Is Ireland’s property market competitive? Can Ireland’s property market crash stimulate future growth through boosting Ireland’s competitiveness? And do Irish people shell out more or less each month on accommodation than their counterparts in other eurozone countries? This is an important question not only for Ireland’s international competitiveness, but also for people in their day-to-day lives. This was a question I was asked last week and couldn’t answer, so I thought I’d do some research.
One thing we do know is that property costs are a big and growing part of Ireland’s competitiveness proposition. Back in the 1980s, the typical FDI project into Ireland was in manufacturing, and from what we know about the costs faced by FDI projects, about half the cost base of a manufacturing plant is determined on global markets, for example raw materials. Of remaining costs, salaries comprise about another half, with the rest a mix of transport, property, utility costs and other costs, typically interest and taxes.
Now, however, the typical FDI project into Ireland is either services based or R&D. For both, globally-priced inputs make up only about 10% of total costs, so you can see straight away how much more important Ireland’s cost base is now, compared to a generation ago. For services projects, labour costs are fully three quarters of the total cost base, while property costs make up a further 10%. For R&D projects, property costs are even more important and labour and property together make up over 90% of the cost base.
To calculate the true role of property in the cost base, we need to remember that typically one quarter of a worker’s wages goes on accommodation, so that must be added to the direct costs of offices and plants. This means that the switch in Ireland’s FDI from manufacturing to services and R&D means that the cost of accommodation in Ireland – be it for firms or for their workers – has become a hugely important determinant of whether Ireland is cost-competitive.
A generation ago, property was directly and indirectly responsible for about 10% of the cost base of the typical FDI project (about 5% directly, plus one quarter of the wage bill, which came to 25%), if current cost profiles are anything to go by. Now, however, property is responsible for between 30% and 40% of the cost base of the typical investment project Ireland is trying to attract.
Reports such as the National Competitiveness Council’s “Cost of Doing Business in Ireland” from last summer go into some detail on the direct costs of property, through building or renting industrial space or offices. The finding from mid-2009 was that costs had fallen significantly but that Ireland was still expensive.
How does Ireland compare for residential property costs, though? At the very least, these are the barometer by which people assess whether their wage is good or not. Some urban economists would go further and say that accommodation costs are the single most important indicator of a region’s competitiveness, because they determine the price level in that region. Below are two graphs that compare accommodation costs in over twenty eurozone cities. (Paris is such an outlier at the expensive end of the scale, I left it out so as not to be accused of making the results excessively dramatic.)
The first graph shows the monthly rental cost of a 120 square metre apartment in various cities across a dozen or so eurozone members. The source is GlobalPropertyGuide.com, which updates annually the purchase and rental cost of a few standard sizes of property in a large number of cities around the world. It is unclear why, given the wealth of information in the daft.ie reports, but they do not have rental information for Ireland. I have used this, in particular information on rents in South Dublin as comparable to most of the districts they cover, to fill in this blank.
Naturally one has to be careful, as comparing exactly like-for-like is a difficult thing to do. This would in particular mean that I would not pay too much attention to differences of less than €100 or maybe even €200. But the order of magnitude of difference is striking: Dublin rents are on a par with other PIGS cities and Ljubljana, and are significantly cheaper than, say, Amsterdam or Helsinki. Other Irish cities are more on a par with Malta and Cyprus – and perhaps other cities of a similar size not included in the GPG analysis.
The second graph below does the same analysis but for buying, not renting. The overall ranking – including for the Irish cities – is remarkably similar to that for renting, a sign that the yield on property does not vary too much around the eurozone. It’s worth remembering that in 2007, the equivalent figure for Dublin would have been closer to €600,000. So Dublin has moved dramatically from the upper third to the lower third of the eurozone’s property cost leagues, in a relatively short space of time.
No doubt property hawks on thepropertypin.com and elsewhere will believe that this is just an attempt to talk up the Irish property market. I don’t see it as that, as none of the facts presented above change the very strong headwinds facing the sales segment in particular, which is blighted by both a lack of finance and confidence on the part of buyers and – especially outside the family home segment in the cities – the known unknown of what properties NAMA has on its books that it may yet dump on to the market.
What I do see the above analysis as showing is that rents – and accommodation costs in general – in Ireland are quite cheap, relative to other eurozone cities, and Ireland’s competitive advantage in this area is if anything likely to improve further over the coming year or two.
PS. I would welcome any sources that readers have which might pad out the analysis of non-capital cities a bit more. Salzburg is probably the only non-capital city of comparable size to the smaller Irish cities included in the figures.