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Irish house price inflation hits 14% in November, the fastest rise in 6 ½ years
Near term risks to upside but some slowdown in housing inflation may emerge as 2022 progresses
Irish Consumer price inflation hits two decade high of 5.5% in December
Global factors the key drivers in worldwide inflation surge…
… but domestic influences could see inflation threaten 7% in coming months
Still in ‘first round’ stage of price pressures-real risks relate to second round threats of wage price spiral and earlier and more aggressive ECB tightening
The latest data on Irish property prices and broader consumer price inflation show a further step-up in what has been a marked worsening through 2021. To a significant extent, sharply higher price pressures here and in most other economies at present are a nasty sting in the economic tail of the pandemic.
How severe this sting may be depends heavily on whether it triggers a damaging price-wage spiral domestically and whether it leads to borrowing costs rising faster and earlier than previously expected as Central Banks worry about a possible return to historic high inflation times.
Property price inflation continues to accelerate
Irish residential property price inflation picked-up for the fifteenth month in a row to reach 14% in November, up from 13.3% in October. The November figure marks the fastest pace of increase in Irish property prices in six and a half years (April 20215 +15.2%). On current trends, Irish property prices are likely to exceed their 2007 peak in the early months of 2022.
While strong demand and strained supply are likely to remain features of the property market for some time, there are some tentative signs that the low-point in terms of supply constraints and the high point in terms of a ‘bulge’ in demand growth have now been seen, implying there may be scope for some cooling in property price inflation as we move through the year ahead.
Today’s data continue the dramatic acceleration in Irish residential property price inflation through 2021, that has boosted the year-on year increase to 14% from an increase of just 0.4% twelve months earlier in November 2020. Underlining this dramatic pick-up, diagram 1 below compares the standard year-on year rate (+14% in November) with and a three month annualised rate (+17.7% to November) which emphasises the intensity of the recent momentum in Irish property prices.
The year-on-year rate of increase in Irish property prices could edge higher in coming months as demand remains elevated and supply interrupted. However, the sense that we may be approaching a near-term peak is tentatively hinted in the slight easing in the 3 month annualised rate of late.
Some possibility of somewhat slower property price inflation in 2022 as demand and supply ‘normalise’
There is little doubt that the structural issue underpinning Irish property prices is a long-lasting shortfall in supply. This constraint implies rapid price increases in periods when demand strengthens. In that context, the catalyst for intense pressure on property prices through 2021 was a surge in demand. In turn, this reflected a combination of factors including the resilience of household incomes to the pandemic, the boost to savings from restrictions on spending, the increased importance placed on accommodation by working and schooling from home, the judgement that borrowing costs would remain low for a substantial period.
Some sense of the importance of demand-side influences is suggested by the fact that on-market home purchases by household buyers (as distinct from institutions) were 7.8% higher in November 2021 than a year earlier and 14.4% higher than the pre-pandemic reading of November 2019.
Diagram 2 below suggests changes in homebuyer demand, as depicted by the trend in mortgage approvals, have tended to produce relatively short lived mini-cycles in house price inflation in recent years. As the pandemic prompted the activation of previously latent demand, price pressures intensified through 2021. Longer property search, allied to extended approval lengths and increased savings, sustained the rising trend in property price inflation through2021.
In light of the slowdown in the pace of approvals growth through 2021, it may be that the current ‘bulge’ in demand fades as 2022 progresses, leading to some easing back in house price inflation in the year ahead. As is usually the case, the precise path of Irish property price inflation back to a more sustainable setting is uncertain. However, as affordability constraints bite and signs of a material improvement in new supply emerge, a bumpy slowing of property price inflation may become established.
Irish consumer price inflation hits two decade high in December and likely to rise further
One factor that might complicate any slowdown in property price inflation in 2022 would be a step-up in domestic wage pressures in response to uncomfortably fast consumer price inflation. Today also saw the release of Irish consumer price data for December 2021. These show an increase of 5.5% y/y, the fastest rise since April 2001 (5.7%). Again, the trend through the past year marks a dramatic change from the December 2020 rate of -1%.
As the diagram below illustrates, rapidly increasing inflation of late is not unique to Ireland. Indeed, December saw US inflation accelerate to 7%, the fastest pace in thirty nine and a half years ( June 1982,+7.2%) and UK data released today show UK inflation at 5.4%, a near thirty year high (March 1992,+7.1%).
The key drivers of surging prices of late are global rather than domestic in nature and reflect sharply higher energy costs amplified by supply bottlenecks worldwide affecting the production and delivery of a range of items. As the diagram shows, the energy costs faced by Irish consumers were 305 higher in December 2021 than a year earlier. Recent trends in global energy markets and industry commentary suggest these influences will neither fade quickly or perhaps fully although they should ease materially as 2022 progresses.
Irish inflation may be further boosted in the near term by additional influences closer to home. The impact of the recent introduction of minimum alcohol pricing could result in a further marked step-up in inflation towards 7% in the early months of 2022. In addition, the strength of the Sterling exchange rate allied to strong inflation abroad will likely seep into rising import costs. These developments coupled with the robust improvement in the Irish economy may add to domestic wage pressures.
Price pain is a problem, could the ‘cure’ be worse?
Although these forces are still largely at a ‘first round’ stage, the critical balancing act domestically is arrive at responses that provide some element of protection to living standards while preventing an altogether more damaging spiral in domestic costs. Calibrating public and private sector measures to deliver this outcome may make for uncomfortable as well as slightly unfamiliar discussions in coming months.
An additional risk factor for the Irish economy in general and the property market in particular is the possibility that Central Banks respond aggressively to current aggravated inflation readings and implement a much larger and earlier tightening of monetary policy. The Bank of England began raising policy rates in December and markets believe the US Federal Reserve will shortly begin a sequence of rate hikes. Although ECB officials have repeatedly suggested Euro area rates will not rise this year, the possibility of such a development or the start of a tightening cycle in 2023 could become an issue for the Irish property market and for the broader trend in living costs as this year develops.
This non-exhaustive information is based on short-term forecasts for expected developments in the economy and financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalised investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a judgment as of the date of the report and are subject to change without notice.