If this is the standard of banking analysis no wonder we’re in such trouble

The Sunday Independent today gives a summary of a recent Deutsche Bank report on the level of housing oversupply in Ireland and how long it will potentially take to work off, suggesting that we need to bulldoze 200,000 houses.  Last week the Sindo reported on a CIF statement that we are about to enter a housing shortage, this week Deutsche Bank think we have 43 years worth of oversupply.  What a difference a week makes!

Interestingly, Deutsche Bank’s report uses present data relating to housing vacancy (from the Census) and population growth (from CSO).  It is data that is frequently detailed on IAN (which we used to refute the CIF pronouncement last Sunday).  Unfortunately, how DB interprets the data is totally misleading for a number of reasons as I’ll set out below.  First it’s worth seeing what they said, taken from the Sindo (I’ve tried finding the original report online but with no joy).

“Deutsche Bank figures suggest that there are 289,451 empty houses in Ireland, including almost 60,000 vacant holiday homes. This represents a vacancy rate of 15 per cent.  … Demand for housing is the key factor as to how long it will take for this oversupply to be reduced, and aside from demand for second homes the key driver should be population growth”  Based on 2011 figures which showed population growth of just 13,000, and the average number of residents per house, the bank estimates that it could take until 2055 for the glut of houses to be worked through. 

The report says that if current population trends are sustained, housing oversupply will take 43 years to clear (this excludes holiday homes from unoccupied houses in the calculations). If holiday dwellings are included in calculations, the oversupply will take 57 years to clear.

However, the 2011 population growth figures were well below the levels seen over the previous decade. But such is the scale of vacant property that even at pre-crisis, boom-year population growth levels it would take almost 10 years to clear the backlog. And this is before taking into account developments which may subsequently be completed, and houses which are still being built — 10,480 in total in 2011.

“Barring a sudden and sizeable recovery in Irish net migration, or a politically controversial policy of demolishing large volumes of excess housing stock, housing oversupply will remain a feature for many years, possibly decades, to come,” says Deutsche.

“This has ramifications for any bank with development loan exposure, and also for the mortgage market, where prices have continued to fall and oversupply makes any reverse of this trend unlikely in the near term.

“Over 200,000 houses would need to be demolished in order for the housing supply to fall to three years of current population growth.”

The first major problem with the analysis is that it conflates housing vacancy with oversupply.  We would always expect there to be some vacancy in any housing market, usually 4-6% of stock.  It is pointless counting holiday homes as vacant stock, they are owned and used and are not oversupply.  Oversupply is the difference between base vacancy and overall vacancy (minus holiday homes).  In Ireland, oversupply off a 6% base vacancy rate is c.110,000 units.  Still a lot, but less than half the total 230,000 vacant units.  Working out how long any stock is liable to last has to be based on the oversupply not vacancy.

Second, it takes no account of obsolescence.  In any one year would expect some housing to drop out of the housing stock because it has become uninhabitable or needs to be replaced.  The housing literature would suggest 3-5 in 1000 houses becomes obsolete a year.  An example in Ireland is the present obsolescence of some social housing that is being replaced through regeneration projects.  We would expect the obsolescence rate in Ireland to be on the low side due to the newness of much of the stock, but it is still an issue that needs to be factored into any oversupply calculation.

Third, present population change data is useful for predicting what might happen in the next one to five years.  For longer term predictions a more thorough analysis needs to be undertaken that looks at the population profile and considers patterns of migration.  As we posted on Thursday, in the short term there will be a reduced demand for housing due to a small cohort of 15-25 working its way up the population pyramid.  In the medium term (10-20 years), however, demand will steadily rise due to a large cohort of 0-10 year olds.  To put in perspective, in 1994 there were 48,255 births, in 2010 it was 76,762.  In other words, it is not enough to just look at population growth when considering housing demand, but also the cohort of household formation age.  Both the CIF and DB fall into this trap when estimating short and long term demand.  One also needs to consider average household size, which has been consistently falling in Ireland over recent decades.  Even if the population remains the same, if household size falls then more housing units are needed to accommodate people.  It is likely that household size in Ireland will continue to fall creating latent housing demand.

Taking the first three points together it is simply not the case that we have 43 years worth of supply, nor do we need to demolish 200,000 houses.

The fourth main problem with the analysis is it takes no account of the geography of housing and population.  It is pointless at this stage to talk about Ireland as a single unit of analysis with respect to oversupply.  As argued on this blog in the past week (here and here), the market in Ireland has become highly differentiated with respect to location, type of property, type of buyer and price.  In some parts of the country, principally inner Dublin, the level of oversupply for houses (though not apartments) is low, in other parts of the country oversupply is large. The profile of the population also varies across the country, as does the pattern of migration.  At present, migration is mainly from rural areas to urban areas, and from inner city to outer suburb.  As such, the level of oversupply and how long it will take to work off differs enormously across the country.  It is certainly the case that the four principal cities and their hinterlands will work their oversupply off first and will be first to start building new houses and this will be within the next decade.  It will take longer in rural areas.

Neither the CIF or DB reports are particularly helpful as neither is realistic, based on a limited set of data and flawed assumptions.  Given the political influence of both, I find it extremely worrying that the standard of their analysis is so weak.  Indeed, given how poor it is, if this is the usual standard, it’s no wonder Ireland and Europe are in the trouble they’re in.  What is needed at this stage is some proper demographic and housing modelling for the country under different scenarios that will give us some reasonable projections as to take-up of stock and future demand.

Rob Kitchin

 

Demographic contraction in Ireland’s house buying cohort

As per our post earlier in the week, the CIF have recently been forwarding the argument that we need to start building again, principally arguing that supply is dropping dangerously low given the massive drop off in commencements and completions of new housing units, and that there is a demographic need to cater for, totally ignoring the issue of oversupply.  In this post I want to focus on potential demographic demand.

If one takes a quick look at the Census 2011 results it suggests that the population is still growing quite rapidly.  Between 2006-2011 the population increased by 348,404 people (8.2%).  If we look at the data in a bit more detail, however, it is clear that during this five year period a fairly fundamental shift occurred.  Basically, the strong growth all happened in 2006 and 2007.  After that, growth slowed markedly.  Whilst population is still growing, it is now at a very low rate.  According to the CSO, population growth in 2010 was 11,400, in 2011 it was 13,600. Nearly all of this growth is through natural increase: a falling death rate and growing birth rate.  People who are very old are more likely to go into sheltered accommodation or nursing homes (freeing up stock) and children under the age of five will not be buying anything any time soon.  In other words, what population growth there is is unlikely to translate into the take-up of housing.

And what of the household formation age and the next few years?  There are two factors at play here.  The first is emigration.  There was net out-migration of 34.5K in 2010 and 34K in 2011, principally of people aged 20-40.  The second is the size of the cohort aged 15-25.  As the figure below shows, taken from the Census 2011 report, this cohort is substantially less in size than the cohort aged 25-40, the group that bought at the height of the boom (2002-2007), when house building was at an all-time high.  The reason for this is low birth rate in the late 1980s and early 1990s.  The birth rate in 1980 was 74,064.  In 1994, the lowest rate and presently aged 17-18, it was 48,255.  In 2010 it was 76,762.  In other words, we now have a relatively small cohort working its way up the population pyramid and this age cohort is now entering household formation age.  Demand for housing is thus going to be much reduced than in the past decade.  It will start to grow again in about 10 years time as the younger, larger cohort works its way up, but we don’t need to start building for them until they reach household formation age.

Age profile for Ireland, 2011 census

 

Beyond the demographics, it is clear that any future housing market is going to be very fragmented, with multiple markets operating that will have contrasting fortunes.  This will be segmented by type of buyer, type of properties, and location.  In highly desirable areas of South Dublin, the market will level off first and start to grow, but probably only for family houses not apartments.  In other parts of Dublin, demand will remain low (and indeed population fell in many part of Dublin over the past five years and in previous censuses).  In the desirable areas, there might well be slight undersupply in the coming year or so, but these places have limited development potential due to a lack of sites, and their surrounding areas do have some oversupply.  Hardly an argument to start building in Dublin again, until oversupply across the city is worked down.  What is clear from the data above is also that the principle driver for take-up is going to be internal migration from elsewhere in Dublin and the country, not population increase.  As for the situation in the rest of the country, just because there is tentative signs that highly desirable parts of Dublin might be starting to reach the bottom does not mean that the end is in sight elsewhere, especially in places where there is high oversupply.

Whilst, the CIF might want to start building again, we need to do some proper demographic modelling of where demand is likely and to also consider the consequences of building in some locations as opposed to encouraging people to live elsewhere in the city where there is oversupply and little demand.  We also need to keep in mind to consider the city as a whole and not just focus on select, desirable locations when we’re assessing the overall state of the housing market.  We definitely shouldn’t be extrapolating from those few locations to make assumptions or pronouncements about the whole city or country housing market as it creates an entirely false picture of what is happening.

Rob Kitchin

 

According to the CIF we need to add supply to our oversupply (do we really need more houses?)

The CIF are at it again.  Apparently we need to start building houses again, as reported in the Sunday Indo.  As usual, they use a selective choice of data to make their case, principally focusing on the supply side of things and ignoring the already existing oversupply and weak demand.  Here is the glaring hole in their analysis.

The Census 2011 reports that there are 230,056 vacant units in the country (excluding holiday homes), of which 110K constitute oversupply on a base 6% vacancy rate.  36,000 of those are either brand new vacant or underconstruction units in unfinished estates.  There are dozens of these estates in the Greater Dublin region and a lot of stock for sale/rent.  Only South Dublin has a vacancy rate below 6 percent.  According to the CSO, population growth in 2010 was 11,400, in 2011 it was 13,600.  This was population not households.  There was net out-migration of 34K in 2010 and 2011, principally of people aged 20-40 (household formation age), the big growth in population between 2006-2011 was children under the age of 5 (they aren’t buying anything soon).  Where is the figure of 25K demand coming from?

There is a reason why only 8,000 units will be built this year – we don’t need any more.  Between 1991 and 2011 there was 933K housing units built in Ireland, households went up by 625K, in other words we built 1.5 units for every one household.  We need to work off this oversupply before we start building again. If supply and demand were in-line we would not have had a drop of 50% (so far) in house prices.  We do need construction – green energy, ICT infrastructure, public utilities, public transport – stuff that will serves domestic and FDI companies and the general public, but not housing (we also don’t need offices or retail space – over 20% of office space in Dublin is vacant).  Even if the units are built where is the mortgage credit coming from for buyers?

The CIF is a lobby group for house builders.  No great surprise they want to build – they need the money to pay back NAMA/foreign banks on the other houses they built in-excess of demand.  If they got their way and built more units then all they’d succeed in doing is continue to flatline the market by adding supply to oversupply.  Of course nothing is stopping them from building other than finance and if they really believed their own mantra then there are thousands of sites with planning permission already granted and they can get on with it.  The reality is that 1,822 unfinished estates have outstanding building work around the country where the developer is inactive due to lack of finance.  Why would developers get finance for new developments when they can’t even finish off existing jobs (and who in their right mind is going to lend for construction given the data above)?  Their plea suggests they want the government to do something – like commission house building or provide tax incentives.  Hopefully their call will fall on deaf ears.  We’re already paying the price for a spectacular property crash.  We don’t need that situation made any worse.

Rob Kitchin

 

CIF, ‘Future Housing Supply in Ireland’ report – One year on

Back in January 2011 the Construction Industry Federation (CIF) released a study entitled ‘Future Housing Supply in Ireland’.  The press release is here, though the report itself has disappeared from open access on the CIF website.  IAN posted on the report on Feb 2nd 2011.  In their report the CIF argued that “Nationally, there appears to be less than one year’s supply“.  The CIF list a number of local authorities who would run out of housing in 6 months (Limerick City was predicted to run out a little after a month) and a dozen more that would run out within the year.  Nowhere was estimated to have more than four years supply.  To quote from our piece decribing the CIF claims from last year:

“In particular, Limerick City, Wicklow, Kildare, Limerick County, Cork City, Waterford City, Greater Cork, Kerry, Galway City, South Dublin all have less than 6 months supply.  Meath, Clare, North Tipp, Fingal, Cork County, Mayo, Dublin City, DLR, Galway County, Westmeath, South Tipp all have less than 12 months supply.   In other words there is an urgent need to start building houses again in a number of places around the country as there is a very real danger of running out of supply in these areas (see Figure 1).” (see below)

We were deeply sceptical about the CIF claims at the time and set out our reasons why.  We were also one of the entities dubbed ‘non-official sources’ in the press release, which basically means independent and therefore with no vested interest – it is up to you whether you view that as a good thing or a bad thing.

So where are we one year on?  Needless to say that no local authority is experiencing an acute shortage of housing units.  In fact, most still have an abundance of vacant stock (see this post and this one) and unfinished estates (see this post and this one).  There has been practically no change on the housing front over the past year, and what change there has been has been concentrated into a few select locales (see this post).  In my view, housing demand is unlikely to change very much over the next one to two years for the reasons detailed in this post.  Demand is mostly likely to come back in the cities and their suburbs first, but might take a long time in some rural areas. Everywhere demand and supply need to be tightened right back up before building starts again.  That means only building at the point where potential buyers are starting to bid against each other for property.  Anything else will keep the market falling or flat.

That’s not to say that we do not need construction, but that it should be concentrated into public infrastructure projects such as green energy, ICT networks, utilities, services such as schools and hospitals, and public transport.  Such infrastructure is a long term investment that will help to attract and support business and help grow the economy.

As I have recently argued at the Irish economics conference in Croke Park: “We need robust housing planning models using demographic and labour market data at fine spatial scales as the foundations to revised development plans before embarking on any new major house building programmes”.  The basis for this has to sound, independent analysis, not the kind of scaremongering and plain wrong analysis forwarded by vested interest groups, that helps nobody including themselves.  The full workings of the models produced and the data used also need to be made available to all citizens, so they can evaluate both the analysis and the resulting planning and development proposals.

 

CIF housing demand projections, Jan 2011

Rob Kitchin

 

The Self-Preservation Society or …

A news item on RTE reveals that the Construction Industry Federation has managed to wangle a meeting with the IMF/EU/ECB Troika today.  “Arriving for the meeting CIF Director General Tom Parlon said they would be setting out the contribution the construction industry could make to the economic recovery.”  A case of the Self-Preservation Society (as in the song from the Italian Job, interesting also about a bank raid) for developers and those who own construction businesses (and we’re talking the bosses here, CIF want a radical reduction in wages and terms and conditions for construction workers to increase competitiveness) or a real and vital contribution to helping Ireland recover?

Sometimes it’s difficult not to automatically rail against the CIF given that its members were a vital part of the country going bust, but in this case there is something here worthy of attention.  Whilst we do not need any housing or offices or retail parks or hotels any time soon, investment in new public infrastructures such as green energy, next generation telecomms, public transport, hospitals, schools, etc. through capital expenditure would have the benefits of creating work whilst investing in developments that would attract inward investment and stimulate growth.  The difficulty is that generating the finance for capital expenditure would necessitate further cuts elsewhere in government spend given that wider austerity measures mean that the markets are adverse to extending the state credit for such stimulus measures.

I think therefore it’s unlikely that the Troika will see anything differently after meeting the CIF.  They will agree that in principle capital spending would be good, but it must be created by further austerity elsewhere; in other words it is up to Ireland to work out how to do this within its existing arrangements, rather than through a re-jigging of the Troika terms.  That is likely to be politically inpalatable to the government.  We’ll see.

Rob Kitchin

 

Future Housing Supply in Ireland

The CIF have just published a report ‘Future Housing Supply in Ireland‘.  Their main argument is that there is between 6 months and 4 years housing supply across the country and yet housing building has all but stopped except for a limited number of one-offs (80% of units built in 2010).  In particular, Limerick City, Wicklow, Kildare, Limerick County, Cork City, Waterford City, Greater Cork, Kerry, Galway City, South Dublin all have less than 6 months supply.  Meath, Clare, North Tipp, Fingal, Cork County, Mayo, Dublin City, DLR, Galway County, Westmeath, South Tipp all have less than 12 months supply.   In other words there is an urgent need to start building houses again in a number of places around the country as there is a very real danger of running out of supply in these areas (see Figure 1).  The report is an interesting lesson in how to combine and spin data for a particular vested interest purpose.

CIF housing demand projections

Principally what CIF have done is taken the DEHLG unfinished estates survey data and matched it to the target population projections in the Regional Planning Guidelines.  There are three main issues with this.

First, it tries to reduce housing supply to the overhang of unsold new housing, ignoring the bigger issue of oversupply (all units inexcess of a base vacancy rate).  The DEHLG itself calculates that oversupply (122-147K) is significantly higher than overhang (43K) – see our key housing stats post.  As we have argued at length elsewhere to try to ignore the issue of oversupply and only focus on brand new houses is a massive folly as it only considers one part of housing stock.

Second, it assumes that the population growth targets issued to Regional Authorities in 2009 are realistic.  These projections were based on 2002 and 2006 census data when there was significant population growth.  The demographic shifts occuring in Ireland in 2011 are very different to that period.  We are back into a period of emigration and the projections are almost certainly over-estimates.

Third, the wider economy is in the middle of a severe recession.  It is very difficult to source mortgage credit, unemployment and underemployment is high, and the next generation of first time buyers are emigrating.  There is little to no credit for investors.  The housing market is simply flat.

In other words, the data entering the model is on the one hand selective and on the other suspect, and the study ignores the general context of the wider economy.  CIF have been telling us for 12 months plus now that we only have 6-12 months supply in some areas of the country.  It seems barely credible to argue that many places will run out of housing in 6 months time.  This is simply is not going to happen given the levels of oversupply, emigration, stagnation in the housing market, and the state of the wider economy.

Census 2011 should give us a good idea as to where we are with housing and population/household demography.  Once the data is released our housing supply/demand models can be recalibrated and we’ll have a better idea as to what kind of building programme we’ll need.  Regional Planning Guidelines and Local Area Plans should then also be recalibrated.  I seriously doubt we need to panic about supply until we have that data.  If the CIF want a case for stimulus, it might have much more credibility arguing for investment in infrastructure than housing.  The solution to an oversupply problem is not to produce more supply, it is to work it off.

Rob Kitchin

 

CIF and NAMA

CIF and NAMA were never going to be happy bedfellows.  The former represent the interests of developers and builders, the latter is charged with relieving the banks of property loans to try and address the banking crisis, and to manage and offload those loans on behalf of the state and taxpayers.  Whilst most citizens view NAMA as a bailout to developers, keeping them afloat when most of them would have gone to the wall a couple of years ago, CIF views NAMA as a predator that is trying to radically overhaul and restructure the building industry, is trying to gain at the developers’ expense and country’s best interests, and is a punative instrument that is inflicting more harm than good on the property sector.

As reported in some of the papers today (here and here), Lombard Street Research have just published a report commissioned by CIF, attacking the rationale and practices of NAMA (which makes interesting reading).  NAMA has responded by arguing that the developers are living in denial and they need to wake up to the new realities of property development and the market. Whilst there is undoubtedly a number of issues concerning the formation and operation of NAMA, CIF’s principle problem is that there is little public sentiment for their views given that they’re clearly a vested interest who seem to care for little else other than the interests of its members (which they try to spin as, what is good for us, is good for the country – the same as they did all through the boom).  From NAMA’s perspective it is finding its work tough because the banks and developers seem very reluctant to work with it, they are economical with the truth, are slow in coming forward with documentation and workable business plans, and are clearly more interested in their own self-interests than acting as good citizens in dealing with the present crisis.  No doubt the spat will continue to run and run.  There are unlikely to be any winners and ultimately citizens will pick up part of the tab.  Sounds about par given the history of the crisis so far.

Rob Kitchin