Housing market key to retail recovery

Keith Lowe, CEO of DNG at the auction of Glendale Estate, on the Shillelagh Road, Tullow, Co. Carlow in July of last year. The estate was sold for €640,000 with a starting minimum price of €150,000 plus VAT

Dan White examines why an increase in consumer confidence and retail sales has been so slow to follow the average house price increase of 1.2% recorded by the CSO

News

9 August 2013

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Signs of a recovery, or at least a bottoming out, in house prices is potentially the best news for the Irish economy since the Celtic Tiger bubble burst five years ago. Even a levelling off in house prices could have an enormous impact on consumer confidence and help get people spending once again.

On the face of it the 1.2% increase in average house prices recorded by the CSO for the year to the end of June is pretty insignificant. Coming as it does after a 50% fall in house prices from their 2007 peak – closer to 60% if the cash sales which are excluded from the CSO figures are taken into account – a 1.2% increase is neither here nor there.

Worst may be over for house prices

However, the 1.2% increase in average house prices was the first such annual increase recorded since January 2008. In the midst of an economic Armageddon one takes good news from wherever it can be found.

So was the increase in house prices recorded by the CSO for real or merely a statistical blip? After several false dawns there are other indications that, if not set for a recovery, the worst may be over for house prices. The strongest such indication has been the recovery in demand for houses in the more established suburbs of Dublin and other major urban centres.

Geographically-split housing market

That’s the good news. The bad news is that, so far at least, the recovery in house prices has been largely confined to a handful of areas. In many other areas house prices are still falling, that is assuming that a buyer can be found at any price. The latest CSO data paints a picture of a geographically-split housing market with average prices rising 4.2% in Dublin over the past year but falling by 1% in the rest of the country over the same period.

There are also other reasons to be wary of definitively calling time on the property crash. Housing is a market that depends like no other on the availability of credit. In the good times virtually all house and apartment purchases were largely funded by mortgages.

A geographically-split housing market has seen many properties fare better in Dublin than elsewhere across the country

Mortgage approvals few and far between

Not anymore. The Irish banks approved €1.3bn of new mortgages in the first half of this year. This was virtually unchanged on mortgage approvals for the same period in 2012 and, on an annualised basis, down by more than 90% on the €40bn of new mortgages lent by the banks in the peak year of 2006. With the banks virtually out of the mortgage market, transaction levels have slowed to a trickle with just 24,000 of Ireland’s two million houses and apartments changing hands last year. At this rate the average Irish house or apartment would have to wait over 80 years to find a buyer.

And now the banks have initiated legal action seeking to repossess 44,000 properties, mainly buy-to-lets, where the borrowers have failed to meet their mortgage repayments. Will such a huge increase in the number of houses coming on the market – almost twice the number of properties sold last year – lead to a further collapse in prices and smother any recovery at birth?

Perhaps, but it mightn’t be a good idea to bet on it. Mortgage lending has risen, admittedly from a very low base, for each of the past three months while an increase in the supply of houses coming onto the market, far from collapsing prices, might be what is required to convince potential buyers that the market isn’t rigged and to take the plunge.

Disappointing retail sales

While the news from the housing market contains at least some room for cautious optimism, no such consolation can be derived from the latest retail sales figures. Although the value of non-motor retail sales in June 2013 was 1.2% higher than in the same month last year, the fact remains that the value of retail sales has fallen month-on-month in five of the past eight months and that the value of retail sales is now down by more than 3% since October 2012. At the very least the mini-recovery in retail sales experienced last year is over.

So what implications, if any, does a stabilisation of the housing market have for the retail sector? In fact the fortunes of the two sectors are inextricably linked. For most people their homes represent by far their biggest single source of wealth. If the housing market is going well most homeowners are more inclined to open their purses and wallets.

A direct link

The link between the two is actually even more direct than the increased consumer confidence that results from a buoyant housing market. Large segments of retailing such as DIY, electrical goods, furniture and hardware are virtually totally reliant on the fortunes of the housing market.

While the overall value of non-motor retail sales has fallen by 18% since 2007, the value of housing-related retail sales has fallen much more dramatically. The value of furniture and lighting sales is down by a massive 58% since 2007, hardware sales are down by 36% while sales of electrical goods are down by over a quarter.

Sold

Examinerships abound

This has led to most of the major DIY chains including B&Q, Homebase and Atlantic Homecare, all going into examinership in order to cut their operating costs by repudiating boom-time leases. It is clear that even a modest recovery in the housing market could have a major impact on the sales of the DIY chains and other retailers selling to homebuyers.
So why, if the housing market has apparently bottomed out, have retail sales been so slow to respond? After all it’s not just the housing market that is showing signs of life. The July Live Register showed that the numbers signing on were down by 3,200 on the previous month and by 18,300 over the previous year.

Reluctant consumers still nervous

What seems to have happened is that with consumers still extremely nervous, concerned about their jobs, property taxes and water charges, they are still reluctant to splash out at the tills. Retail sales, which used to be a leading economic indicator, have instead become a lagging indicator.

This almost certainly means it will take a lot more good economic news before shoppers can be persuaded to part with their money once again.

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