New housing supply dented by Covid-19
New supply for the Irish residential property market was on a steady rise before the Covid-19 pandemic and associated restrictions depressed activity. Prior to these disruptions, completions, as measured by the CSO’s new dwelling data, rose by 18% last year to over 21,000 units.
This year had also started in an encouraging manner, with completions registering a 17% increase in Q1 on a year-on-year basis. Indicators of future supply were also exhibiting positive signs in the early months of this year. Housing starts (commencement notices) were up 5% in the first quarter of this year compared to the same three month period in 2019. Meanwhile, planning permissions surged by 97.4% y/y in quarter one.
However, the Covid-19 restrictions resulted in homebuilding activity coming to an abrupt halt and sites being closed from late March until the second half of May. The impact of this was captured in the ‘housing’ subcomponent of the construction PMI falling to a record low of just 4.9 in April. The construction sector was included within the first phase of the easing of restrictions, allowing activity to gradually restart last month. This was reflected in the housing component of the PMI improving to 21.4 in May. However, this is still well below the breakeven growth level of 50 and the 49.7 reading recorded in February.
Looking ahead to the remainder of the year, the ‘lost’ period of homebuilding activity will reduce the level of new supply that comes on stream in 2020. The more challenging and uncertain economic environment, will also act as a major headwind to building activity. As a result, only those developments that are at an advanced stage are likely to be finished this year. All other developments may be put on hold, until the economy gets back onto a firmer footing.
Overall then, from a supply perspective, in a best case scenario, completions may only total in the region of 16,00-18,000 units this year. Before the crisis struck, we were projecting new supply of around 24,000 units in 2020. In the context of the continued shortfall in supply versus demand of at least 30,000 units per annum, the net impact is that it could push out by a further year the timing whereby supply and demand become closely aligned. Even before this shock, this equilibrium situation was not envisaged to be reached until possibly 2023.
Lagging data will take time to capture the impact of Covid-19 on house prices
The most recent CSO figures on residential property prices show a 0.3% monthly fall in April. On a year on year basis, price growth slowed to 0.5% from 1%. In terms of the geographic breakdown, the data reveal non-Dublin prices continued to outpace the ‘capital’ in their respective annual rates of growth. In Dublin, prices were flat in year-on-year terms, while non-Dublin prices rose by 1.1% when compared to April 2019.
However, the April data are not reflective of price conditions in that month. The primary source the CSO uses to calculate its Residential Property Price Index (RPPI) is the Stamp Duty returns to Revenue. Therefore, it captures prices that were agreed a number of months before. Another factor to bear in mind is that the CSO applies a smoothing calculation/technique to reduce the month to month volatility in the data.
Overall then, given the lagging nature of the data, the true impact of the Covid-19 restrictions on prices may not be captured in official figures until the second half of the year. Even then, the data may still be distorted due to the likely low level of sales being agreed in recent months (e.g. in the three months to May, transactions fell by 33% y/y) creating difficulty for the official RPPI data to capture the real extent of price moves in a largely dormant period for the housing market.
Notwithstanding this, it is expected that the very challenging economic backdrop will bring downward pressure to bear on house prices. However, given that this downturn is expected to be short and the on-going shortfall in supply outlined above, the extent of any prices falls may be limited.
The recent Central Bank of Ireland/SCSI Property Survey found that the median expected price fall nationally over a one-year time frame is 5%. Meanwhile, over the medium term, median expectations are for national house prices to be just 2% higher by Q1 2023 compared to their Q1 2020 levels.
The substantial reduction in new supply, combined with the potential for house prices falls, will result in a significant decline in new mortgage lending this year, despite the 6% increase in the value of mortgage drawdowns in Q1. This is already evident in the latest mortgage approvals data, which showed a 62% yearly fall in May.
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