Brexit Impact on Irish Housing Market and Economy Insights

Brexit and the Irish Housing Market DATE 4th December 2018 EVENT/VENUE Local Government Management Agency Conference, Ashling Hotel, Dublin, AUTHOR Kieran McQuinn Research completed as part of ESRI/Dept of Housing Research Programme on Housing Economics www.esri.ie @ESRIDublin @ESRIDublin #ESRIevents #ESRIevents #ESRIpublications www.esri.ie #ESRIpublications

Presentation Overview Structural Issues in the Housing Market Implications of Brexit Whole economy Housing market: Demand-side Supply-side Legacy Issues What can the Government do? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 2 20 March 2025

Housing Market Issues Although house price inflation moderating House prices and rents continue to increase sharply Macroprudential measures may see Tenure shift towards renting While there is evidence of increased activity Supply levels still < than structural demand Structural demand estimates 25 30,000 units p.a. Supply in 2018 18,500 units, 24,500 units in 2019? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 3 20 March 2025

Macro-effects of Brexit Brexit general equilibrium impact ESRI analysis Scenarios: EEA style agreement, a Switzerland/EU style of agreement (EFTA) and a WTO scenario. Each of these scenarios combines a range of assumptions on trade, FDI and lower contributions to the EU budget to generate alternative paths for the UK economy and also for the wider international economy www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Macro-effects of Brexit EEA EFTA WTO Ireland is very exposed to Brexit due to close economic relation with the UK Percent deviation from Baseline Level: Gross value added at basic prices -2.3 -2.7 -3.8 Gross value added at basic prices, Traded sector -2.6 -3.0 -4.3 Uncertainty surrounding the process invites to consider different scenarios Gross value added at basic prices, Non-traded sector Exports of goods and services -2.3 -2.7 -3.6 -3.0 -3.5 -4.9 Personal consumption of goods and services -2.2 -2.5 -3.4 Employed persons -1.2 -1.4 -2.0 Estimates in line with other forecasts Average wage -2.2 -2.5 -3.6 Shock to foreign demand hurts traded sector and exports Deviation from Baseline: Personal Consumption Deflator, % -0.2 -0.2 -0.3 GDP Deflator, % -0.2 -0.2 -0.3 Lower employment and wages affect the non-traded sector Personal savings rate, % -0.3 -0.3 -0.5 Unemployment rate, % 1.2 1.4 1.9 General Government Balance, % GDP -0.6 -0.8 -1.0 Lower tax collection worsens Government balance From Bergin et al. Modelling the Medium- to Long-Term Potential Macroeconomic Impact of Brexit on Ireland . The Economic and Social Review, Vol 48, No 3, Autumn (2017) www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 5 20 March 2025

Macro-effects of Brexit Impact on the level of Real Output in Ireland 0.0 -0.5 -1.0 Percent deviations -1.5 EEA FTA -2.0 WTO -2.5 -3.0 -3.5 -4.0 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Housing Demand Typically a function of: Household income (+), Interest rates (-), Demographics (+), Employment (+). Brexit has an unambiguous impact on Income and employment Both are reduced vis- -vis no Brexit www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Brexit and Demographics? More complex potential outcome Brexit may reduce inward net migration Reduced economic activity Reduces attractiveness of domestic economy However, A particularly adverse outcome for the financial sector in London Increase inward migration Particularly into Dublin market? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Movement of Labour Generally Traditionally, UK and Irish labour markets highly integrated UK has acted as a safety valve for the Irish market If frictions emerge More difficult for Irish workers to move to UK Then, Domestic shocks likely to be greater in scale House price/activity fluctuations greater? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Overall Impacts Demand-Side Regional differences? Outside of Dublin aggregate demand likely to contract However, demand may increase in Dublin Due to increased inward migration Previous research (Lawless & Morgenroth) Highlights regional impact of Brexit Areas reliant on agriculture most hit www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Supply Side of the Market Labour and materials More difficult to source? Increase construction costs for Irish builders? Likely to reduce activity levels Similarly if Brexit leads to Disruptions in financial markets Access to finance may be restricted www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Overall Impact on Market ?? P ?? ?1 Q 18,000 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Less Activity Overall ?? ?? P ?? ?1 ?? ?2 Q 18,000 www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie

Expectations and the Housing Market Most of the impact of Brexit Through real variables However, expectations are very important Both consumer and producer Greater uncertainty leads to more caution Some evidence: Investment has been adversely impacted Therefore, compound the impact on activity www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 14 20 March 2025

Implications for housing support Eligibility for Housing Assistance Payment (HAP) Determined by Family s disposable income, With maximum limits set on the rent that can be covered. Slower income and employment growth? Numbers of families qualifying for HAP Higher than currently expected. If Brexit results in Greater migration to and so higher rents in Dublin, HAP expenditure is likely to be higher than currently anticipated www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications

Legacy issues? Rate of mortgage arrears Declining, but still high by European standards Arrears are a function of Income, unemployment and house prices Lower income, higher unemployment and lower house prices Slower decline in rates of arrears Implications for NPLs of credit institutions www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications

Monetary policy normalisation As growth in the euro area improves Policy rates likely to increase However if Brexit impacts European growth May slow the rate of interest rate increases Help affordability in the domestic market? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications

In summary Housing market activity impacted Lower demand and lower supply Occurs via real variables and expectations Implications for housing supports Legacy issues Mortgage arrears Monetary policy normalisation www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 18 20 March 2025

Policy response? If due to Brexit: Gap between: Housing supply and structural demand Is greater Greater role for the State In addressing supply shortfall? Need for greater provision of housing supports? www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 19 20 March 2025

However: Brexit and fiscal space Expenditure benchmark Spending can grow at reference rate potential Hard Brexit Reduces potential output and Reference rate Ultimately this means Reduced fiscal space over the medium-term Cumulative impact of 600 million after 3 years www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications

Thank You www.esri.ie @ESRIDublin #ESRIevents #ESRIpublications @ESRIDublin #ESRIevents #ESRIpublications www.esri.ie 21 20 March 2025