Dr. Kieran McQuinn:

I thank the chairperson for the invitation to the ESRI to appear before the committee. I am research professor and head of economics and I am joined by my colleagues, Dr. Conor O'Toole and Mr. Barra Roantree.

While we have not specifically addressed the impact of Brexit on the Irish housing market, researchers at the institute have examined the impact of Brexit at an aggregate and sectoral level. We have also built up an extensive research expertise in the area of housing. As a result, our comments are informed by a considerable body of research. I will start by summarising the results of some analysis, which has examined the overall impacts of Brexit on the economy.

The macroeconomic effects of Brexit are significant and negative for the economy. Depending on the nature of the UK's exit from the European Union, Irish output levels could, by 2026, be up to 4% less than a baseline no-Brexit case. While 4% may not appear to be a significant impact, it has to be borne in mind that this impact will cumulate over a long period. Therefore, income levels will be lower than otherwise would be the case and unemployment rates will be higher than in a no-Brexit scenario. In the case of the latter, it has been estimated that under a WTO-style exit, unemployment in the Irish economy could be almost 2 percentage points higher than under a no-Brexit situation.

In the area of housing demand, the impact of Brexit on income levels and unemployment are particularly important. When we think of the demand side of the housing market, we think of income levels, interest rates, unemployment and demographics as being key fundamental variables. Across a number of markets, movements in these variables have been shown to be key drivers of house prices. The impact of Brexit on income levels and the labour market is fairly unambiguous - both are expected to be lower than a no-Brexit scenario. In this respect, housing demand is likely to be lower due to both factors. The situation in the context of demographics is less clear-cut. As a result of the fact that Brexit will have an adverse impact on domestic economic activity, it may reduce the number of people coming to work here. This, again, would reduce the demand for housing and result in lower house price growth relative to a baseline no-Brexit case. On the other hand, Brexit could result in a large number of people moving to Ireland from the United Kingdom, particularly if there is significant fallout for the financial sector in London. This could see an increase in the number of people coming to live and work, particularly in Dublin, which would increase housing demand. Therefore, one could see significant regional differences in the impact of Brexit on the Irish housing market. The rest of the country may be adversely impacted while the greater Dublin market may be less so.

One other issue worth mentioning in the context of demographics is the potential for what we call increased friction in the relationship between the Irish and UK labour markets. By friction we mean anything which prevents people from moving and working in one jurisdiction to another. Traditionally, the UK labour market has operated as a form of safety valve for the Irish economy. When unemployment starts to increase significantly in the domestic economy, people tend to move to the UK to find employment. If this becomes harder to do as a result of Brexit, it will increase the scale of negative shocks in the Irish economy. Therefore, housing demand will experience greater fluctuations than would otherwise be the case. In terms of the flow of mortgage credit, if financial stability risks in the banking sector materialise following Brexit, this could limit the availability of mortgage financing which could also put downward pressure on prices and subdue demand.

Colleagues at the institute have carried out extensive research on the implications of Brexit for the production processes of Irish firms. Where this might impact the housing market is in any difficulties Irish firms may have in securing relevant materials and labour from the UK market. If Brexit causes a significant increase in the cost for Irish firms in securing labour and materials, this will push up the cost of house building domestically with associated implications for prices. This may also extend to financial sector considerations. If access to finance for development becomes impaired due to disruptions in financial markets, the flow of financing to commercial real estate development may decline if international equity flows moderate. Again, this could increase the cost of supply, with prices being pushed up as a result. Overall, and notwithstanding the particular case of the Dublin market, Brexit may lead to lower levels of housing demand if income and employment effects are considerable and no inward migration boost materialises. The risks to housing supply are more clearly on the downside.

At this juncture, it is important to note that housing supply levels are considerably lower than structural demand, with our research showing this is most clearly the case for lower-income households. If Brexit were to result in a lower level of housing supply by the private sector, it is important that the State continues to invest in affordable and social housing. Brexit-induced reductions in income and employment, or increased inward migration to Dublin, could also have implications for what will soon be the Government’s main income-related social housing support for private renters, namely, the housing assistance payment, HAP. Eligibility for HAP is determined by a family’s disposable income, with maximum limits set on the rent that can be covered. If income and employment growth are slower than anticipated due to Brexit, the numbers of families that qualify for HAP in the coming years will likely be higher than currently expected.

Similarly, if Brexit results in greater migration to Dublin, and therefore results in higher rents, HAP expenditure is likely to be higher than currently anticipated while the rent limits set down by regulations may require more frequent revision. Those were last revised in March 2017, and rents have increased by 12% in the capital since then.

Regarding market expectations, these changes in the demand and supply side of the market have all been discussed in the context of changes in economic and demographic variables. However, expectations, both those of consumers and producers, are extremely important in the residential market. To date, the entire Brexit process has resulted in a marked increase in uncertainty in the economy. Greater uncertainty typically makes households and firms more cautious in their decision making, therefore, resulting in less activity in a market such as the housing one. This, again, is likely to result in lower housing demand and supply.

Regarding some legacy issues in the housing market, mortgage arrears is still an issue in the Irish market. While rates have fallen in recent years due to improved economic circumstances, they are still above European averages. Key drivers of mortgage arrears are income, employment and house price levels. As we have already seen, income levels and employment levels are likely to be less than would otherwise be the case, while house price levels will likely grow at a slower pace compared to a no-Brexit situation. Therefore, the rate of decline in mortgage arrears is likely to slow due to Brexit. This, in turn, will have implications for the non-performing loan levels on the balance sheets of Irish financial institutions, which will impact their performance as we go forward.

Brexit may slow the extent to which the European Central Bank, ECB, wants to normalise monetary policy. If Brexit brings about slower growth across the eurozone, this may lead the ECB to moderate the degree to which policy rates are increased. Lower policy rates are likely to result in domestic mortgage interest rates being lower than what they otherwise would be. This would improve affordability in the Irish mortgage market as interest rates are a key determinant of affordability.

I thank the members for their attention. My colleagues and I would be delighted to any questions they may have.