12 Apr 2019

House prices marginally lower in February

The latest Residential Property Price Index (RPPI) release from Ireland’s CSO shows that prices were marginally lower (-0.1% m/m) in February. On an annual basis, national prices were +4.3%.



The latest Residential Property Price Index (RPPI) release from Ireland’s CSO shows that prices were marginally lower (-0.1% m/m) in February. On an annual basis, national prices were +4.3%.


This is the fourth successive monthly decline in the national index, bringing the cumulative fall since October to a modest 1.3%. Given the wide disparity between supply (annual completions are running 40% below the long-term average and c. 50% below new household formation) and demand (a growing population, record employment and real earnings growth of 3% y/y), we think that this soft patch is a temporary blip as opposed to the start of a new dynamic in the housing market here. Indeed, factors such as the Central Bank of Ireland’s macro-prudential rules (which slap loan-to-income and loan-to-value limits over the majority of front-book lending in a calendar year) may be causing some seasonal distortions to the index.


In terms of regional trends, Dublin prices slipped 10bps in the month, while ex-Dublin prices were flat. On an annual basis, Dublin residential price inflation is running at 1.4%, its slowest rate of increase on this basis since November 2012, while ex-Dublin prices are advancing at +7.5% y/y, with this divergence driven by the macro-prudential rules (average Dublin asking prices are 47% above the national average, while disposable incomes in Dublin are 17% above the national mean).


The national RPPI is 18.8% below the nominal peak reached during the Celtic Tiger period, which compares to the 30-40% declines that we understand the high street banks here incorporate into their provisioning models, which some offers reassurance in terms of asset quality.


Our expectation has been (and remains) for national house price inflation of 5% in 2019. While the recent modest dip in monthly prices is a headwind to this forecast, we see no reason to pare our FY estimates on the basis of preliminary data for the opening two months of the year.


Bank of Ireland Group: Acquisition of KBC corporate loan portfolio

KBC Bank Ireland has this morning announced that it has agreed to sell a legacy performing Irish corporate loan portfolio of c.€260m to Bank of Ireland (BIRG), with the deal expected to close sometime over the course of 2019.


KBC has said that the transaction is expected to have negligible impact on its P&L and capital levels, and allows the bank to focus on its core SME and retail clients in Ireland. Although BIRG has not issued any comment or RNS in relation to the transaction, we view the transaction as an incremental positive which shows the Group is keen to look at all options to add performing loan volume in the current market.


We would expect the transaction to add roughly 1% (annualised) to EPS (though probably something negligible in FY19 given associated transaction costs and with the deal unlikely to close until the middle of the year) and consume c.5bps of CET1.


Irish Economy: Annual rate of inflation above 1%

The latest CPI release from the CSO shows that the headline rate of inflation was +1.1% y/y in March, the first above-1% reading since February 2013. Prices, on average, rose 80bps in the month.


Two COICOP (classification of individual consumption by purpose) divisions accounted for the bulk of the upward move in the annual rate of inflation, namely Restaurants & Hotels (+3.6% y/y, driven by a combination of the higher VAT rate on hospitality services and buoyant trading conditions) and Housing-related items (+4.3% y/y, with upward pressure seen in rents, RMI and utility costs).


Three sub-indices within the CPI that we closely track are Accommodation Services, Private Rents and Insurance. Taking those in turn, Accommodation Services prices jumped 6.8% m/m and were +3.1% y/y, with the annual rise reflecting the aforementioned very strong trading conditions and the VAT increase that took effect on 1 January. Private Rents climbed 40bps in the month and were +5.6% y/y, reflecting the glaring mismatch between supply and demand in the PRS market (see our RPPI comment above). The annual increase in rents is at a 16 month low, likely influenced by the 4% annual rent increase caps that pertain in the key urban markets. Last, but by no means least, average insurance rates fell 30bps in the month and were -1.6% y/y, driven by supportive developments in the claims environment.


Given the strong economic backdrop, it is not a particular surprise to see the annual rate of inflation firming to this post-crisis high. Nonetheless, the increase in prices is 300bps below the latest (Q418) recorded annual rise in average weekly earnings (+4.1%), so many Irish households are still experiencing a meaningful uptick in real earnings.  


Central Bank chatter 

As is the norm, directly after ECB monetary policy meetings, the great and the good of the Governing Council (GC) hit the streets in order to clarify any haziness surrounding Mr. Draghi’s communication the previous day. Yesterday it was the turn of the Bank of Italy Governor, Ignazio Visco and Bank of France Governor Francois Villeroy to spread the good word. It was the job of Mr. Villeroy to let all know that the ECB GC were in consensus in relation to the analysis of the impact of negative interest rates on the banking industry. Mr. Visco was in agreement saying that “the figures are not very large” and that “we are discussing, still analysing the effects”. He also pointed out that the revised parameters around the new TLTRO program should be available in June.

In the US, N.Y. Fed President, John Williams, was in a reasonably upbeat mood when he pointed out that the US is “closing in on the longest economic expansion on record, unemployment is at historically low levels, and inflation is close to our 2 percent target” but he is “acutely aware that not everyone is feeling the benefits of the economy’s good performance.” A slightly more cautionary tone emanated from Fed vice chair, Richard Clarida, who said that “the incoming data have revealed signs that U.S. economic growth is slowing somewhat from 2018’s robust pace". 


For the first time in quite a few weeks, all things Brexit move backstage after the confirmation of the six month extension. Meeting with angry reaction from hardliners who want to leave the EU as soon as possible, UK PM, Theresa May had to go through the usual motions of confirming the extension to Parliament whilst pleading for a deal before the European Parliamentary elections which would in theory enable the UK to exit the EU before June.


Mrs. May and UK Labour leader, Jeremy Corbyn held talks in Westminster yesterday aiming to find a way out of the current Brexit impasse. May is continuing her efforts to reach an agreement with Labour in order to approve her divorce deal. A Labour spokesperson suggested that talks are continuing and there is ‘an effort to make substantive progress towards finding a compromise plan’.  

US talks

US-North Korean: Trump rejected calls for combined economic projects with North Korea but said the door remains open to dialogue. This could widen the rift between the two and threaten the denuclearisation deal. South Korea’s failure to convince Trump could dent sentiment in the Korean Peninsula and prevent any further progress in the talks for now.

US-Japan: Trade talks between the US and Japan are set to kick off next week as Trump seeks to reduce the $60bn trade deficit. A fresh tariff war could exacerbate the slowing global growth pressures. Trump will be looking to crack open Japan’s agriculture market while Abe will be looking to avoid any fresh tariffs on Japan’s motor industry.

Economic releases

10.00 EZ Industrial Productions

15.00 US Michigan Consumer Sentiment