Thursday 22 August 2019

Dan O'Brien: 'New Central Bank boss has little leeway to ease mortgage rules'

The continued easing of the housing crisis is reflected in opinion polls, but there is still a distance to travel, writes Dan O'Brien

Gabriel Makhlouf will take up his role as Central Bank governor on September 1 under a cloud of controversy. Photo: Vivek Prakash/Bloomberg
Gabriel Makhlouf will take up his role as Central Bank governor on September 1 under a cloud of controversy. Photo: Vivek Prakash/Bloomberg
Dan O'Brien

Dan O'Brien

Last May this column argued that a range of housing-related data pointed to the worst of the housing crisis being over. Instead of welcoming some good news, the article raised quite a few hackles, proving, if it ever needed proving, that there is a vociferous minority who want something to be outraged about and will react strongly when the cause of their outrage might be taken away.

Before looking at the further evidence of an easing of the housing crisis over the past three months, consider a couple of recent polls which provide interesting insights into how the public views a range of housing matters.

Last week, the bi-annual Eurobarometer poll of opinion across the 28 countries of the EU was published. One of the many questions it puts to people is to ask them what the most pressing national issues are in their country. In the spring, when the poll was taken, Irish respondents put housing among the country's biggest issues, with 54pc citing it as one of the country's two most pressing matters, well above the second most cited issue (health at 41pc).

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The poll shows how seriously the issue is taken among the public. But the share of respondents saying housing is among the most pressing national issues fell by a statistically significant six percentage points since the previous poll last autumn. That is a sign that the easing of the problem is being felt on the ground.

A Kantar poll conducted for this newspaper in recent weeks provides further insights into housing matters. Remarkably, almost half of those asked believed that the housing market was heading for the same sort collapse as occurred in the half decade after 2007. This better reflects the scale of the national trauma suffered as a result of the crash than the wisdom of crowds.

The difference in credit conditions between now and 2007 is chalk and cheese. In the 2000s, excessive credit caused a bubble and when it collapsed, it brought down the economy. If the property market slumps in the foreseeable future it will be because the economy slumps, not because there is another bubble ripe for bursting. And even if there were to be a deep recession, following a no-deal Brexit for example, it is very unlikely that property prices would fall by 50pc, as they did in the 2007-12 period. That is because excessive credit is not a factor driving price levels today.

Also odd is the public's view on policy measures put in place since the crash to prevent exactly the sort of bubble that caused so much misery. Two thirds of respondents don't like them, saying that they are unfair on first-time buyers. Growing public opposition to rules on how much people can borrow is reflected in the views of politicians who are increasingly calling for a loosening of the rules.

This will be an early test for the new governor of the Central Bank, Gabriel Makhlouf, who has left a senior civil service position in New Zealand to take up the role at the beginning of next month. It is the Central Bank that is tasked with regulating the lenders, including limits on the size of loans relative to incomes and the price of the property being purchased. For Makhlouf to ease the rules would give the appearance of caving in to political pressure. That would undermine the credibility of the new governor, including among his eurozone peers for whom central bank independence is sacrosanct.

Makhlouf will be aware of concerns in Frankfurt about his appointment. It has emerged that the European Central Bank raised questions about a citizen from a non-euro area country becoming a member of its governing council (Makhlouf, who holds a British passport, will automatically take a seat on the ECB's most important committee by dint of his governorship of the Irish Central Bank). He starts the role at a disadvantage because of this, and will need to win over the other 24 members of the governing council.

Making matters worse for the incoming governor was his mishandling of a budget leak in his previous role, which emerged since he won the job in an open competition. That has tarnished his reputation before he even becomes governor, placing him in an even more disadvantageous position. All this points to a man with little leeway for error or being seen to err. As such, the borrowing rules look set to remain unchanged for the foreseeable future.

With polling data discussed, what does the most recent hard, housing-related data have to say about whether the worst of the housing crisis is over?

Start with the most pressing aspect of housing shortage: homelessness. There was a three-fold increase in the number of people formally registered as homeless in the four years to early 2018. In the year and half since then, the numbers have stabilised at around 10,000 people. This is, of course, too high, but stopping a problem getting worse is the first step in its resolution. The second most pressing issue on housing is rents. Many more people are affected by high rents than are homeless. As of the last census in 2016, there were more than 300,000 households in the private rental sector.

Last week the latest consumer price inflation figures were published. They include a detailed breakdown of the prices of almost everything that is purchased across the economy. They include private rents. From a time when rents were rising at double-digit rates as recently as 2016, the latest figures showed that rents across the country were 5.6pc higher in July than in the same month as last year. Change on a month-by-month basis shows a continued downward trend in July.

Such rates of increase are still too high, but the trend is downwards and it is happening as pay growth is accelerating. Put another way, the amount of renters' incomes being absorbed by housing costs is stabilising. It is worth noting that the CSO figures cover both existing and new rental agreements in the market.

Despite this, they get much less attention than the consistently higher figures compiled by the Residential Tenancies Board, which only includes new rental agreements. It should be the other way around.

What about house prices? Property inflation has also been cooling even more rapidly than rent inflation. The latest national annual increase was down to 2.8pc in May, a rate that is below average earnings' growth across the economy. Price developments in June, which will be published next week, are likely to show a further easing. And as prices have been falling in Dublin since last November, home purchases have actually become more affordable in the capital.

The deceleration in rent and property price inflation, reflects demand and supply factors moving into alignment. Given the economy is still growing strongly and the population is expanding at a rate seven times' faster than the European average, it is not the demand side of the equation that is driving the realignment.

The ramping up of supply explains what is happening. Last week the CSO published figures on the number of homes completed in the April-June period of this year. At almost 5,000, that represented a rise of 12pc on a year earlier.

If there is anything to cause concern in the recent data, it is the slowing growth rate of new home completions. In the second half of 2017, completions were growing by 50pc on an annualised basis. Such a clip was never going to be maintained, and more modest increases are only to be expected. But with supply still not sufficient to meet demand, a slowing to single digit rates of growth would be unwelcome. That probably won't happen in the quarters to come, but it is one to watch.

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