CSO reports residential rents fell by 0.9% in the month of December 2011; mortgage interest costs up a hefty 14% year-on-year

This morning Ireland’s Central Statistics Office (CSO) has released its inflation figures for December 2011. The headline Consumer Price Index (CPI) was down 0.3% compared to November 2011, but up 2.5% year-on-year (down from 2.9% in Novembe 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 14.1% in the past 12 months as domestic bank-driven interest rate rises take effect. It should be said that in the month of December 2011, inflation on mortgage interest fell by 3.2% as ECB interest rate reductions and domestic regulatory and political pressure bore fruit.

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

Elsewhere private rents fell by 0.9% in the month of December 2011, the biggest monthly fall in over a year, but over the past year, rents are up by 3.0%. 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 3.0% increase (mostly recorded in February and October 2011). At the start of January 2012, the Department of Social Protection reduced its rent assistance payments by up to 29% (an average of 13%) and the Department claims that some 40% of the rented market in the State is affected by rent assistance payments. Private rents have tended to fall in line with rent allowance even though many landlords will not accept rent allowance tenants. The betting on here is that private rents will come under pressure in the short term but it might take a couple of months for the changes to feed through.

*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”