Irish residential rents continue to stabilise with 0.2% rise year on year, mortgage interest costs up a hefty 14.6% year on year

This morning, Ireland’s Central Statistics Office (CSO) has released its inflation figures for August 2011. The headline Consumer Price Index (CPI) was up 0.2%  month-on-month and 2.2% year-on-year (down from 2.7% in July 2011). The biggest driver of inflation in the past 12 months continues to be the CSO category of housing-related costs, and within that, the most significant component is mortgage interest* which has risen a hefty 14.6% in the past 12 months and indeed 0.7% in the past month alone as ECB and domestic bank-driven interest rate rises take effect. Mortgage interest comprises nearly 7% of the CPI so the effect is significant.

Elsewhere it seems that private rents continue to stabilise, though there was a small monthly rise of 0.1% in August 2011, and an annual rise of 0.2%. It seems that in our financial crisis, the big correction in rent took place in 2009 with a 19% maximum decline, compared to a decline of just 1.4% for all of 2010. Since the start of this year there has been a 1.7% increase (mostly recorded in February 2011). So on that basis, I think it fair to characterise rents as stabilising. There is a view however that rents are artificially elevated at present as a result of the social welfare rent assistance programme. Although it is the case that many properties that are advertised for rent will not accept rent-assistance claimants, it is arguable that landlords for these properties still reference their prices to rent assistance provided by the State, which by the standards of other countries, is seen as generous (the latest allowances are available here) Will rent assistance survive the budget cutting as we to deal with our deficit? Minister for Social Protection, Joan Burton, has signaled that rent assistance may be in the firing line for the December 2011 budget.  We currently spend €500m annually on rent assistance.

*The CSO notes the following in respect of mortgage interest “In line with normal practice for a fixed base price index, the current approach to measuring mortgage interest in the CPI reflects the situation in the base reference period December 2006 when the standard variable rate was dominant. Subsequently, tracker mortgages have become more popular. This did not give rise to any difficulties while the standard variable and tracker mortgage interest rates moved broadly in line with one another, which would be the normal expectation. However, the decoupling that has taken place since August 2009 has resulted in dramatically different trends emerging. For example, between September 2009 and September 2010 the standard variable rate increased from 2.93% to 3.66% whereas the tracker rate did not change. The Mortgage Interest component of the CPI, which is largely determined by the trend in the standard variable rate, increased by 25.1% as a result and contributed +1.25% to the overall change in the All Items index. It is crudely estimated that the latter impact would have been reduced by between 0.2% and 0.5% had the Mortgage Interest component been calculated on a current weighting basis. Users should take this “weighting effect” into account in interpreting the mortgage interest related movements in the index”