Housing crisis will dampen any Brexit positives

Housing crisis looks set to worsen before improving, writes Jim Power

This week we were treated to two further pieces of evidence showing just how hot the residential housing market is becoming. The basis for the heat is clear; demand is totally outstripping supply and this is manifesting itself in spiralling rents in a pretty dysfunctional rental market and spiralling prices for those who want to buy.

On the demand side, there are easily understood factors such as demographics, the strong labour market and the general buoyancy of the economy driving demand. What is less clear at this early stage is the impact that the politically-influenced relaxation of the Central Bank’s lending criteria last year, and the introduction of the help-to-buy scheme are having.

However, logic would suggest that if you put more money into the hands of a first-time buyer or indeed any buyer, then the price of houses will inevitably rise. Rather than grilling the Governor of the Central Bank, the political system should accept blame for these policies, but such a development would not be a characteristic of our increasingly populist and dysfunctional political system.

On the supply side, it would appear that we do not have the capacity to deliver the level of supply that is required. In its blanket approach to developers, it is certainly arguable that a situation has been created whereby we do not have enough developers with the willingness or capacity to satisfy housing demand. It cannot be healthy to have an agency such as Nama with such a stranglehold and position of excessive control over the property market. However, the expression of such views will not win any plaudits from ‘official Ireland’, but it is something that our political system needs to think about.

The invocation of Article 50 last week has placed a focus back on Brexit and the opportunities and challenges that it presents for Ireland. The crisis in the housing market will not enhance our ability to exploit the positives, but I suppose that is just stating the obvious.

Two areas of the economy have been affected by Brexit thus far, namely the food and beverage sector, and the auto industry. Bord Bia showed us in January the hit that food and beverage exports took in the second half of last year on the back of sterling weakness. New car sales are also being affected to some extent, as evidenced by the latest data from the Society of the Motor Industry (SIMI). New car sales in the first three months of the year were 8.3% down on the same period in 2016, but the outcome would have been considerably worse but for a surge in registrations in the dying days of March.

The cynics might suggest that this is a case of the industry pushing registrations through before the end of the first quarter. However, there are also timing issues involved. Easter was much earlier last year and registrations of hire drive cars always increase before the holiday season is effectively launched. It is only in recent days that this phenomenon is occurring due to the lateness of Easter this year.

Interestingly, used car imports from the UK are soaring again this year and were up by 56.1% in the first quarter. Continued sterling weakness is driving this trend, and while many of the imports are relatively old, they are still likely to be displacing some new car sales. From the perspective of the Revenue Commissioners, there is a hit here because the VAT and VRT receipts on used car imports are just over a third of the receipts from new car sales.

The outlook for the auto industry was always going to be uncertain coming into 2017, given the issues created by sterling weakness, the uncertainty around Brexit, and the fact that the market had recovered strongly over the past three years. However, the new car market is proving more difficult than anticipated, despite the fact that the typical economic factors that drive sales such as economic growth, the labour market and the availability of car finance are all very strong.