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2020 Q2 Market Commentary

 

Many highly paid renters don’t want to buy

Ten years ago the Irish housing stock hit 2 million, a new high at the time, before falling  for the next six years, such was the collapse in housebuilding, which failed to keep pace with the depreciation rate. The stock is now expanding again (completions exceeded 21,000 last year, double the figure in 2016) but is lagging the growth in population so the stock per capita has yet to arrest its decade long fall. The pick-up in house building was widely forecast but the supply response has been underwhelming and certainly weaker than expected by the Government. It is also significantly below that seen in the Celtic Tiger era, implying a range of constraints, including, inter alia, the price of land, a scarcity of labour, VAT on building, access to funding and thin margins for builders.

Demand has also picked up of course and almost half a million jobs have been created since 2011 with the numbers at work at record levels, exceeding the previous peak by over 100,000. Household disposable income now exceeds €115bn, up over 15% in the last three years alone. This backdrop of rising incomes relative to scarce housing supply has pushed up residential prices by 84% from the lows in 2013, but has been almost matched by a 76% rise in rents (which bottomed earlier) an unusual feature of this cycle.

What is different this time? One big factor is the absence of the leverage seen in the Celtic Tiger era, as the Central Bank mortgage controls essentially peg the growth in the average new mortgage to the growth in buyer income, with the average LTI for First Time Buyers currently 3.1 from over 4 in the pre-crash era. The Central bank itself estimates that, absent the controls, new mortgage lending might be 40% higher with prices 20% above current levels. Some potential house buyers are therefore pushed into the rental market or still living at home. But we have the odd situation that the average monthly rent actually paid is €1240 nationally and €1,762 in Dublin, according to the Residential Tenancies Board, against the €990 monthly cost of a new FTB mortgage. So the average rent paid nationally would service a €290,000 mortgage, against the average €230,000 actually drawn down by FTBs.

Yet the Central Bank controls are not the only driver here. Full-time employee earnings in Ireland averaged around €49,000 last year, substantially lower than the €68,000 earned in jobs that barely existed fifteen or twenty years ago, such as  Information and Communications . Moreover that differential has widened considerably over the past decade, from €10,000 a decade ago. Similarly average full-time pay was €66,000 in financial services in 2019, again substantially outpacing average earnings growth since 2010.One implication is clear- workers in these industries, mainly based in Dublin, can afford to pay much higher rents than those on average incomes and below. Another point, though, is that many of these workers may simply prefer to rent rather than buy, even though it is at a higher cost, because they do not envisage remaining in Ireland for ten or twenty years, and that shorter time horizon affects the decision. Many too, may be more familiar to a rental market rather than the home-ownership model that was the main feature of Irish housing.