The income distribution and the Irish mortgage market

How concentrated are mortgage originations among those on higher incomes? Has this pattern changed through expansion and contraction in the Irish housing market? Combining for the first time information on the incomes at origination of a large sample of Irish mortgage holders with survey information on the population income distribution in each year, my colleague Reamonn Lydon and I address these issues over the period 1994 to 2014 in an Economic Letter released recently by the Central Bank.

In the work we highlight that the income profile of borrowers entering the First Time Buyer, Mover-Purchaser (also referred to as Second and Subsequent Buyer), and Buy to Let markets is markedly different.

The first chart below shows the evolution of the share of new First Time Buyer mortgage originations going to each population quintile between 1994 and 2014 (income distribution data were not available to us for 2015 at the time of carrying out the work). A number of patterns are evident:

  • The share of those in the top income quintile fell from over 40 per cent in 1994 to around 12 per cent by 2008.
  • The share of those in the middle income quintile rose from 15 per cent to over 40 per cent over the same period.
  • There has been a slight reversal of this pattern since the financial crisis; however, the share of originations going to the middle quintile is still well ahead of the top quintile.
  • Those in the bottom 40 per cent of population incomes have generally accounted for less than ten per cent of mortgage originations in a given year.

ftb

Next we examine the Mover-Purchaser or SSB market, and find that:

  • There was a similar convergence in the market shares of the 5th and 3rd quintiles over the Celtic Tiger period.
  • The reallocation towards the top income quintile in this market has been much sharper since 2008, with the market share standing at above 60 per cent for 2014.

ssb

The findings suggest that the crisis has been associated with some significant structural shifts in mortgage market participation. In the case of the SSB market, it is possible that the role of negative equity in impeding mover-purchases has been much more prevalent in recent years outside of the top quintile of the population income distribution. In the case of First Time Buyers, where the changes have been relatively less pronounced, the shifting age profile, where borrowers are entering the market later in life, may also explain the shift towards higher-income purchasers. Our research does not attempt to definitively quantify the role of supply side (such as bank lending policies) and demand side factors in explaining these changing patterns.

Other related research was also released in the Bank’s recent Quarterly Bulletin: The balancing act: household indebtedness over the lifecycle, by Apostolos Fasianos, Reamonn Lydon and Tara McIndoe-Calder. Finally, another related piece came out as a Research Technical Paper on the Great Irish (De)Leveraging by Reamonn Lydon and Tara McIndoe-Calder.

Conference notification

The Central Bank and the European Investment Bank will jointly host a conference on “Investment and Investment Finance: Funding Growth and Recovery in Europe” on the morning of April 10th in the Bank’s new premises, North Wall Quay.

The following speakers are confirmed, and a full programme will be available on the Bank’s website in the coming days:

  • Michael Noonan, T.D., Minister for Finance
  • Prof. Philip R.Lane, Governor of the Central Bank of Ireland
  • Andrew McDowell, Vice-President, European Investment Bank
  • Gabriel Fagan, Chief Economist, Central Bank of Ireland
  • Debora Revoltella, Chief Economist, European Investment Bank
  • Danny McCoy, CEO, IBEC

Further information is available here.

Household formation among young adults

A guest post from Reamonn Lydon and Apostolos Fasianos of the Irish Economic Analysis division here at the Bank.

The overall population increased by 4% between 2008 and 2016. At the same time, the number of young adults aged between 20 and 34 fell by a quarter– from 1.15 million to 860 thousand (see Table 1. See also the excellent study by Glynn, Kelly and MacEinrí (2015) on migration patterns for this group).

Table 1 CSO population estimates (Table PEA01)
 (`000s) 2008 2016 % change
Age <20 1209 1327.4 9.8%
20-24 373.6 226.8 -39.3%
25-34 777.8 633.6 -18.5%
35-44 662.2 733.2 10.7%
45-64 978.9 1127.2 15.1%
65+ 483.7 625.5 29.3%
4485.2 4673.7 4.2%

The large decline in the 20-34 population means that housing demand will be lower than the past.  However, there have also been significant changes in the household formation patterns of this group which are relevant when it comes to thinking about housing demand in the future.  As the figure below shows, just before the property crash just over 30% of young adults lived with parents, but by 2016 this had risen 37%.  Taking into account the population drop, this is around an additional 25,000 young adults versus the situation in 2006, and just under 320,000 in total living with parents in 2016.

F1Census data for 2016 is not yet available to calculate the latest figures, so we have drawn on the QNHS and Household Finance and Consumption Survey (HFCS, 2013) to try and complete the picture to 2016.  The HFCS is particularly useful as it allows us compare Ireland with other countries (Figure 2).  Ireland looks similar to both the EU and US (although the US data is for 18-34 year olds living with relatives, not just parents), but is somewhat higher than the UK. We know, however, that UK third level students are more likely than their Irish counterparts to live away from home.  Southern European countries, with relatively high rates of youth unemployment – such as Spain, Portugal and Italy tend to have a higher proportion of young adults living with their parents.

rea2

What do these figures mean for housing demand?

The answer depends on the extent to which you believe the shift towards more young adults living at home is a cyclical or a structural change. Certainly, there is a slow-moving cyclical part to it – the proportion rose as the employment prospects for this group worsened and young people stayed on in education (Conefrey, 2011).  The CSO also reported a sharp drop in the proportion of 19-24 year-olds in shared accommodation (i.e. renting), from 22 to 18% between 2006 and 2011.  So there may be a jump in demand in the short term, because not only do the delayed entrants want to enter the market after a (cyclical) delay, but those who are younger will now start forming households at a younger age.  There is already some evidence of this in the 2016 QNHS, which shows the percentage of 20-24 year olds living at home falling for the first time in almost 10 years, from 70 to 68%.

However, there might also be structural changes to consider. For example, if the easy credit of the bubble years meant that buyers got on the housing ladder at a younger age than previously, and this has since been reversed, then the ‘pent-up’ demand might not be so large.  We know that the average age of FTBs has risen in recent years, having fallen during the boom.  In this case, young adults could continue to form households at a rate similar to what we are now seeing.

In all likelihood, the shifts we have witnessed are a mix of cyclical and structural changes. However, how much is cyclical does matter. As Table 1 showed, there were just over 860,000 20-34 year-olds in 2016. Ignoring immigration flows which could increase the size of this age cohort further, each 1% fall in the proportion living at home means an additional 8,600 individuals looking to rent or buy. This is a large figure in the context of current estimates for annual housing demand, which range from 20,000 and 40,000 units.

Central Bank workshop on macroprudential policy

The Central Bank will host a workshop entitled “Evaluating the effectiveness of macroprudential policies” on Wednesday February 8th in the Institute of Banking in conjunction with the European Central Banking Network and the Centre for Economic Policy Research. A description of the event is outlined below.

Macroprudential policies to mitigate structural and cyclical systemic risk are now in operation in a number of countries.  Assessing the impact of these policies on the resilience of the financial sector and the wider economy is at the core of research and policy activities following the crisis.  Given the multi-faceted concept of financial stability that these policies are meant to contribute to and the still emerging theoretical framework, a number of analytical approaches have been advanced for policy evaluation and design.  The workshop will bring together the policy and academic communities to consider these evaluation approaches covering the use of macro models, time series techniques and the analysis of micro data. Of particular interest are those policies aimed at enhancing the resilience of banks, households and other sectors of the economy through building up structural capital buffers (e.g. G-SIB, O-SII, SRB) and enacting borrower-based measures (e.g. Loan-to-Value and Loan-to-Income limits).

Programme: 

08:45 Coffee and Registration

09:15 Session 1 Policy Panel – Chaired by Fabrizio Coricelli (Paris School of Economics and CEPR) with Vice-President Claudia M. Buch (Deutsche Bundesbank), Governor Boštjan Jazbec (Banka Slovenije), Governor Philip R. Lane (Central Bank of Ireland)

10:00 The use and effectiveness of macroprudential policies: New evidence – Eugenio Cerutti (International Monetary Fund)

10:50 Coffee

11:10 Inspecting the mechanism: Leverage and the Great Recession in the Eurozone – Philippe Martin (Science Po Paris and CEPR)

12:00 The impact of bank capital on economic activity – evidence from a mixed-cross-section GVAR model – Christoffer Kok (European Central Bank)

12:50 Lunch

14:00 Capital inflows – the good, the bad and the bubbly – Dennis Reinhardt (Bank of England)

14:50 The impact of macroprudential housing finance tools in Canada: 2005-2010 – Tom Roberts (Bank of Canada)

15:40 Coffee

16:00 Objective-setting and communication of macroprudential policies – Jochen Schanz (Bank for International Settlements)

16:50 Closing remarks – Governor Philip R. Lane (Central Bank of Ireland)

The workshop is hosted by the Central Bank of Ireland as part of a series of annual events organized by the European Central Banking Network (ECBN) in cooperation with CEPR.

To register for the event or for any queries, please email fsdadmin@centralbank.ie by Friday 3rd February 2017.

Venue: The Institute of Banking, Citi Building, IFSC, 1 North Wall Quay, Dublin 1, Ireland – https://goo.gl/maps/aLj85WQdjWu.

Central Bank presentations at the DEW

Four presentations from Central Bank economists were made at the recent Dublin Economics Workshop, reflecting a range of research activity on the commercial real estate, enterprise credit and interbank markets. Paper titles and a brief description below.

Eoin O’Brien and Maria Woods: “Applying a macroprudential risk analysis to Irish commercial  real estate prices”

Research focuses on Irish commercial real estate market and presents a range of indicators that can be used to assess the sustainability of prices and enhance the Central Bank of Ireland’s existing macroprudential risk assessments of this sector.  Developing analytical tools to identify real estate risks, among other areas, is a priority for policy makers focused on mitigating systemic risk.  To complement traditional statistical indicators of price misalignment such as the deviation of the price-to-rent ratio from its historical average, two reduced form models are specified drawing on the property literature and long-run Irish data (1985Q1 to 2013Q4) to approximate a fundamental price series.  Periods where actual prices deviate from this fundamental series can be identified over the sample.  Non-linear methods suggest that the relationship between price changes and estimated misalignments may vary over the property cycle.

James Carroll, Paul Mooney (Dept of Finance) and Conor O’Toole: “Irish SME Investment in Economic Recovery”. Link (p73).

An in-depth look at the types of SME engaging in investment during the economic recovery, along with the financing sources behind said investment. Key findings:

  • The share of SMEs investing has increased steadily since 2012, and currently about a third of SMEs are investing on a six-monthly basis.
  • Younger firms, controlling for other firm characteristics, invest more. Improvements in profitability and turnover are important drivers of investment.
  • SME investment responds to regional  economic conditions, as measured by the unemployment rate.
  • Smaller, younger, non-exporting firms, who are likely more reliant on local household spending, respond most to domestic conditions.
  • Investment is mainly financed through internal funds, and there is no evident increase in the external financing share since early 2013.

James Carroll and Fergal McCann: “Cross-country comparisons of SME borrowing costs”

This research provides a methodology to strip out borrower- and bank-related factors which may form part of the explanation for cross-country interest rate differentials. Using the case of UK and Irish lending by Irish-owned banks, the research suggests that, of a 240 basis point (bps) difference in raw average borrowing costs, about 100-150 bps is not explained by bank- and borrower-level characteristics and can therefore be attributed to market-level factors such as bank competition, collateral enforceability and the aggregate outlook for default probabilities. Earlier research from the two authors shows that across Europe, such aggregate factors are indeed associated with higher enterprise borrowing costs.

Paul Lyons and Terry O’Malley: “Monitoring Ireland’s payments system using Target II”

  • Research provides a description of Ireland’s component of the Eurosystem’s large value payment system (TARGET2-IE).
  • TARGET2-IE forms an important part of the Bank’s analytical toolkit in that it can be used to examine the degree of interconnectedness between banks in Ireland; to develop indicators for systemic risk monitoring; to map Ireland’s payment networks to provide a source for measuring price and quantities in the short term interbank loan market involving Irish banks.
  • Early research results identify differences between the interbank and customer payments networks with the customer payment network displaying a small number of highly connected banks in addition to a large number of isolated banks.

 

Central Bank of Ireland Macro Financial Review 2016:1

The Bank’s most recent Macro Financial Review (MFR) was released recently. As well as providing an in-depth view of financial developments and risks in all key sectors of the economy, the MFR also contains a number of interesting analytical boxes on topics such as the components of NFC debt, SME actions after a credit rejection, household financial vulnerability estimates, residential property price expectations, new indicators of systemic stress and financial conditions, CoCo bonds and reciprocity in macroprudential policy.

The key messages from this most recent MFR can be summarised as follows:

  • Risks to the economic outlook are weighted to the downside and relate mostly to uncertainty in the external financial environment.
  • While economic conditions are improving, public and private sector indebtedness remain high.
  • Workout of impaired loans and disposal of non-performing loans in banking sector ongoing, domestic bank profitability remains weak.
  • Mortgage regulations: Call for evidence which will inform review opens from 15 June to 10 August.

The full report can be downloaded here.