Elkstone Real Estate June 2020
In our April and May updates, we concluded that the residential real estate sector, and particularly the Build-to-Rent sub-sector, would prove to be broadly resilient in the face of the ongoing uncertainty arising from the COVID-19 Pandemic. Central to this was a forecast that there would continue to be a Supply/Demand imbalance going forward.
Given that the pace at which an easing of social restrictions has accelerated in recent weeks, it is appropriate to recap on the immediate outlook for the residential sector as a whole. Two recently published reports can help to give us guidance on this: Banking & Payments Federation Ireland – Housing Market Monitor – Q1 2020; Daft.ie Housing Market Report – May 2020. (All statistics quoted herein come from the above publications which are appended to this update)
Simon English is a Manager on the Elkstone Real Estate team
Residential – “A Recap”
Short Term Supply
Forecast housing completions for 2020 at the start of the year ranged from 24,000 – 26,000 units. The year started off positively with Q1 completions up 17.2% from 4,254 in Q1 2019 to 4,986, setting the trend to beat the 2019 completions rate (21,000 units) for the year. More than half the units completed were in multi-unit developments, reinforcing the importance of this sub-sector within the residential sector going forward in respect of delivering badly needed housing units.
Q2 2020 statistics will not be available for some months but will indicate an unprecedented fall in completion rates given 6 weeks of site closures enforced as a result of the lockdown in April and May. Furthermore, while sites have re-opened the social distancing and health protocols in place will reduce the capacity and subsequent pace of construction through the remainder of 2020.
The current forecast is that a 50% capacity in the construction sector will deliver year end completions of 14,000 units, whereas a 75% capacity would deliver 16,500 units. Both figures would fall significantly short of both the 2019 actual output and the 2020 forecast output.
Short Term Demand
A reduction of mortgage drawdowns in Q1 2020 of 28% from the same period the previous year gives an indication of the impact of Covid-19. To put matters in context, we have outlined some key dates below:
- 30th January – WHO declared the virus outbreak as a ‘Public Health Emergency of International Concern’
- 29th February – Virus reached Ireland
- 12th March – WHO declared the virus outbreak as a ‘Pandemic’
- 12th March – Schools, colleges, childcare facilities and cultural institutions closed nationally
- 24th March – Businesses, venues, facilities and amenities closed nationally
- 27th March – All ‘non-essential’ travel and contact with people outside one’s home banned
As with the housing completion statistics, the Q2 mortgage figures when published will likely show a significant further reduction in mortgage drawdowns as buyers either deferred purchasing decisions, or were not physically able to view properties.
In the immediate short term, demand for housing will be dictated by a combination of two factors: 1. Public confidence that that Covid-19 Pandemic is ‘under control’; and 2. The pace and shape of an economic recovery (we previously discussed the potential ‘recovery curve’ shapes in our May update).
Residential supply issues still remain
despite the impact of COVID-19
Beyond the Immediate Short Term
Whereas statistics for housing completions and mortgage drawdowns tend to be reported on a quarterly basis, statistics for prices and rents are available on a monthly basis. These monthly statistics can help give us some insight into market behaviours during Q2.
In April 2020, average national house prices fell by 5.5%, before an upward correction of 3.7% in May. These figures are based on a much lower level of trades. As restrictions ease the figures for the month of June and later months should better reflect the market equilibrium.
Rental market prices did not experience as much volatility as sales prices. A fall in rental prices of 2.1% in April, was offset by an upward correction of 0.6% in May. Furthermore, national average rents at the end of May were still 0.7% higher than the same time 12 months previously. Assuming no further macro-economic shocks, this would indicate that the rental sector has proved resilient to date as we forecast in our April and May updates.
Beyond the immediate short term however, we believe that a ‘Back to the Future’ assessment is appropriate. Whilst economic turbulence may have an impact on discretionary spending, and particularly on the likes of luxury goods and travel, housing, whether rented or bought, is a necessity, and barring an unlikely significant population shock, demand will still exceed supply for the foreseeable future.
With that in mind, we cast our eyes back to a pre-Pandemic world, where a significant increase in housing supply was required just to meet ongoing shortages, let alone to deal with projected new household formations over the next decade with forecast requirements ranging between 25,000 and 45,000 units annually (the Central Bank forecasts a figure at 34,000 units annually in the mid-point of this range).
The recent Pandemic has definitively impacted negatively on the supply of housing in 2020 with targets highly unlikely to be met, and the ‘run-rate’ of completions beyond that is still uncertain given new on-site health and safety protocols. The demand side for housing will continue to recover (assuming a broader macro-economic recovery) and we do not see circumstances in the short to medium term where a supply/demand equilibrium will be met. With this in mind, we still continue to foresee a resilience in the housing sector as the nation moves into a post Pandemic world.
Banking & Payments Federation of Ireland (BPFI) Housing Market Monitor Q1 / 2020 read full report here
The Daft.ie Housing Market Report – An analysis of recent trends in the Irish estate market for May 2020 read full report here