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Irish Property Market 2020 Part 3
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It seems not only house market but most of the equities around the world, like Stocks.
Although property price probably has one of the lowest chance to experience any significant fall between any other equities.
WFH & Savings are the main players to blame.
All asset classes have appreciated in value due to the extra cash in circulation from QE.
If you plot the Residential Retail Price index (Source CSO) against Loans for House Purchases (Source CBI) you can see that it is not Bank lending that is driving the increase in House prices.
The overall Loans for house purchases has been decreasing since 2013 which means that the amount of new loans for house purchases is less than what is being repaid on a monthly basis. which means that their is an increase in Equity owned by existing homeowners.
The increase in RRPI is being driven by non-bank lending since 2015 which is around the time QE was introduced by the ECB.
The following chart where I plotted the M2 Money supply v RPPI illustrates this.
This tells me that the increase in house prices since 2015 will be down to a combination of:
-Institutional Investors that have extra cash available thanks to QE.
- people's loan requirements are lower due to higher savings or Equity in existing properties.
-Shortage of Supply
The last point to note is that QE has mainly stayed in the Financial sector as there was limited government Fiscal Spending unlike in 2020 where 17.6bn has hit the wider economy via direct supports by the Government which is one of the main reasons why we have not seen a fall in property values as you would expect with such a economic Shock.0 -
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Timing belt wrote: »The increase in RRPI is being driven by non-bank lending since 2015 which is around the time QE was introduced by the ECB.
The following chart where I plotted the M2 Money supply v RPPI illustrates this.
This tells me that the increase in house prices since 2015 will be down to a combination of:
-Institutional Investors that have extra cash available thanks to QE.
- people's loan requirements are lower due to higher savings or Equity in existing properties.
-Shortage of Supply
The last point to note is that QE has mainly stayed in the Financial sector as there was limited government Fiscal Spending unlike in 2020 where 17.6bn has hit the wider economy via direct supports by the Government which is one of the main reasons why we have not seen a fall in property values as you would expect with such a economic Shock.
I mostly agree with your first diagram. In big part disagree on your second diagram, don't have time to go in details. Thus just commenting on second part.
M2 has closer relation to deposits/savings, than QE program.
If you add QE program with M2 money supply, they wouldn't be very inline with each other. Where as deposits/savings would.
Property price went up significantly before the introduction of QE in March 2015.
Although QE has a very big impacts on equities. It is not as directly related to Property Market. If the Covid is gone, and inflation recovers close to 2%, QE may be removed/reduced, but it is far from one to tell what will happen with Property prices.
WFH, has more direct impact in saving increase than QE program. And WFH likely has increase in the the need of living space, thus increase in demands.0 -
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I mostly agree with your first diagram. In big part disagree on your second diagram, don't have time to go in details. Thus just commenting on second part.
M2 has closer relation to deposits/savings, than QE program.
If you add QE program with M2 money supply, they wouldn't be very inline with each other. Where as deposits/savings would.
Deposits and savings up to 2 years along with Cash in circulation make up the M2 money supply.
An increase in deposits and savings would not increase the money supply as it would have a negative impact on cash in circulation and the M2 money supply would still end up being the same if these were the only factors in play.
The central banks increase money supply by cutting Rates and reduce the supply by raising rates and use this blunt tool to manage inflation.
As rates are bellow Zero and the negative rates are not passed on to all customers by the banks the central bank has used QE to manage the money supply.
i.e. If they undertake QE.. the purchase assets from the banks and give them cash and thereby increasing the money supply.
The following Chart plots this and yes the increase in money supply is exactly in line with QE
Yes Property Prices started to Stabilise from July 2012 around the time that the ECB cut it's rate to Zero and thereby making mortgages cheaper. But it wasn't till 2015 that the Non-household buyers (i.e. institutional investors and the Government) really started expanding there purchases.Property price went up significantly before the introduction of QE in March 2015.
i.e.
Although QE has a very big impacts on equities. It is not as directly related to Property Market. If the Covid is gone, and inflation recovers close to 2%, QE may be removed/reduced, but it is far from one to tell what will happen with Property prices.
Yes QE has a big direct impact on housing as bond yields are low off the back of QE and this drives investors to start seeking out other assets with higher yield such as residential property. This hunt for yield accompanied with plenty of cash is why 1 in 3 properties sales in 2019 was to someone that did not directly occupy the property.
The following extract from an FT article in Feb of this year even calls this out:
"The biggest reason of all for Ireland’s housing disaster has to be Europe’s ongoing experiment with quantitative easing and ultra-low interest rates. This has a double-whammy effect on property prices. Investors are lured into the market by a search for returns in an otherwise low-yield environment. And housebuyers are encouraged to buy with cheap mortgages."
The central banks will find it very difficult to switch off QE as they have already tried this a few times and each time the stock market started to crash which in turn lead to more QE. Whatever they do will need to be done very slowly and overtime which is why we will have low rates for years to come. The only exception to this is if there real economic growth accompanied by a spike in inflation then they will be able to act a bit faster.
So Once Covid is gone and if the economy does recover and if we start seeing inflation close to 2% (Something that the Eurozone has been trying to achieve since 2008 and have failed miserably at it) then we may see QE slow down but if it was to stop all at once there would be a crash to the stock market and to the property market as investors would exit those markets chasing yield in the bond market.WFH, has more direct impact in saving increase than QE program. And WFH likely has increase in the the need of living space, thus increase in demands.
No doubt WFH has helped a cohort of the population get on the property ladder but there are many who are unable to work from home and only for QE allowing the government to borrow money to support these people via the PUP there would have been a shock to the banking system that was bigger than 2008.0 -
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The following is a summary by country of the Risks in the European property Market according to Vulnerabilities in the residential real estate sectors of the EEA countries Report by the European Systemic Risk Board Published September 2019
I thought people might interested in seeing where Ireland sit in relation to other European countries
According to the report (pages 101-102) Irelands Key vulnerabilities are:
• Elevated but declining household indebtedness
• High house price growth
I found the following paragraph interesting:
"Housing prices have grown by 11.3% (real annual growth) in Q3 2018 and by 9.9% (real annual growth) over the past three years. This dynamic has been coupled with high levels of investment in construction, albeit coming from a low base, which may contribute to the house price decrease if the economic cycle turns around. On the other hand, this effect is to some extent mitigated by legal and structural limits to supply (high building costs, impaired balance sheets of construction firms, skill shortages and land hoarding). Furthermore, a significant (although declining) part of the RRE transactions are non-mortgage financed, which may to some extent limit the vulnerabilities connected to the collateral values. While recent increases in house prices have outpaced income growth, available estimates do not point to an overvaluation (Central Bank of Ireland’s own valuation metrics indicate that house prices are now in line with or just above values justified by economic fundamentals)."0 -
Timing belt wrote: »The following is a summary by country of the Risks in the European property Market according to Vulnerabilities in the residential real estate sectors of the EEA countries Report by the European Systemic Risk Board Published September 2019
I thought people might interested in seeing where Ireland sit in relation to other European countries
According to the report (pages 101-102) Irelands Key vulnerabilities are:
• Elevated but declining household indebtedness
• High house price growth
I found the following paragraph interesting:
"Housing prices have grown by 11.3% (real annual growth) in Q3 2018 and by 9.9% (real annual growth) over the past three years. This dynamic has been coupled with high levels of investment in construction, albeit coming from a low base, which may contribute to the house price decrease if the economic cycle turns around. On the other hand, this effect is to some extent mitigated by legal and structural limits to supply (high building costs, impaired balance sheets of construction firms, skill shortages and land hoarding). Furthermore, a significant (although declining) part of the RRE transactions are non-mortgage financed, which may to some extent limit the vulnerabilities connected to the collateral values. While recent increases in house prices have outpaced income growth, available estimates do not point to an overvaluation (Central Bank of Ireland’s own valuation metrics indicate that house prices are now in line with or just above values justified by economic fundamentals)."
Excellent contributions thank you very much. Very insightful.0 -
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