With Davy Stockbrokers predicting a 70% fall in Irish construction activity from its peak over the coming ‘medium term’ (2009-2011 or so), I though it might be timely to review some headline statistics for Ireland’s property overhang.

Recently, I’ve been peddling the idea that between 2004 and 2007, we were building twice as many homes as we needed and building twice as many for 3/4 years implies building half as many as you need for 6/8 years to return to equilibrium. Does that stack up? Or, put another way, if we start in 2002 with Census statistics on the stock of housing, use Dept of Environment statistics for the period 2002-2008 and turn Davy’s figures into ballpark estimates for 2009-2013, how bleak will things look in five years time?

The answer, much to the chagrin of those who loathe two-armed economists, seems to be that it depends – in this instance on what part of the country you’re talking about, but also about what you think is the appropriate long-term need for new houses in this country. If we take 2001 figures (technically March 2002 figures) as our ‘departure from normality’ point, how far off course are we? Between 2002 and 2008, we churned out over half a million properties, off an existing base of just 1.3 million households. Back-of-the-envelope estimates, based on an overview of economists’ figures on this topic, suggests that we should have been building perhaps 300,000 households in that same period. (That’s using an equilibrium figure of 40,000 properties a year, rising temporarily after the accession of new EU member states.) So, enough with all the stats, what’s all this for, you wonder. Well, I was hoping to use all this to answer two key questions:

  • Where suffered worst from Ireland’s properties building bonanza? Where is housing inventory lying around most?
  • How long will we have to sit around building hardly anything until we’re back to some semblance of normality in the property market?

Where did we build our extra properties? By the end of 2008, we were about 5 years ahead of schedule – i.e. we’d built 12 years supply in just 7 years. To give a regional flavour, based on insights gleaned from the property overhang per county figures I calculated in December, I split Ireland into three regions – Dublin, Connacht/Ulster and the rest of the country. (The data allow for a full county-by-county analysis, however time constraints and poor formatting in the various external sources has prevented me from threatening another heatmap!) Over the period in question (2002-2008), more houses were built in Connacht/Ulster than there were in Dublin, which has almost twice the population! As a result, in terms of years of “pre-production”, if you will, while Dublin had under 2 years excess supply by end-2008, Connacht/Ulster had almost 8 years. Once more emphasis: builders managed to produce 15 years output in Connacht/Ulster in just 7 years.

How long will we have to sit around building nothing? It’s all very well for someone to come along after the fact and say “You shouldn’t have done that”. What’s more interesting is to shed some light on where the adjustment will come first and where it will be hardest. One option would be just to close up our construction sector for a few years until inventory shifts sufficiently and prices start to rise. Practically, of course output doesn’t and shouldn’t collapse to zero and, as per Davy’s figures, will be in the range of 10,000 to 25,000 over the coming 5 years.

Therefore, I’ve assumed output of 20k in 2009 (still slowing down), 10k in 2010 (bottom of the market) and then a simplistic 5k increase in output every year after that, rising to 25k in 2013. Let’s call this the ‘post-Section 23′ scenario. This is contrasted with a ’20:20 foresight’ scenario where steady-state output in construction remains 40,000, apart from a minor blip of 35,000 in 2009 due to global economic circumstances. In both scenarios, new houses are allocated according to a region based on its Census weight – crucially, and we can relax this later, even in our post-Section 23 world, output resumes in Connacht/Ulster, not at the distorted rates we saw but in proportion to its size. The result of all this is the chart below. The figures show the excess of properties as a percentage of the total property stock in each of the three regions.

Ireland's excess properties, % of total properties, by region, 2003-2013f

Ireland's excess properties, % of total properties, by region, 2003-2013f

The results are pretty clear:

  • Even with some major internal restructuring of the construction industry (i.e. rebalancing output of houses according to a region’s weight in the economy), Connacht and Ulster will still have a significant property overhang, more than 10% by 2013 – and that itself based on a drastic 70% contraction in building activity from peak levels.
  • For most of the country – and indeed the country on average – the overhang will have halved by 2013 but will still be in the region of 5/6%.
  • In Dublin, shortages in housing may emerge as quickly as 2012.

Objections to the above might include one along the following lines: construction will not only contract 70% but also no-one will be building in Connacht/Ulster for years to come so even the rebalancing of output described above is not an accurate forecast. In that case, the overhang will just take the full 8 years from 2008. Section 23 and the property boom will have taken construction jobs from 2009-2015 and left them in 2002-2008 – a sort of integenerational outsourcing.

Another objection is that the optimistic (if 2012 is optimistic) scenario painted for Dublin hinges on that long-term need of 40,000 units a year (which translates into about 12,000 new units in Dublin annually, based on its Census weight). Significant and persistent net outward migration from Dublin from 2009 on – which incidentally is why I believe that Dublin Bus, so clearly an ‘inferior good’ in the economist’s sense of the word, is losing money when incomes fall – might mean that the demand for housing in the period 2009-2013 may fall to 20,000. Replacing 40,000 with 20,000, from 2009 on suggests that the average percentage overhang for the country stays stuck at 10% and Dublin – while still much lower – remains stuck at 3-4%.

In sum, we are where we are. We’ve more than enough houses everywhere in the country and plenty of houses in places where we won’t need them for another 10 years or so. Therefore, it would be wise for the Government to take this crisi-tunity, as Homer Simpson would say, to harness both supply and demand sides of the market.

  • On supply, it should focus the efforts of the much-trimmed residential construction industry, when that sector starts to medium-term plan in 2010/2011, on Dublin and other areas around the country most likely to show a shortage of property this side of 2015.
  • On demand, the Government should attempt to deliver balanced regional development, taking property overhang as an opportunity for affordable housing to create new centres of employment. Taking this to its most logical conclusion, firms outsource because they want to free up resources to specialize on what they’re good at. Therefore, we must adopt a mentality along the following lines: “Let’s take this opportunity to treat our property boom as intergenerational outsourcing, which has freed us up to focus on what we’re good at.” (Just don’t say all we’re good at is construction!)
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4 Comments

  1. Graham said on February 26, 2009 | Permalink

    Ronan,

    Lots and lots of comments on this interesting blog entry:

    As far as I can see (and I’ll admit my brain is a bit fried at this stage on a Thursday), you’re evidence for a property overhang is based on an assumption that we were adequately stocked heading into the boom. This is not the case. I don’t have figures to hand, but if I recall correctly even by Census 2006 we still had a ratio of population to dwelling units below or just about at the European average. So if we’re overbuilt, I would say it’s by not more than 100k units.

    Furthermore, a confounding factor in your regional comparison is the differential demographic trends across the country. Dublin households are at present more hourglass in their Demographics – you’ve got old Mrs Sheedy in Churchtown who’s 85 years old living in a semi-detached on her own; then you’ve got young families in the endless new estate jungles of the commuter belt whose kids are all still in primary school.

    Still a much more important driver to housing demand – and hence whether we have too many or too few – will be net migration trends. Population growth through immigration has a much more immediate impact on household formation than increases in the natural birth rate (obviously), while the reverse is true for emmigration.

    I cannot say for sure if this is true, but I strongly suspect there are important differences between migratory trends across the regions. I’m betting Dublin will prove to be more transitory (and hence quicker to deflate housing demand) than the rural areas.

    So I think the problem is not too many houses, but houses that are still way too dear. The fiction of semi-detatched relics in Clonskeagh worth 750k is not just an issue for the balance sheets of banks, it is an intergenerational wealth transfer issue, and crucially a competitiveness issue.

    Coming to your conclusions, I disagree on both counts. Creating an adequate, transparent and efficient system of obtaining planning permission is all the government ever needs to do on the supply side.

    On the demand side, what we really need is a residential property tax charged on the assessed value of the dwelling. This will bring some sanity to the aforementioned 750k semi in Clonskeagh, while pricing in the overhang in Longford and Leitrim to encourage a better population balance.

    Anyone from America knows this is the best way to get retirees moving out of expensive city locations (“Couldn’t afford the property tax”).

    But other attempts to “deliver balanced regional developed” are a recipe for further competitiveness erosion and inefficiency (remember decentralisation?)

  2. ronanlyons said on February 26, 2009 | Permalink

    Hi Graham,

    Great comment, thanks for taking this head-on as I was trying to give a picture and this really needs a going-through on the details.

    You’re right, I did assume all was well in 2002. I understand your comment but I offer a couple of related points for the contrary.
    (1) Ireland fits more people into each house than other European countries, hence the smaller stock. That’s slowly changing over time, but it’s still the case.
    (2) Even at 40,000 units a year, we’d have been building 150% the EU average on a per capita basis (p.101 http://www.forfas.ie/media/ncc090108_acr_2008.pdf) and almost twice our previous long-run output of about 20,000 (http://www.daft.ie/report/Daft-Rental-Report-Q4-2007.pdf). Surely that output would be more than enough to build enough to match demand.

    For the above reasons there are also economists out there who believe we were over-stocked by the time 2002 came rolling around. Hence my taking 2002 as a sort of mid-point between both camps.

    On the second and third points, different demographic trends and property taxes, I’m not sure how this refutes the analysis given. I agree with you in principle on both points but all that will do is affect Dublin’s steady state price and the rate of transactions, rather than steady state output… or have I misunderstood?

  3. Graham said on February 26, 2009 | Permalink

    Hi Ronan,

    Yes, the “how many paddys can we cram into a house” coefficient is indeed hard to calculate, but my feeling is we Irish don’t like living on top of each other any more than the Germans or the French. (Well, at least, I don’t!). We may have done it in the past, but only because we were too poor to build enough houses to live in.

    The demographics and property taxes comments were not designed to refute your analysis per se, just to add some flavour to the debate. My only point on the demographics, really, is that it makes inter-regional comparisons of what the output should and will be over the medium term difficult.

    Basically, I agree that the issue of when, where and how soon we will start building again is a fascinating one.

    I think too you are the first to really start asking this question!

  4. John said on April 8, 2009 | Permalink

    Your estimate of 200k overbuilding between 2002 and 2008 is exaggerated.

    Between 2002 Q2 and 2008 Q1 (the six years following the 2002 census), the number of households in Ireland increased by 288k, slightly lower than your estimate of 300k.

    However, in those six years the number of houses built was 458k, a lot lower than your estimate of 500k.

    That leaves a surplus of 170k.

    However, from that you must deduct the number of old houses that became obsolete in that time, i.e. old houses that fell into disrepair or were abandoned as they were far below modern standards of comfort. The various census indicate a continuing large fall in the number of households living in pre-1919 and pre-1940 built houses. I estimate (and so does the Dept of the Environment) that about 10k to 12k houses (mostly very old houses) become obsolete each year. This reduces the surplus to the range 98k to 110k.

    In addition, from that you must deduct the number of new second/holiday homes built in those six years. Unfortunately, there are no definite figures for this. However, CSO figures in their Household Travel Surveys indicate that the number of people resident in Ireland, who holiday in their own holiday home in Ireland, more than doubled in this period. Plus, of course, holiday homes rented out to foreign tourists. So, although I can’t be certain, I estimate the number of new second/holiday homes built in those six years at about 30k to 50k. That reduces the surplus to the range 48k to 80k.

    Even the upper end of this range (80k) is well below the 200k you estimated. It also knocks on the head the idea that there are 350k ‘empties’ in Ireland waiting to be unleashed on the market. Its nonsense. There might be 350k ‘empties’, if you include every ‘tumble-down shack’ in Athlone, every ‘cottage by the Lee’ , every house built circa 1900 with a stone floor and draughts blowing in from every direction. But, if we’re taking about modern high-quality centrally heated houses of the type people of today might want to live in, there are nowhere near 350k ‘empties’. As I said above, its probably in the range 48k to 80k and falling as house completions have dried up. If, as some claim, there actually are 350k ‘empties, then why aren’t they showing up on Daft? The most recent Daft survey shows the stock of houses for sale falling. So, where
    have the 350k ‘empties’ disappeared to?

    As for future housebuilding, it depends entirely on future population growth. If net emigration resumes, obviously the requirement for new houses will be much less than in the past decade. If it doesn’t, and both net immigration and population growth continue at a high level, then the requirement for new houses will be much the same as in the past decade. Right now, nobody can possibly know which of these two scenarios will prevail over the next decade.

4 Trackbacks

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