More are spending, but we’re not spending more
While there is broad agreement that the Irish economy is recovering, there is considerable disagreement as to the strength of the upturn and, more importantly, how widely it is being felt or how it will develop.
Most economic indicators are pointing upwards, but paint different pictures as to exactly how well the economy and those who depend on it are doing.
Last week, house-price data for September showed a ‘white hot’ increase of 12.8%, the fastest growth in two years, seemingly signalling buoyant and broadly-based increases in demand.
However, consumer price data for October — also published last week — shows an annual increase of just 0.6%, one of the lowest inflation rates in Europe and more consistent with a notably ‘cooler’ economic climate.
One indicator of why other measures might meet or differ is the KBC Bank/ESRI consumer-sentiment survey. The October reading suggests the economy is in solid recovery, with half of those surveyed expecting a further improvement in the next 12 months. However, only one-in-four consumers expects an improvement in their own household finances. So, the survey suggests that the average consumer feels their circumstances are falling well short of the booming economy they read or hear about.
The Irish property market seems to encapsulate these contradictions. Most commentary on property market pressures focuses on a shortfall in supply.
But Irish house-price inflation has picked up sharply in the past year, in spite of some, admittedly modest, increase in new home-building — this suggests that something must be stirring on the demand side.
One theory is that this reflects a build-up in borrowing, but we need to be careful what we mean by this. It is true that the average amount people borrowed to buy a home has increased by 11% in the past year, but this is lower than the increase in prices.
Upward pressure on Irish house prices is the result of more people borrowing, rather than because people are borrowing more.
The improvement in the Irish economy has strongly increased the numbers living and working here in recent years.
While the circumstances of the average consumer have improved relatively modestly, the fact that there are significantly more able and willing consumers means that demand has picked up notably, particularly in areas such as housing.
The number of people now thinking about a home has increased markedly in the past year. The latest wave of the KBC Homebuyer sentiment survey suggests that there are probably two ‘ready and willing’ buyers for every property transaction in the Irish residential market in the past 12 months.
Pent-up demand has built up, because housing transactions ran at extremely low levels over the past six or seven years. As a result, many now find themselves in accommodation that no longer meets their changed family circumstances.
The improvement of late in Irish economic circumstances is making more people comfortable about the idea of buying a home. It is also prompting a renewed interest in property as an investment, but the most notable finding of the homebuyer survey is a pick-up in those wanting to move home, because their family size has changed, or because they need to move for work or personal reasons.
The message from these surveys is that the Irish economy is improving, but this improvement, and the problems that went before, mean that in areas such as the housing market, the surge in prices is telling us about intense pressures on households, rather a return to the boom.
For these reasons, the recovery in the Irish economy, and in the housing market in particular, is set to remain uneven and challenging for some time to come, as we cope with a rising population and pent-up demand.
Austin Hughes is chief economist at KBC Bank Ireland
