Economic Performance

Expectations, credit and house prices

Happy new year to the community. Of course new year means new quarter and new quarter means house price reports…

The latest House Price report is out this morning. The PDF is available here. For me, the key takeaway is as follows: house prices fell in the final quarter of 2014 and it seems very unlikely to have been statistical noise or a seasonal effect. 35 areas are analysed in each report. For each of the first three quarters of the year, an average of 32 showed quarterly gains in asking prices. For the final quarter, this flipped, with 30 of 35 regions showing a fall. For Dublin, this was the first quarterly fall since mid-2012. (Given the size of increases earlier in the year, a one-quarter fall still leaves the year-on-year change large and positive: 20% in Dublin and 8% elsewhere.) Broadly speaking, a mix-adjusted analysis of Price Register transactions shows the same. While it is only one quarter, it seems more than just a statistical blip.

For me, the check-list of what matters for house prices contains five items: [1] household incomes, [2] demographics and [3] housing supply (“the fundamentals”); and [4] credit and [5] expectations, these last two being the “asset factors” that can create and destroy housing bubbles. None of the fundamentals changed dramatically in the final three months of the year (the only thing you could argue was a slightly higher volume of listings in Dublin), so the change after September must be due to asset factors.

The Central Bank proposed in October to cap residential mortgages as early as January 2015, although this could not affect prices directly in 2014. So the last remaining candidate is expectations.* The quarterly report includes findings from a survey of housing market sentiment. This survey indicates that, yes, those active in the housing market did revise downward their expectations about future house price growth, particularly in Dublin. Whereas those surveyed in September expected a 12% increase in Dublin house prices over the next 12 months, this had fallen to less than 5% by December. I expect that the Central Bank would be happy if it were the case that their proposals strengthened the link in people’s heads between fundamentals (in particular people’s incomes) and house prices.

As for my opinions on the Central Bank guidelines themselves, I submitted a response to the Central Bank’s Consultation Paper, which is available online here. The TL;DR version is “max LTV good, max LTI bad”. I made similar points at an Oireachtas hearing on this and related topics in late November.

* Some have argued that the end of Capital Gains Tax relief was what drove trends in the final months of 2014. The theoretical reasoning behind this is unclear – it is not obvious that this would affect supply more than demand – while practically speaking, it is also not clear how this would have managed to infiltrate the vast bulk of the market which is not of interest to investors. When asked what they thought was driving house prices, those active in the housing market rarely mentioned tax factors, instead picking credit and supply as the main factors.

events Unemployment

Central Bank event: Labour Markets over the Business Cycle

The Central Bank is hosting a one-day conference on “Labour Markets over the Business Cycle” on 11 December in Dame Street (programme below). There is a limited number of places still available. If you wish to attend, please email by 9 December. Please note that places will be allocated strictly on a first-come-first-served basis.

Labour Market Adjustment over the Business Cycle

A one-day conference at the Central Bank of Ireland

11 December 2014
Liffey room, Dame Street, Dublin 2

email to confirm attendance by 9 December



11 December  
08:45 Registration and coffee
09:00 Opening remarks – “Prospects and Challenges for the Irish Labour Market 2015 – 2020”. John Flynn (Head of Irish Economic Analysis Division, Central Bank of Ireland).
Session 1 


Cycles in employment, unemployment and wages
  Labour market transitions in Ireland – Thomas Conefrey (Irish Fiscal Advisory Council)
  Wage Cyclicality – Mario Izquierdo (Banco de Espana)


11:00 Coffee & tea break
Session 2
Labour market attachment
  Are the marginally attached unemployed or inactive? – Martina Lawless (CBI/ESRI)
  Sources of wage losses of displaced workers – Pedro Portugal (Banco de Portugal)
13:00 – 14:00 Lunch
Session 3
14:00 – 15:45
Wage flexibility
  Wage flexibility in Ireland – Olive Sweetman (Maynooth University)
  Wage Setting – Flexibility and Rigidity in the UK since 1975 – Jennifer Smith (University of Warwick)


Session 4


Labour market adjustment during and after the crisis: the role of policies and institutions
  Pedro Martins (Queen Mary University of London)
  Questions & discussion


  Closing remarks

Conference Ends

Banking Crisis

Central Bank 2010 Annual Report

The Central Bank’s annual report for 2010 was released today. Continuing his valiant service, Lorcan has read the report so we don’t have to. For those ELA-philes out there, Lorcan spotted the following lovely sentence:

In addition, the Bank received formal comfort from the Minister for Finance such that any shortfall on the liquidation of collateral is made good.

Anyone care to speculate on the legal value of “formal comfort”? For instance, relative to the guarantees passed in to law under ELG scheme, how does a formal comfort compare?

Banking Crisis Fiscal Policy

Central Bank and NTMA Annual Reports

The Central Bank have released their annual report (press statements from Governor Honohan here and from Chairman of the Regulator Jim Farrell here).  The NTMA has also released its annual report here and its mid-year business review here.

Economic Performance

Central Banks Forecasts Not So Grim

The lead headline in the Irish Times today must have depressed many: “Economy to shrink 11% over the next 18 months, says Central Bank.”  Things feel bad now, how bad would they feel if output fell by another 11% over the next 18 months.  Well, this is not at all what was forecasted by the Central Bank and their forecast is actually not that gloomy at all.

First, the bank’s forecast is that the average level of GDP in 2009 will be 8.3% lower than the average level of GDP in 2008, and then that the average level of GDP in 2010 will be 3% lower than in 2009.  The Bank did not release a forecast about what will happen over the next 18 months.

Second, while the Bank (like the ESRI) do not release quarterly assumptions underlying their forecast, one can back out roughly what they might look like.  Seasonally adjusted real GDP in 2009:Q1 is already 5.8% below last year’s average level.  So, if GDP was flat for the remaining three quarters of the year, then the Bank’s figure for the year average over year average for 2009 would be -5.8%.  One way to get their figure of -8.3% is to assume a decline of  -1.8% over each of the last three quarters of the year.

However, if that were to occur, then even a flat level of GDP in 2010 would produce a year average over year average figure for 2010 of -2.7%.  So, in fact, rather than an 11% decline over the next 18 months, the banks figures are actually consistent with a decline in GDP from the end of June to December this year of 3.6%, followed by a very small decline in the first quarter of 2010 and flat GDP after. A more likely scenario that would produce the Central Bank’s forecasted outcome would see a larger fall in 2010:Q1 and perhaps 2010:Q2 followed by a recovery in the subsequent quarters.  In light of the severe fiscal contraction being inflicted on the economy over this period, this would not represent such a bad outcome.

Beyond the question of what the Central Bank forecast actually implies, there is the more general issue, which I have referred to before, of the difficulty in mapping forecasts based on year-average over year-average into commentary about what is actually happening now in the economy.

Rossa White of Davy’s has also written on this issue.  See here.

Banking Crisis Economic Performance

Guest Post by Jonathan Westrup: Major Regulatory Reform?

We are pleased to bring you this guest post by Dr Jonathan Westrup of the IMI and author of the 2002 TCD Policy Institute Studies in Public Policy No. 10 Financial Services Regulation in Ireland – the Accountability Dimension .

” Further to Karl Whelan’s post, the government has clearly decided to radically reorganise the present unwieldy structure that, for the past 6 years, incorporated the financial regulator within the Central Bank.

Two features of the proposed reform immediately stand out. First, the decision to put responsibility for stability and supervision into one organisational structure rather than to have them divided between the Bank and the Regulator. Second, the decision to set up a presumably stand alone Financial Services Consumer Agency with responsibility for consumer protection incorporating the existing consumer directorate of the Regulator and the Office of the Financial Services Ombudsman.

What is intriguing is the Taoiseach’s reference in his speech to “international best practices similar to the Canadian model”. A quick look at the Canadian regulatory system, as Karl mentions, shows that a distinguishing feature of the model is that the Central Bank has never had a responsibility for regulation. Instead, since 1987, the Office of the Superintendent of Financial Institutions (OSFI) has regulated both the banking and insurance sectors while Canada remains the only major country without a securities regulator, with responsibility devolved to the individual provinces. In terms of a consumer protection mandate, the provincial securities regulators all have a responsibility while, since 2001, the Canadian government established the Financial Consumer Agency of Canada with a mandate “to strengthen oversight of consumer issues and to expand consumer education in the financial sector”. However, according to its website, it has a budget of only 8 million Canadian dollars.

So on the face of it, the relevant part of the Canadian model to which the Taoiseach refers, is the hiving-off of the consumer protection aspect of regulation.

There is little further detail at the moment of the new regulatory system but there are some very important questions. We are told that a new Head of Banking Regulation will be appointed, but how will insurance and securities regulation fit into the Commission?  What will be the relationship between the Governor of the Central Bank and the Head of Banking Regulation, given the demands of the Maastricht Treaty in terms of determining the governor’s accountability towards the domestic political system? Will the present 50/50 funding arrangement between the industry and the Central Bank continue with the new model? What will be the powers of the new consumer agency outside the Banking Commission?

The government has clearly decided, yet again, not to set up a stand alone single financial regulator, but to go for a variant of the Twin Peaks model where all prudential regulation is the responsibility of the Central Bank and conduct of business regulation is regulated separately. However, in the Dutch case, which is the Twin Peaks exemplar, the conduct of business function is more comprehensive than appears to be the case with the proposed Financial Services Consumer Agency.  With details so limited at this stage, this assumption may not be accurate.

Many governments are wrestling with reforms at the moment, with the UK’s Financial Services Authority promising “a revolution” in financial regulation in their proposed reforms due before the end of the month. The government has moved quickly but more detail is required before making assumptions about how the system might work. Given the fairly immediate need to hire the new head of banking regulation, questions about the model will presumably be clarified very quickly.”