Deflation

Tawny

I'm not an economist so this might be a stupid question, and its probably answered on some of the other threads so let me know if it is but...

Are we likely to see deflation in ireland, other than the obvious house/rental costs? Like whats happening in the UK? http://news.bbc.co.uk/2/hi/business/7736193.stm

I mean like normal living costs, the price of a pint etc? Its hard to see how it can't happen, because generally everyone is feeling the pinch, so surely suppliers have to lower their prices to sell.

So I'm just interested in hearing opinions generally.

Time Magazine

It's very hard to know. Thanks for our cartel-like vintners, the price of a pint will not fall. In fact one federation came out to say that none of them will lower their prices (of course they spun it to say none of them would raise prices..)

I'm sure cross-border shopping etc will put downward pressure on prices. However the exact level of inflation is primarily determined by the money supply, which is set in Frankfurt, so it's hard to be sure.

I wouldn't say it's out of the question, basically.

Économiste Monétaire

Will deflation occur? I believe that the probability is quite high. To consider why that is, it’s worth looking at what causes deflation--at least some causes--and the components of the CPI. The Economist is correct when he states that the money supply is predominantly influenced by the ESCB, rather than we the people, i.e. the government: our representative medium, so we can only hope that other countries have sufficient problems in that our situations are comparable and measures, that could be described as extreme by some accounts, can be taken if so required.

Deflation is likely in the short-term simply because demand has/will take a nose dive, and firms will try to offload goods. You’ve already seen this occur over the brief pre-Christmas period, i.e. large scale discounts. Specifically vis-a-vis alcohol, it’s unlikely you’ll see a shift there, unless the government decide to cut excise duties. Clothing and footwear will be down for December CPI, as will energy. Further reductions in asset prices with imply a lower level of wealth in the economy, which could lead to a further fall in prices. You also have the problem of expenditure levels when deflation increases the overall debt level. Then deflation expectations will, possibly, take hold. All of that is self-reinforcing.

The CPI will still contain items that will be in the positive, such as health (6% this year, I believe), alcohol and tobacco. So far, for a year-on-year negative change, we have: (i) housing, water, electricity, gas; (ii) transport; (iii) food and non-alcoholic beverages; (iv) clothing and footwear; (v) recreation and culture and; (vi) communications. I fail to see any gain in these, which have been negative from 07 to 08, coming in the near-term; except for food prices, and possibly fuel when China really starts to stock up on “cheap” oil and the U.S. begins to turn around (also trouble in the middle-east).

With regard to the money supply, our problem is banks’ aversion to lending. When that occurs, the money supply can freefall, because the credit cycle is frozen as banks prefer the safety of investing in bonds rather than lending to businesses and private individuals. Thus, inducing quite a large deflationary period, or a deflationary cycle, which is difficult to get out of; even more so when we do not have Irish discretionary monetary policy. The extent to which that will occur is dependent, in my view, on how long it takes us to recognise the serious problems for banks’ loans books, i.e. removing distressed assets from the balance sheets was signalled as being of major importance to ending the Japanese “zombie bank” situation, if I recall correctly. The money supply issue is quite complicated, though, and how it will turn out is difficult to predict as we're part of the Eurozone (and a small part, at that).

I could also be wrong on these, but it’s just a viewpoint... This all also depends on how you judge what is deflation, and at what point is it dangerous, rather than a brief correction to a lower cost base.

Tawny

Économiste Mon&#233 wrote: »

Interesting argument. Not sure how much I understood but interesting all the same.

I didn't just mean the price of a pint though, it was more a euphemism for general price of things.

Économiste Monétaire

Tawny wrote: »

Interesting argument. Not sure how much I understood but interesting all the same.

I didn't just mean the price of a pint though, it was more a euphemism for general price of things.

If there are chunks of what I wrote that are incomprehensible, then by all means ask for an expansion; even if it's just an acronym, for example. I tend to write cryptically without realising that I'm doing so.

silverharp

Économiste Monétaire wrote: »

With regard to the money supply, our problem is banks’ aversion to lending. When that occurs, the money supply can freefall, because the credit cycle is frozen as banks prefer the safety of investing in bonds rather than lending to businesses and private individuals. Thus, inducing quite a large deflationary period, or a deflationary cycle, which is difficult to get out of; even more so when we do not have Irish discretionary monetary policy.

just to add that people will react in the same way , taking "equity" out of ones house for home impovements will drop , car loans will drop and unless people are forced to use credit cards as a desperation measure then credit card debt will drop as well. One would have to assume that a significant minority of people are sitting on foreign/other second property that is unsellable or are eating cash instead of generating cash, pension funds and investments that have had a significant hair cut, so many people will feel significantly poorer. This will create a very real and necessary defensive stance from many.

Économiste Monétaire

silverharp wrote: »

just to add that people will react in the same way , taking "equity" out of ones house for home impovements will drop , car loans will drop and unless people are forced to use credit cards as a desperation measure then credit card debt will drop as well. One would have to assume that a significant minority of people are sitting on foreign/other second property that is unsellable or are eating cash instead of generating cash, pension funds and investments that have had a significant hair cut, so many people will feel significantly poorer. This will create a very real and necessary defensive stance from many.

Indeed. The general trend of increases in private sector credit, and especially residential mortgages, collapsed for October. The November figures are out tomorrow, I'd hazard that the annual change will be 0% and, possibly, a negative monthly change for mortgages. Household deposits will creep upwards (slower for the next two months), and I'd wonder by how much Credit Card debt will fall from January onwards. Total outstanding personal CC debt is 2,915,200,000 (the payments on these amounts has continued to fall); just basing on historical trends we'll see a jump for the Christmas period, but I'd wonder if the % increase will be down on last year. Also, the figures for lending to businesses on a short-term basis will be interesting to note.

Interesting numbers ahead, for sure. Batten down the hatches, start saving :pac:

damnyanks

No talk of lowering minimum wage yet. If that hits a realistic level I'm sure we'll be right on our way.

OfflerCrocGod

damnyanks wrote: »

No talk of lowering minimum wage yet. If that hits a realistic level I'm sure we'll be right on our way.

Lowering minimum wage seems to me the sure fire way to worsen the current situation. Best place for cash right now is in lower earners hands as they are much more likely to spend.

Économiste Monétaire

Well, the November statistics weren’t very pretty. Mortgage lending increased by 0.07%, and private sector credit overall had a year-on-year increase of just 8.4%, falling from a y-on-y increase of 17.7% in January. There was a month-on-month increase of €539 in PSC. Loans, up to a year, fell by €2.5bn.

Mortgage lending, if you remove the adjustment for securitisation, had a drop of 6.2% year-on-year; that’s a fall from €123,981bn, in January, to €115.731bn (last November’s figure was €123.407bn). The figure given on the RTÉ site was adjusted for securitisation, €96m month-on-month increase. It shows quite a sharp jump in the securitisation of mortgages by our institutions... Retail clearing increased their euro securities holdings from €2.335bn to €6.24bn, and non-clearing institutions increased their holdings from €14.668bn to €18.018bn.

The money supply, year-on-year, changes: M1 fell by 14.2%, M2 fell by 1.2%, and M3 fell by 8.6%. Overnight deposits fell by €3.4bn; 3-month deposits fell by €254m and; two-year deposits increased by €1.4bn. Just a note on main refinancing operations, lending increased from €7bn, at the end of July, to €48.737bn, at the end of November. At least the amount in the deposit facility decreased from €7.5bn, to €2.6bn. (A little trivia: The approx. value of currency issued by the CB, at the end of November, was €8.578bn.)

On the credit card front, new spending was €868m (last November it was €1.048bn). Amounts outstanding on Credit Cards is €2.917bn; and payments received on these fell from a little over €1bn, down to €897m. The reduced spending is certainly marked from previous years.

At least our competitiveness increased, apparently.

The ubiquitous CB PSC graphs for anyone not too bothered to download the monthly stats:

damnyanks wrote: »

No talk of lowering minimum wage yet. If that hits a realistic level I'm sure we'll be right on our way.

Reducing the minimum wage will increase the overall real burden of debt. I'd hazard a guess that quite a few of those people will be highly indebted at this time of year.

SimpleSam06

Économiste Monétaire wrote: »

Mortgage lending, if you remove the adjustment for securitisation, had a drop of 6.2% year-on-year; that’s a fall from €123,981bn, in January, to €115.731bn

Hrm. Something that always bothered me about mortgage lending figures. €115 billion divided by approximately €300,000 we'll say, is roughly 380,000 houses. Is there an overwhelming majority of high cost commercial properties skewing the figures, or whats going on there? Surely top up mortgages and foreign property investment couldn't explain it away?

Économiste Monétaire wrote: »

Reducing the minimum wage will increase the overall real burden of debt. I'd hazard a guess that quite a few of those people will be highly indebted at this time of year.

Not to mention that doing a 40-hour week on minimum actually leaves you worse off than social welfare, factoring in rent allowances and medical care.

Économiste Monétaire

SimpleSam06 wrote: »

Hrm. Something that always bothered me about mortgage lending figures. €115 billion divided by approximately €300,000 we'll say, is roughly 380,000 houses. Is there an overwhelming majority of high cost commercial properties skewing the figures, or whats going on there? Surely top up mortgages and foreign property investment couldn't explain it away?

Well, "residential mortgages" include three subsets: Principal dwelling houses, buy-to-lets, and holiday homes/second homes. The majority of mortgages are in the east coast and around built-up, urban areas. A recent UCD study of the geographic dispersement of mortgages looks like this: (the lighter the shading, the higher the number of houses with mortgages)


I'd say the fact that the majority of mortgages are around urban areas (with inflated prices) and the total value of these residential mortgages has ballooned over only the last 4 years, €61bn in 2005 -> €147bn today (adjusted for securitisation), would lead me to believe the mortgages are based on new property that were bought at very high, inflated levels. That's one view of why the figures are so high vis-a-vis mortgage per house. Loans to commercial companies, for the purpose of buy-to-let, isn't included in these figures, as far as I know.

SimpleSam06

That chart is very interesting, and I might borrow it for accom/prop if you don't mind.

Économiste Monétaire wrote: »

I'd say the fact that the majority of mortgages are around urban areas (with inflated prices) and the total value of these residential mortgages has ballooned over only the last 4 years, €61bn in 2005 -> €147bn today (adjusted for securitisation), would lead me to believe the mortgages are based on new property that were bought at very high, inflated levels.

I don't know, I keep turning the numbers over in my mind and its just not clicking. 90,000 houses built at the height of the boom in 2006, almost 100,000 outstanding for sale on Daft, 17% to 20% of stock empty (no word on the percentage of that currently for sale mind you) a natural demand of 30k to 40k per annum, which is the important one, and I can't see any sort of boom absorbing more than three times that. And 2007-2008 were not good years for property sales.

It boils down to average mortgages of over a million euros each, unless it includes a staggering amount of top up mortgages. Are loans to developers for the purposes of building residential properties included in that?

Économiste Monétaire

SimpleSam06 wrote: »

That chart is very interesting, and I might borrow it for accom/prop if you don't mind.

Aye, GIS maps are quite interesting. The study was from UCD GPEP, and published in a book this July called, A sense of Ireland. The graph is from the UCD news page, the book is filled with them.

SimpleSam06 wrote: »

I don't know, I keep turning the numbers over in my mind and its just not clicking. 90,000 houses built at the height of the boom in 2006, almost 100,000 outstanding for sale on Daft, 17% to 20% of stock empty (no word on the percentage of that currently for sale mind you) a natural demand of 30k to 40k per annum, which is the important one, and I can't see any sort of boom absorbing more than three times that. And 2007-2008 were not good years for property sales.

It boils down to average mortgages of over a million euros each, unless it includes a staggering amount of top up mortgages. Are loans to developers for the purposes of building residential properties included in that?

What the average mortgage amount is I don’t know, so I couldn’t say what proportion of all houses are mortgaged; the big excel file from the Dept. of the Environment is probably where you’d find that information. With regard to the figures, the way the CBFSAI aggregate loans, vis-a-vis construction and anything to do with housing, is complicated. I’ll try not to make a total mess of it.

The overall figures they use include three separate measures: Construction, Real Estate Activities, and Residential Mortgages. The majority of the “Construction” numbers are related to housing currently being built, with a proportion also being used for infrastructure. They don’t disaggregate the construction figure to give a clearer picture there, only to say that infrastructure is definitely in a minority. When the houses are built, the credit amounts are transferred to “real estate activities.” These loans are for companies about to sell homes and commercial property, loans to companies which have rented the properties, developers waiting to sell, and so on.

Then you have “residential mortgages” which is, as far as I have always understood it, private citizens borrowing for the purpose of purchasing homes--they then either use them as their principle home, rent them, or keep them as second homes. The last figures that disaggregate private sector credit is for September. Just an example is this: Personal credit €172.851bn, of which €147.546bn was “residential mortgages,” “other housing finance” being €1.110bn, and “other” was €24.19bn. Now breaking down the residential mortgages we have: Principal dwelling houses at €111.315bn, buy-to-let at €34.776bn, and holiday homes/second homes at €1.458bn.

If you take the average price of new homes for urban areas, like this: Dublin €390,544; Cork €316,561; Galway €308,225 and; Limerick €278,881, it’s understandable to see how the average loan per house could be so high--the figures I gave for average new homes are from Q2 2008, and they’ve fallen from previous year figures when a lot of the build up in mortgage debt was happening. The average price for second-hand homes is slightly higher for all cities, especially Dublin with €455,142. That might not answer the question of how many mortgages there are, and what the average amount outstanding is per mortgage, though--you might have better luck here. I could see how all the debt built up, simply from the increase in the average price of homes and the reduction in required down-payment. Just a viewpoint... :pac:

SimpleSam06

Still points to a staggering number of transactions in terms of mortgages taken out, on the order of more than half the GDP in euros, with a life term of 30 years each, never mind interest. And thats just one year. What an astonishing amount of future earnings wiped out.

silverharp

SimpleSam06 wrote: »

Hrm. Something that always bothered me about mortgage lending figures. €115 billion divided by approximately €300,000 we'll say, is roughly 380,000 houses. Is there an overwhelming majority of high cost commercial properties skewing the figures, or whats going on there? Surely top up mortgages and foreign property investment couldn't explain it away?

Napkin calculation, dont know if it helps, probably one of those calculations where the average may mean little, some people have €1m mortages and others buy for cash

Mortgage Debt 2000 was 30bn (existing housing stock)

say half a mllion new mortgages since (new and second hand) /85bn = €175K avg mortgage over the whole period

edit - EM mentioned a number of €147bn, if that is the morgage debt issued to the public then the average would be more like €240K?




one of the balancing numbers is how many properties Irish people own abroad assuming they "liberated" equity on Irish properties


http://www.ptireturns.com/en/pti/news.php?show=74

"A study last year estimated that Irish investors own around 60,000 foreign properties, with countries such as Spain, Portugal and France among the most popular.

It also estimated the property could be worth around €5.5bn, although industry experts claim that the true number of foreign properties in Irish hands could be closer to 250,000."

SimpleSam06

silverharp wrote: »

say half a mllion new mortgages since (new and second hand) /85bn = €175K avg mortgage over the whole period

Maybe I picked it up wrong but was that not €115 billion for one single year?

anonymous_joe

In relation to alcohol, I'd almost be vaguely childish enough to wonder if it could actually see increased demand due to reduced incomes causing stress etc.

Économiste Monétaire

SimpleSam06 wrote: »

Maybe I picked it up wrong but was that not €115 billion for one single year?

Oh no, the figure is for debt outstanding. Meaning, that's the total debt, not just debt issued in a single year. That might have been my mistake :P We seem to have got our wires crossed somewhere, must be the after effects of new years...

SimpleSam06

Économiste Monétaire wrote: »

Oh no, the figure is for debt outstanding. Meaning, that's the total debt, not just debt issued in a single year. That might have been my mistake :P We seem to have got our wires crossed somewhere, must be the after effects of new years...

Thats why I love the internet, you get to the bottom of things eventually!

Économiste Monétaire

Whoops If we were to issue €147bn of new mortgage debt a year, we would really be in some mess--that's above 75% of GDP. But, the increase from 2005, €61bn, to November 2008, €147bn, is quite remarkable; especially if you consider that house prices have fallen something like 15% (depending on whose figures you use) from Nov '07 to Nov '08. Total outstanding property related debt, being construction, real estate, and private mortgages, looks something near €260bn; or approx. 137% of 2007 GDP. Mmmm... fun with numbers :pac:

damnyanks

Économiste Monétaire wrote: »

Reducing the minimum wage will increase the overall real burden of debt. I'd hazard a guess that quite a few of those people will be highly indebted at this time of year.

That assums unskilled workers can easily get jobs.

I'm assuming the rate of unemployment continues to grow at a high rate and that the unskilled workforce is badly hit.

Économiste Monétaire

damnyanks wrote: »

That assums unskilled workers can easily get jobs.

I'm assuming the rate of unemployment continues to grow at a high rate and that the unskilled workforce is badly hit.

I was illustrating the negative side to reducing nominal wages (transposing the minimum wage into that for some workers) with regard to its effect on the real debt burden; rather than market mechanisms for matching the unemployed to jobs, which is what you seem to be writing about.