11 Dec 2019

Irish Economy/homebuilders/REITs: Central Bank highlights housing supply deficit

The Central Bank of Ireland (CBI) yesterday published an Economic Letter, ‘Population Change and Housing Demand in Ireland’, which estimates that 33,000 new housing units will be required each year over the next 20 years to satiate demand – an increase of around 60% from current output levels. 

Of the 33,000 unit annual requirement in the paper’s central scenario, the majority (c.18,000) of this demand arises through natural population increase, with net migration accounting for c.10,000 and obsolescence of the housing stock accounting for c.5,000. In contrast, and despite a strong and consistent rate of increase over the past six years, national housing output is likely to reach just 21,000 units this year.

Alongside the CBI’s base case, its two alternative scenarios also caught our eye. In the central scenario net migration is assumed to run at +30,000 p.a., 10% lower than current levels. However, should net migration fall to +10,000 p.a. – a not implausible scenario, particularly given the “wildcard” nature of migration flows in such a small open economy – the annual housing requirement reduces to 23,000 units. This base case also assumes that headship rates (household size) remain unchanged from current levels. However the average number of people per Irish household has been steadily declining towards EU and UK averages (except for the 2011-2016 period) and, should the Irish average converge with that of the UK by 2051 – also not implausible given the long-run trend – the annual housing requirement increases significantly to 47,000 units.  

Also illustrative is the paper’s backward-looking view on the last decade of housing requirements. It estimates that an average of 27,000 dwellings was required annually between 2011 and 2019 to meet the need arising through population growth and changes in household formation. The comparison with actual output in that period is stark. Output has averaged less than 9,000 per year this decade implying that the “stock” of unmet housing need is in excess of 160,000 units. This housing deficit has been the driving force between persistent and strong increases in residential prices and rents for the past five years, even though these upward forces have more recently been moderated by higher supply and the CBI’s own mortgage lending restrictions.

Although the CBI figures are not a surprise to us (or to many we suspect), and they tally with our own thesis, they are a reminder of the housing supply shortfall facing the country. In this environment, the path of least resistance for prices and rents remains to the upside.

Tory lead slips

YouGov published its second and final MRP opinion poll of the election campaign last night. MRP models voter preferences by socioeconomic factors with some allowances for local characteristics, enabling seat by seat predictions. 

Overall, the Tories are predicted to win an overall majority of 28, somewhat less than the equivalent poll a fortnight ago which gave them a margin of victory of 68. With a winning margin over Labour in the popular vote of 9%, the latest findings estimate the Conservatives will win 339 seats, Labour 231; the Lib Dems 15 and the SNP 41. (Note that the poll does not model the 18 of the 650 seats located in Northern Ireland). The Tories are predicted to have a victory over Labour of 5% or less in 25 seats. Indeed the poll’s confidence interval for the number Conservative seats is 28, which means that a hung parliament is within the margin of error of the results. A number of the party’s ‘big beasts’ may be in trouble - YouGov reports that Environment Secretary Theresa Villiers will lose her seat, with Dominic Raab and Iain Duncan Smith holding only narrow leads. 

Sterling fell back on the poll results with the benchmark EUR/GBP rate currently sitting at £0.8450 having breached the pivotal £0.8400 level earlier in the week. YouGov’s seat by seat projection available here https://yougov.co.uk/uk-general-election-2019/.

Fed decision due

The Federal Open Market Committee (FOMC) meets for its last policy meeting later today, with the decision due at 7pm (2pm Washington time) tonight. Chair Jerome Powell will deliver his usual post meeting press conference thirty minutes later and we will also see updated economic projections published at the same time as the policy announcement. 

We expect the policy decision to be one of no change with the Federal funds target rate range held at 1.50-1.75%. Our expectation is also that there will be no dissentions this time. Despite the two hawkish objections last month – both the Boston Fed’s Eric Rosengren and the Kansas City Fed’s Esther George objected to the 25bp cut – we expect all voting members to be on board this time. The FOMC is now clearly in pause mode as it assesses the impact of the three quarter point reductions to the funds rate made at the prior three meetings. We doubt even the most dovish or hawkish participants will find reason enough to object to this stock take.

Economic Releases


US 13.30 CPI

US 19.00 FOMC announcement