Housing completions to fall well below demand

Data from the Department of the Environment shows there were just 10,480 new homes completed in 2011.

This is a fall of 28% compared to the 14,600 units completed in 2010 and the lowest level of output since records began in 1970. At the height of the property cycle, completions were running at a level of some 90,000 units per annum.

Completions as recorded by the department are measured by connections to the ESB network, and as such incorporate the finishing out of work in progress for some time as well as new construction activity. The best indication of the level of this new construction activity is given by commencement notices, which are required for all new housing starts, apart from local authority direct builds.

Only 4,380 units were commenced in 2011, with the seasonally adjusted annualised rate dropping to just 3,260 by quarter four last year. This compares with over 75,000 units commenced in each of the three years from 2004 to 2006. The overall level of new commencements, though, hides the extreme weakness of new developer activity. Almost 80% of commencements in 2011 were for single units while there were just 860 commencements in multi-unit developments. This same trend is reflected in new house guarantee registrations, which largely reflect developer activity rather than self builds. There were just 834 such registrations in 2011. This very weak trend continued into January this year in which there were just 45 new units registered.

The very depressed levels of this new activity, by developers in particular, would indicate that output will fall even further this year. Even on the basis of a further finishing out of work commenced in earlier years, we are forecasting that only 8,000 units will be completed in 2012. This is well below our estimate of potential demand, which we put at around 20,000 units per annum after allowing for emigration. With supply thus falling short of potential demand, this suggests there should be a slow erosion of the supply overhang of unoccupied properties.

However, this potential demand may not be fully unlocked until there is an easing in the current depressed consumer sentiment and fears about employment prospects abate. Sentiment remains very much against the housing sector for purchase/investment and house prices continue to fall.

Indeed, the CSO residential property index showed prices nationally falling by 1.7% in December, a 16.7% year-on-year decline from year earlier levels, bringing them 47% below their 2007 peak. Dublin prices have fallen 55% from their peak, while those outside the capital are down a more modest 46%. Apartments have performed worse than houses, with prices falling to 57% and 46%, below peak levels.

However, the rental market appears to have bottomed. Indeed, according to the CSO, private rents in January were still some 3% above their end 2010 lows.

Meanwhile, estate agents report some pick-up in transactional activity. However, any strengthening of activity would be from very low levels. The weakness of the housing market is illustrated by the fact that, according to the Central Bank of Ireland, the level of mortgage lending outstanding fell by 3.8% year-on-year in December, the 22nd consecutive month of negative year-on-year growth.

In terms of new lending, Irish Banking Federation data show just 3,224 mortgage drawdowns for purchase purposes in Q4 last year. This was a fall of 20% compared to the same quarter of 2010 and down from the level of around 30,000 per quarter at the peak of the market. However, Q4 was the strongest of any quarter last year providing tentative evidence that the level of new mortgage lending has stabilised.

* John Beggs chief economist AIB