08 Feb 2019

Irish Economy: Household assets heading towards the €1trn mark

Quarterly Financial Accounts data from the Central Bank of Ireland show that household debt sustainability continued to improve in Q318, with household net worth strengthening to an all-time high of €769bn in the quarter.

Household net worth rose €12bn during Q3, with almost all of this improvement due to a €12bn rise in housing assets (to €535bn), while financial assets (€382bn) and financial liabilities (€148bn) were both effectively flat in the quarter.


For context, household net worth peaked at €719bn in Q207 at the high water mark of the Celtic Tiger period, before collapsing to €430bn by Q212. Since then, net worth has surged by 79% due to a combination of rising asset values, elevated savings rates and deleveraging, to where it now stands 7% above the Tiger peak.

Gross household disposable income (on a 4qms basis) rose 1.3% q/q to a record €109.3bn. This improvement, allied to broadly stable debt levels, means that the ratio of household debt to disposable income has improved to 125.8%, its lowest since Q403 (it peaked at 212.4% during the crisis years). While this improvement is very welcome, it is worth noting that Irish households are still the fourth most indebted in Europe on that measure (after Denmark, the Netherlands and Sweden).


Irish households’ gross assets now stand at a record €917bn and are heading for the €1trn mark. Given the outlook for house prices (see our dwelling completions comment below) and structurally high savings rates, we think the €1trn milestone could be reached in the next three years, absent a major pull-back in financial markets.


Irish Economy: Dwelling completions at 18,072 in 2018


Dwelling Completions data from the CSO show that 18,072 units were completed in 2018, which represents a 25% uplift on the 2017 outturn. Nonetheless, this level of activity undershot our estimate of 19,000 completions.


Of last year’s total, 11,001 were Scheme units (+39% y/y); 2,372 were Apartments (+6.5% y/y); and the remaining 4,699 were One-off Housing units (+10.2% y/y). The low growth in apartments reflects the difficult economics of construction in that segment, a point that is not helped by still restrictive planning rules. Indeed, six of the 26 counties in the State had no apartment completions in Q418, while four counties had only one apartment completion apiece.


Given the pricing differentials within Ireland, it is no surprise that Dublin and its commuter belt is the main area for new build activity. Only seven counties had more than 100 or more scheme dwellings in Q418. Five of these seven were Dublin and its immediate neighbours (Louth, Meath, Kildare and Wicklow), with Cork and (somewhat surprisingly) Waterford the other two.


Housing completions troughed at 4,575 units in 2013 and, since then, they have recovered to the 18,072 seen last year. Despite this improvement, activity remains significantly adrift of even the low point of the range of estimates (30,000 to 50,000) of annual new household formation. The continued mismatch between supply and demand is contributing to ongoing upward pressure on both residential prices and rents – a phenomenon we see enduring for another few years at least, due to factors including, but not limited to, a lack of labour (construction sector employment is lower than it was at the end of 2000) and credit (bank lending for residential investment and development has fallen 89% since 2010). This has implications for owners of residential property assets (IRES, HBRN, the housebuilders) and also for the banks in terms of collateral values and new lending (and, within that, price/volume dynamics) growth.


BoE slashes growth forecasts


With just 49 days to go until the UK’s scheduled exit from the EU and amidst the heightened economic uncertainty that has come with this, the Bank of England (BoE) announced yesterday that it was making no changes to its current policy stance. The ‘Bank rate’ was firmly left at 0.75% whilst the targeted total for QE purchases was held at £435bn for Gilt holdings and £10bn for corporate bonds. These decisions were backed by unanimous consent. This was fully in line with consensus expectations and our own forecast. Alongside the policy decision the BoE also published the meeting minutes and the Inflation Report (IR) which encompassed the updated economic forecasts. The near term growth number made for bleak reading, with the 2019 GDP growth forecast chopped to 1.2% from 1.7%, which would (if realised) represent the weakest annual growth rate since 2009. This downgrade was not all attributed to Brexit uncertainty. The BoE Governor clearly appeared more concerned about the weaker global growth backdrop, with the slowdown in momentum in key economies such as China and the Euro area having proved more persistent and presented more drag than the BoE had previously expected.


Brexit quandary weighs heavy


Our reading of the BoE’s messaging today is that it needs to receive reassurance on a couple of fronts before it is content to move ahead with its next Bank rate rise, but we continue to suspect that further increases in Bank rate will follow. Quite obviously, Brexit is one of these factors where the Bank needs to see a resolution that sets the UK on a relatively smooth Brexit transition path. The MPC insisted that it would do its assessment of the supply and demand consequences of such a shock and as such the Committee’s response would not be “automatic”; it would depend on the balance here. Again, the Governor refused to rule out the possibility that it might need to raise rates in the case of a clear supply shock. However he did highlight the possibility that the BoE could vary the horizon over which it returns inflation to target (within limits). Our suspicion is that it would likely choose to do so in such circumstances and that an easier rather than tighter policy stance is more likely in the case of a disorderly “no-deal”. The greatest insight on “no-deal” concerns at the BoE perhaps came from the Governor’s remark that he does not wake-up in the morning anymore, but rather in the middle of the night. While interest rate markets have further reduced their expectations for rate rises over the course of the next few years, sterling has made gains through the course of yesterday afternoon. This has followed reports of progress in Brexit talks that have flowed from meetings between PM May and EU chiefs in Brussels yesterday.


Oil Update


Oil started the week strongly reaching a 2019 high of 63.63 $/b on Monday morning but has since moved down thanks to a strengthening dollar. The catalyst for Monday’s upswing in price was bullish OPEC news released last Friday. We learnt that OPEC crude production fell to its lowest level in 2 years thanks to deeper than expected cuts from the Saudis, further declines from Iran and disruptions in Libya. US production growth also failed to excite with the active rig count falling to the lowest level in 9 months. This news came at a time where concerns on oversupply were already being addressed by sanctions on Venezuela and OPEC+ cuts. On Tuesday and into Wednesday morning however, oil reversed in direction, with Brent spending the last few days in the 61 $/b - 63 $/b range. Sitting at just over $61.50$/b this morning.