Thursday 20 June 2019

Dan O'Brien: 'The worst of the housing crisis is over'

Home-building is surging, increases in rents and house prices are slowing. Good news, writes Dan O'Brien

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Dan O'Brien

Dan O'Brien

The last week of February 2013 was a turning point. For the first time there was real reason to believe the economic depression which followed the property crash was coming to an end.

That winter week saw figures on both jobs and joblessness published. "These two sets of numbers are probably the most encouraging economic news in half a decade," I wrote at the time. The recovery has continued uninterrupted since.

The last 10 days have brought what seems to me the same sense of change in the housing crisis - for the first time in six years pay levels are rising faster than house prices. In other words, the relationship between people's incomes and the price of buying a property has stabilised. That will bring comfort to many seeking to acquire their own home.

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Two other sets of figures give further reason to believe the big problems around housing are being brought under control. First, the number of new homes being built continues to grow rapidly, and although there is still some way to go before supply meets even the lowest estimate of demand, things are moving in that direction fast.

Second, and perhaps most importantly, rent increases have slowed sharply and are now within touching distance of pay increases. That will bring relief to the hundreds of thousands of people who don't own the roofs over their heads.

Before looking in depth at the dry facts and figures, consider a few of the broader issues around housing and discussion of the topic.

Just as there was a lot of gloom around in early 2013 - the country was in an international bail-out and there had been almost no good news on the economy since the crash six years earlier - there is a lot of downbeat analysis about housing, homelessness and affordability.

There has been very good reason for the gloom. But as was the case in 2013, when claims were made that 'austerity' made recovery impossible and many people had given up believing that the corner could be turned after politicians had wrongly claimed so often that it had, there appears to be a reluctance to believe that housing problems can be solved. This pessimism has even pervaded some expert quarters.

This may be because our public discourse tends towards pessimism. Another aspect of the negativity around housing is the belief that everyone who rents is a frustrated homeowner. There are, of course, plenty of people in that position. But it is by no means all.

Ireland has moved towards the international average in terms of the share of the population which rents. Part of this is a due to the phenomenon of extended adolescence - people are settling down later and many want to keep their options open. Buying a home unquestionably reduces mobility.

Another big reason for the decline in home ownership is immigration. A rising share of the population is not Irish by birth. The newly arrived everywhere are much more likely to rent than to buy. The more mobile and transient nature of the population is likely to result in the share of renters continuing to rise.

Now to the details of the recent housing-related data. At the beginning of the column I posited a view that the easing of rental inflation was perhaps the most important aspect of the recent changes in the housing picture.

That view is based on the fact renters have had a tougher time of it than anyone else, and that the big increase in homelessness in recent years is directly related to high rents. And rents are high. They are far above pre-crisis peaks, in contrast to property prices - the average house price nationally remains almost one-fifth lower than just before the crash in 2007-08.

The shortage of housing is most acute in the rental sector and, anecdotally, is to be seen at property viewings when throngs of people show up to look over each property.

The good news is that rent increases are now at their lowest rates since 2013. The latest inflation figures compiled by the CSO show they were rising at just over 5pc annually in April. That is down from an extended period of near double-digit increases over a three-year period to early 2017.

This easing of rent inflation is happening at the same times as an acceleration in pay growth. The latest average weekly earnings figures show an annual increase of 4.6pc. This means rent increases are, on average, now eating into people's incomes only marginally. In other words, the affordability of rents is stabilising, albeit at a high level.

The easing of house price inflation has been even more marked. Last week's figures (for March) showed property prices rising at their lowest rate in six years. Nationally, prices were up 3.9pc on a year earlier, which, as noted at the beginning of this column, is lower than earnings growth.

In Dublin, where prices are far higher than anywhere else in the country, price rises fell to just 1.2pc in March, the lowest since 2012. Indeed, Dublin home prices have fallen for five months on the trot (compared to each previous month), the longest period of decline since 2011.

To a considerable extent, the easing of rent and house price inflation is due to more new homes being built.

Last week's final set of house-related figures, published last Thursday, showed a 23pc increase in the number of new dwellings completed in the first three months of this year compared to the same period last year. On recent trends, 22,000 homes will be completed this year. It may well be more.

That is still not enough in anyone's view, given the level of demand in a fast-growing economy, but with housing cost increases now moving into line with pay growth, the worst of the housing crisis is very likely to be over.

*******

If there is reason to hope Ireland's housing problems are on the wane, recent days have brought more reason to fear for Ireland's exporters and those who work in that huge, dynamic sector. Over the past 10 days, the US president has dramatically upped the ante in his trade war with China. Donald Trump's willingness to escalate such conflicts bodes ill for Ireland.

All EU countries, represented by the European Commission, have a common international trade policy. If Trump does to the EU what he has done with China, more and more Irish exports to the US risk being subjected to punitive taxes on arrival at American ports.

That matters a lot because the US is Ireland's biggest single export market by a distance. Last year goods worth €40bn were shipped to the American market. That was more than France, an economy more than 10 times bigger than Ireland's.

Among the EU 28 countries only the other major economies - Italy, the UK and Germany - sold more stuff to the Americans in absolute terms. Relative to economic size or on a per head basis, no EU country comes close to Ireland's export dependence on the US.

While export growth to the US has been broad-based, medical and chemical product have driven recent increases and now account for more than 70pc of goods exports by value. Irish eyes in the trade space are focused on any hint from Washington that products made by this sector will be hit with new tariffs. If that happened, the negative impact for the Irish economy is potentially very large.

At this stage, succour can be taken from the fact EU-US trade was still booming in the first months of 2019, according to export/import figures just published by the EU's statistics agency. Two-way trade grew by a strong 12pc in the first three months of the year compared to the same period in 2018.

Trump, it seems, shows up everywhere - except in the economic data. One hopes that will continue. One has to fear that it won't.

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