CSO reports residential rents continue to stabilise; mortgage interest costs up a hefty 18.1% year on year

This morning Ireland’s Central Statistics Office (CSO) has released its inflation figures for October 2011. The headline Consumer Price Index (CPI) was up 0.3%  month-on-month and 2.8% year-on-year (up from 2.6% in September 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 18.1% in the past 12 months as domestic bank-driven interest rate rises take effect. Whilst the Financial Regulator and Taoiseach have called on banks to ease interest on mortgages, the banks have effectively offered both the finger. Junior finance minister Brian Hayes yesterday branded some of the banks “pathetic” for not passing on the recent ECB cut in its main lending rate – some might think that a Government which has significant stakeholdings in much of the banking sector and is needed to guarantee lending to banks, and which has enacted draconian legislation to give it control over banks, is itself “pathetic” for not being able to enforce its will.

Mortgage interest comprises nearly 7% of the CPI “basket” so the effect is significant.

Elsewhere it seems that private rents are stabilizing and indeed, showing signs of inching up – there was a monthly rise of 1.3% in October 2011, and an annual rise of 2.2%. By the way, private rents are one component of the “rents” shown above, the other is local authority rents. 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 2011 there has been a 3.7% increase (mostly recorded in February and October 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) Over the summer and again in recent days, Minister for Social Protection, Joan Burton has strongly signaled that there will be substantial cuts to rent allowance in Budget 2012, set to be unveiled on 6^th December, 2011. We currently spend €516m annually on rent assistance and 96,000 households receive the benefit.

*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”