14 Jun 2019

Banks / Housebuilders / REITs: Residential price inflation slows again

The latest Residential Property Price Index (RPPI) release from Ireland’s CSO shows that prices rose 0.3% during April, a second successive month of growth. On an annual basis, however, price inflation has cooled to 3.1%, the slowest rate of increase since July 2013.  


As has been the case for some months, price growth was concentrated outside of Dublin. In the capital, prices were flat during April (snapping a five month sequence of declines), while on an annual basis prices were up just 0.5%. Outside of Dublin, prices rose 0.5% m/m and were +5.6% y/y. This differential reflects the impact of the Central Bank’s macro-prudential mortgage rules, which slap LTI and LTV limits on the majority of front book lending. Dublin asking prices (per data) are 47% above the national average. As a sense check, the latest Residential Tenancies Board data show that Dublin is seeing the strongest growth in residential rents across Ireland’s regions at this time (see our separate CPI comment), so for many of those renting they are caught in a vicious circle of rising rents eating into more of their disposable incomes, compounding the challenge of saving for a large enough deposit to comply with the Central Bank mortgage rules.


This latest uptick in the RPPI means that national prices have now increased by 81.9% from the early 2013 trough. Despite this surge, prices are still 18.5% below the nominal peak that was recorded in 2007. This peak-to-current move compares favourably, however, with the 30-40% peak-to-trough assumptions that we understand the domestic lenders incorporate into their provisioning models.


With housing output (18,828 units in the 12 months to end-Q119) languishing well below even the low end of the range of estimates (30,000–50,000) of annual new household formation; employment growth at +3.7% y/y; wage inflation running at +3.4% y/y; and the next move in Irish mortgage rates more likely to be down rather than up, we expect to see residential capital values continue their upward ascent. This has implications for the sectors mentioned in the header.


Irish Economy: Inflation moderates to 1.0% in May

The latest CPI release from the CSO shows a moderation in the annual rate of inflation to 1.0% in May from April’s 1.7% outturn.
Prices fell by 10bps in the month, with this drop chiefly driven by a 1.6% m/m decline in Transport-related costs (specifically, lower air and sea fares).


In terms of the annual move, the main items putting upward pressure on the CPI are Housing-related items (+4.4% y/y, led by rent and utility prices) and Restaurants & Hotels (+3.2% y/y, with the VAT increase a key factor behind this uptick), which are being partly offset by falls in Furnishings (-3.9% y/y, we suspect the weak pound is a key driver of this) and Communications (-6.3% y/y, as telephony related prices continue to soften) prices.


Three key segments that we track within the CPI data are Accommodation Services, Private Rents and Insurance. Accommodation Services prices rose 3.4% in the month and were +3.7% y/y, reflecting strong domestic demand and rising tourism numbers; Private Rents rose 0.3% m/m and were +5.2% y/y, driven by the ongoing mismatch between housing supply and demand; and Insurance prices were flat on the month and -1.3% y/y, reflecting positive developments in the claims environment.


While recent CPI releases have shown a build-up in inflationary pressures in the economy, they are not yet at a level that would be troublesome, while they also lag far behind the 3.4% y/y rate of wage inflation, pointing to a significant improvement in household real incomes.


Irish Economy: Residential mortgage arrears fall again in Q119

The latest Residential Mortgage Arrears and Repossessions release from the Central Bank of Ireland shows that banking industry-wide arrears fell during Q1, with the improvement concentrated in the PDH (owner-occupied) segment.


To start with the PDH segment, the data show that in Q1 there were 726,089 mortgages in issue with a balance of €97.9bn. Of these, 43,643 accounts (6.0%) were in arrears of more than 90 days past due (90dpd), with the balance on these accounts of €8.6bn (8.7%). This represents a marginal improvement on the more than 90dpd arrears cases of 43,983 (6.0%) with a balance of €8.7bn (8.8%) in Q418, although to put it in context arrears peaked during the crisis at 12.9% (volume) and 17.3% (balance) in Q313.


In Q119 there were 111,665 BTL mortgages in issue, with the balance on these at €19.1bn. Of these accounts, 16,275 (14.6%) were in arrears of more than 90dpd with a balance of €4.3bn (22.6%). This compares to 15,628 accounts (13.9%) with a balance of €4.3bn (21.9%) in arrears of more than 90dpd at end-Q418. The sequential uptick in BTL accounts in arrears of more than 90dpd appears puzzling given the fundamentals of the rental market here, but we note that the Central Bank attributes this to “loan classifications following loan sales”. In any event, the arrears issue has significantly improved from the Q314 nadir of 22.1% (number) and 30.8% (balance).


Banks continue to work towards addressing troubled accounts, with 99,707 PDH and 16,845 BTL accounts restructured at the end of Q119. Of these, 85.8% (the same proportion for both BTL and PDH) were deemed to be meeting the terms of their restructuring. However, long term arrears remain a key challenge for the sector, with arrears of more than 720dpd accounting for 90% of total arrears within the PDH accounts in arrears of more than 90dpd (and 91% for BTL). At the end of Q119 the banks had 2,552 properties (1,441 PDH and 1,111 BTL) in their possession, down from 2,807 at end-Q418. Banks repossessed 127 PDH dwellings and 33 BTL properties during Q1, of which just 38 PDH and 13 BTL dwellings were repossessed on foot of a court order. In addition, rent receivers were appointed to 373 BTL accounts during Q1, bringing the stock of such accounts to 5,398.


The aggregate balance on banking industry-wide mortgage accounts in arrears of more than 90dpd has declined for 23 successive quarters, which is clearly very welcome. Given the economic and housing market fundamentals, we expect to see continued improvements as the year goes on.


Irish Economy: NTMA raises another €1bn

Ireland’s NTMA yesterday raised €1bn from a tap of the benchmark 10 year bond.


The €1bn raised from the tap of the 1.1% Treasury Bond came at a yield of just 29.7bps, reflecting the very favourable market conditions (from the perspective of issuers). Total bids received were €2,712m (2.7x covered).


With Ireland expected to run another general government surplus this year, the proceeds from this sale will help towards the refinancing of expensive legacy borrowings. Indeed, next week sees the maturing of a crisis-era bond with €7bn outstanding that carries a coupon of 4.4%, so the agency’s raising of long-term funds at less than 0.3% will help to create a virtuous circle where interest costs are further pared, enhancing Ireland’s creditworthiness and (hopefully) leading to further Sovereign upgrades over time as the public finances benefit from material interest savings as more of the crisis-era debt is redeemed.


This sale brings the proceeds from sales of benchmark bonds in 2019 to €10.25bn, which compares to the 2019 funding target of €14-18bn.


Boris takes the lead

Yesterday’s first Conservative Party leadership contest has seen the field of candidates narrowed down to 7, with Andrea Leadsom (11), Mark Harper (10) and Esther McVey (9) all failing to make the cut, Rory Stewart also came close to being eliminated, surpassing the 17 vote threshold by just two votes. Of the results the most notable figure is the 114 vote total for Boris Johnson, which puts him way out in front of his nearest rival Jeremy Hunt who received 43 votes. Michael Gove came in third with 37 votes. According to BBC reports, Health Secretary, Matt Hancock after receiving just 20 votes and lying in 6th place is “mulling over” whether or not to continue in the leadership race. The key point to take from this, is that if Boris Johnson manages to maintain his backers he is going to be hard to beat. The next round of voting takes place on Tuesday 18th June.


Oil update 

US crude inventories were reported to have increased according to figures released on Wednesday but not by as much as expected at +2m barrels. This news pushed the market lower, nudging Brent under the pivotal 60 $/b level. There was an abrupt about turn in pricing yesterday morning though, after news of another potential attack on two ships in the Gulf of Oman. It has not yet been confirmed that the damage sustained by the two vessels was definitely an attack or who might have been behind it. The finger of blame will inevitably be pointed at Iran, however.


While the damage to shipping has caught the headlines, there have also been other attacks on Saudi Arabia. A cruise missile fired by Houthi rebels is reported to have struck a Saudi airport and there have also been fresh incursions by drones. The Saudis have threatened reprisals for these latest attacks. The 12th June low was just above the 59.50 $/b level in Brent. This level has again shown itself to be an important support area, just as it did last week and back in January. The attacks in the gulf have not disrupted the flow of crude so far, but there is always a risk of escalation and a more direct confrontation between Saudi Arabia and Iran. Next resistance levels for Brent are the 62.50 $/b area followed by last week's high of 64.10 $/b.


Chinese data

Economic indicators from China for May were softer than expected this morning. Industrial production grew by 5.0% on the year (consensus 5.4%, April 5.4%), while fixed asset investment was recorded up 5.6% yoy, against median forecasts of 6.1%. Retail sales held up relatively well though – these were 8.6% up on a year ago (consensus 8.1%, April 7.2%).


These figures will encourage continued speculation of further easing measures by the PBoC, especially bearing in mind that industrial production growth now stands at its weakest level since 2002.


Economic Releases

13.30 US Retail Sales
13.55 UK BoE Governor Carney speaks
14.15 US Industrial Production