1. 2030: The future of the Irish residential market
DATE
26th June 2019
VENUE
National Housing Conference, Stillorgan, Co. Dublin
AUTHOR
Kieran McQuinn

2. Outline of presentation
Future trends in housing activity and finance
Assess future affordability pressures in the market
Based on current trends
18 July 2019

3. Future trends in housing activity and finance
Addresses two-related mortgage market issues
Long-run housing demand
Closely related to demographics
Using the model generate
Forecasts of future housing demand
Based on COSMO
Assess implications for the banking sector
Sizeable increase in credit/balance sheets
Policy issues which arise?
18 July 2019

4. Irish Housing and Financial Sectors:
From the mid 1990s onwards
Emergence of the Celtic Tiger
Prompted significant increase in housing market activity
Initial activity warranted by economic fundamentals
From the early 2000s credit market developments became more prominent
Ability of Irish financial institutions to borrow from abroad.

5. Model of Long-Run Housing Demand:
Builds on earlier research
Duffy, Byrne and FitzGerald (2014)
Using micro-data, they look at
Household formation and tenure choice
They estimate a measure of realised demand
Over time (1982 – 2015)
We examine relationship between
Activity and structural demand

6. Structural Demand and Housing Activity
Units

7. Short-Run Models of Housing Demand:
Estimate error correction model (ecm):
Based on long-run model
Also include short-run dynamics for
Prices and interest rates.
Use the ecm
To generate forecasts of activity levels
Key variable:
Forecast of future demographic trends
COSMO forecasts

8. Household Formation Forecasts
Units

9. Actual vs Structural Demand
Units

10. Irish Banking Sector - Background
Liquidity problems of Irish banks faced
Heavy reliance on short-term money market funding,
Funding base that is more deposit-based
Loan-to-deposit ratios introduced as part of CBI (2011)
Basel III greater reliance on stable funding
Crucial assumption:
COSMO: deposits are assumed to grow with GDP
Lending in excess of this growth rate
Funded from non-deposit sources?

11. Housing Investment and Housing Stock

12. Required level of credit (€ bns)?

13. Funding Requirements of the Banks?
Required expansion in credit =
Similar expansion in funding liabilities.
This may take the form of
Higher levels of retail deposits, short- and long-term debt securities, or
Levels of capital.
COSMO:
Retail deposits assumed to grow in line with GDP while,
Capital levels determined by features of the banking sector
Size, its exposure to the real estate sector and profitability.
Remaining liabilities of the banking sector are treated as a residual.

14. Projected levels of Deposits and Capital (€bn), and the Loan-to-Deposit Ratio

15. Financial Sector Implications
Regulatory developments impact on banks funding?
Net Stable Funding Ratio (NSFR)
A share of liabilities to be of more medium/long-term duration
Issuance of covered bonds
Debt securities backed by cash flows from the issued loans.
Typically cheaper than other types of non-secured funding
Bonds are treated as high-quality collateral by the ECB.
 Required funding achieved through
Entry of foreign banks into the Irish retail banking sector.
Access to stable medium- to long-term funding via parent

16. Real Economy Implications
Higher level of residential investment
Implies a higher level of demand relative to the baseline.
Output gap is 0.3 percentage points higher
Fiscal intervention in the form of
Higher personal/ consumption taxes or
Reduced government spending.
Irish household sector may not be able
Fund the necessary housing investment
Greater role for the rental sector?
With substantial equity injections, possibly from outside Ireland

17. Affordability: Over the period 2005 – 2015
Document housing affordability trends for Irish households split by age, region, household structure and their position in the income distribution
Evaluate the suitability of international definitions of high housing costs in an Irish context
Policy implications?
18 July 2019

18. Survey on income and living conditions (SILC)
EU-SILC
Collects a wide array of household variables
From Member States.
households surveyed each year
Primary focus is to collect information used to derive indicators of poverty, deprivation and social exclusion
Contains information on
home ownership, details of mortgage debt, monthly mortgage instalments, monthly rental payments and income
18 July 2019

19. Measures of housing affordability
𝐻𝑃𝑇𝐼= 𝐻𝑜𝑢𝑠𝑖𝑛𝑔 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑀𝑅𝑇𝐼= 𝑀𝑜𝑟𝑡𝑔𝑎𝑔𝑒 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒 𝑅𝑇𝐼= 𝑅𝑒𝑛𝑡 𝑃𝑎𝑦𝑚𝑒𝑛𝑡 𝑁𝑒𝑡 𝐼𝑛𝑐𝑜𝑚𝑒
18 July 2019

20. Housing payment to income ratios 2005-2015
Figure: Housing Cost to Income Ratios
a) By Distribution
b) By Tenure
18 July 2019

21. Housing payment costs by income quartile
Figure: Housing Payment to Income Ratios by Income Quartile
a) Mortgaged Households
b) Private Renter Households
18 July 2019

22. No formal definition in an Irish context
High housing costs
No formal definition in an Irish context
Apply 2 “rules” in international literature
30% of income benchmark
30/ % of income plus in lowest 40% of income distribution
Identify the share, and composition, of households defined as “high housing cost” by these measures
18 July 2019

23. High housing costs - 30% benchmark
Figure: Share of Households Above 30% Benchmark
a) By Tenure
b) By Income Quartile
18 July 2019

24. High housing costs – 30/40 measure
Figure: Share of Households in 30/40 Group by Tenure
18 July 2019

25. Summary of findings & future implications?
Certain groups do face significant affordability challenges
Rental sector in Dublin
Difference between the low income households, and the rest
Widened over the period ,
Housing affordability inequality has grown
Lower income, private renters, single adult households
Face a higher ratio of housing costs to income
If the future sees more people renting
Affordability pressures set to increase?
18 July 2019