Further improvement in new supply, but still long way to go
Improvement in the pace of new supply
The rate of increase in the supply of new housing units accelerated in the third quarter of this year. The CSO’s ‘new dwelling completions’ rose by 22% on a year-on-year basis. This represented a pick-up in the pace of growth when compared to the 16% yearly rate in the first half of 2019. Over the first three quarters of the year, completions are up 18% compared to the same period in 2018. They rose by 25% for the full year in 2018. The moving four quarter aggregate number is now at 20,249 units.
Based on their current trajectory, completions in the region may total 21,500 this year. Looking at the geographic breakdown of the data, it shows that 60% of all completions in the third quarter were in Dublin and the commuter belt area of the Mid-East (i.e. Kildare, Louth, Meath, Wicklow). However, it is noticeable that the yearly rate of growth of new supply in Dublin was at just 3% in Q3. Meanwhile, the Mid-East recorded a very strong 52% increase over the period.
Forward looking ‘hard’ data indicators point to on-going improvement in future supply, although some survey data suggest a more mixed picture. Figures for housing starts, based on the Department of Housing’s commencement notices, showed a year-on-year increase of 33% in quarter three. This compares to a 17% y/y increase in H1 2019. However, the sharp increase in Q3 may in part be due to activity being brought forward ahead of new building regulations coming into operation in November. The 12 month cumulative total is running at 26,000 units.
Meanwhile, registration data, which are a proxy for developer activity, indicate that this sector has lost some momentum this year and are on course to record a smaller increase in 2019 versus 2018. On the other hand, planning permissions were up by 23% in the first three quarters of the year, with the 12 month running total now above 34,000 units. Meantime, in terms of survey data, the housing sub-component of the construction PMI, has been on a weakening trend over the last few months.
Worryingly, in November it fell into contraction territory (i.e. below 50) for the first time since 2013. Overall, from a supply perspective, the key issue is that new housing completions continue to run well below the estimated annual demand of 35,000 units. Given recent trends, this required level of supply may not be attained for another three years. Even then, supply is only meeting annual demand. It will be even longer before the pent-up demand that has been accumulating over recent years is also satisfied.
House price inflation has slowed sharply this year
The residential property market has seen a continuation in 2019 of the sharp slowdown in annual price inflation that started to emerge around mid-2018. Annual CSO house price growth is now at its weakest since mid-2013, slowing to 0.9% in October. This contrasts with a 13% rate of growth seen in April 2018. However, on a month-on-month basis, prices have now risen for eight consecutive months, suggesting the downtrend is levelling off.
The geographic breakdown of the data shows that that the Dublin market is actually experiencing falling house prices. In October, prices were down by 1.5% in year-on-year terms, representing the third straight month of yearly declines. Prices outside the capital continue to rise, although the pace of increase has slowed considerably. Non-Dublin prices increased by 3.3% y/y in October, well down on the 15% rate seen in June of last year.
The sharp deceleration in house price growth largely reflects the impact of the central bank macro prudential mortgage rules. These rules, which were recently reaffirmed by the CBoI following their annual review, act as constraints on the level of finance that potential homebuyers can access. This issue appears to be having the greatest influence on the Dublin market, where prices are far higher than elsewhere in the country. The weakening trend in prices in Dublin has coincided with a slight rise in unsold stock on the market, with the daft.ie figures on stock available for sale showing a 2% year-on-year increase in September. At the same time, the rate of growth in new mortgage lending has slowed this year compared to 2018. Lending was up 11% in value terms in the year to Q3, versus 20% in 2018. Meantime, while approvals continue to rise, the rate of increase has slowed in recent months, with the 12 month running total standing at around 39,500.
As we look ahead to 2020, the Irish residential property market will continue to be defined by supply undershooting demand, although the gap should continue to narrow. However, it could be well into the next decade before supply and demand come close to balance. Meanwhile, prices seem likely to rise at just a modest pace, despite the ongoing shortage of housing.
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