 36,000 units per annum.
There are important regional differences that one must be aware of when assessing the prospects for the Irish housing market. On the demand side, the share of the total population in the Greater Dublin Area will continue to increase, reflecting the lure of employment in the city, both from internal and external migration and the higher starting base.
Supply shortages to increase in the short-term: Overbuilding in the boom years of the 2000s caused an oversupply in the Irish housing market, reflected by the fact that 11.5% of the housing stock was vacant in 2011. Within this, there were important differences between locations and types of properties. For instance, 25% of apartments were vacant but 10% of houses were. Regionally, the vacancy rate ranged from 5% in South Dublin to 23% in Leitrim. The lowest vacancy rates were all in the Greater Dublin Area, and were below 'normal' even in 2011."
The economists say that new Central Bank mortgage restrictions will cause a moderation in new mortgage lending, but this will not occur until the second half of 2015. "We now expect gross lending growth of 29% in 2015, followed by 11% in 2016. The measures are aimed at preventing a repeat of the credit-fuelled housing bubble of the 2000s, and are something that we welcome. The tighter lending standards must be set against growing demand and low interest rates. Annual gross lending of €8bn is a reasonable target for a 'normal' level of lending (c.€4bn currently), but this will not be achieved until later in the decade.
"Prices should reflect underlying fundamentals but sometimes become detached due to expectations, both on the upside and the downside. Ireland has experienced both in the past decade. We believe that prices right now are close to fair-value, and will see strong, albeit moderating growth over the next two years (7% in 2015, 5% in 2016). Price/income ratios and affordability metrics are close to historical averages, but will deteriorate over the coming years. From an investment perspective, residential yields offer a significant pick-up over government bonds, and strong growth will see rents (9% in 2015, 8% in 2016) surpass the previous peak by the end of this year."