Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

January 2017

Property in 2017 – the year ahead

2016 saw a number of important policy shifts in relation to property in Ireland, particularly in the final few months of the year. The first was creation of a Cabinet-level Minister for Housing, a sign that – with the change of government – the severe shortage of housing was finally being taken seriously by those in power.

The second substantive change was the long announcement, from about mid-summer until the Budget, of “help” for first-time buyers of newly built homes in the form of a tax rebate. This kicks off in earnest with the new year and is likely to combine with the third change. This was the revision of the Central Bank’s mortgage rules, which came through in November. These revisions mean first-time buyers no longer require a deposit larger than 10%, even if they borrow more than €220,000.

Combined, these two measures create something of a two-tier market. Take two otherwise identical families, on the same household income and with two young children. Their only difference is that one rents the two-bedroom apartment they live in currently, while the other owns it.

Both families are looking to buy a newly built family home in the Greater Dublin Area, at a cost of €400,000. The family that own their apartment will need to produce a deposit of €80,000 (20%), while the family that rent their apartment will – once the tax rebate is factored in – need a deposit of just €20,000 or 5%.

In terms of how this will affect the market, both the rebate and the change to Central Bank rules will have the effect of further stimulating demand and thus pushing up prices. In a way, they are complementary measures. The tax rebate will have the biggest effect on cheaper new homes (those costing between €200,000 and €400,000), while the rule change will have a bigger effect on more expensive homes, including second-hand ones.

Either way, the expectation for the year coming is for a return to house price inflation in Dublin after something of a two-year pause, with average prices in the capital increasing by just 4% between early 2015 and late 2016.

Increases of at least 5% and probably closer to 10% will also be expected in the rest of the country, as strong demand interacts with a lack of supply. The country needs at least 40,000 new homes a year – and probably closer to 50,000 once obsolescence and immigration are factored in. But the current hope is to get construction of 25,000 new homes by 2021.

There is an excessive focus on the “starter home”, however. In fact, when you look at Ireland’s demographic structure, there are close to enough family homes in the country to cater for our families. What Ireland lacks – more than any other high-income country – is apartments.

This shortfall is unlikely to be addressed in the coming year, however, as the cost of building apartments is prohibitive, compared to average incomes. The break-even monthly rent for a two-bed apartment – even with free land – is roughly €1,600 but in most parts of the country, a two-bed rents for less than half this.

So, while there will be a fuss about the vacant site registers (and in time the vacant site levy), until the hard costs of construction have been dealt with, expect little improvement in the chronic lack of accommodation for one- and two-person households. Government Ministers lodging complaints against developments in one of the small number of areas where apartments are viable certainly doesn’t help.

One area that has recovered somewhat in recent years and is likely to continue to strengthen in 2017 is purpose-built student accommodation. Ireland is in the middle of a long higher-education boom. This appears to have been missed by the Higher Education Authority: a 2015 report of theirs predicted student numbers to rise from 168,000 to 193,000 in the decade to 2024. Instead, there are likely to be 193,000 students as early as this September, seven years ahead of schedule!

In that context, all new purpose-built student accommodation is welcome, even if it will only really cater for better-off students. The reason this is the case is the same problem that bedevils residential construction in Ireland currently: how expensive it is to build. Looking at the pipeline of student accommodation, it is likely that this will be only just enough to meet new demand and will do little to take existing students out of the general private rented sector.

So 2017 is likely to be another year of very strong demand for all types of residential property: sales, rental, new, second-hand, urban, rural, houses, apartments, student living and assisted living. It is also likely to be yet another year of weak supply in all these segments.

Solving this would mean dramatically reducing the cost of building a home – by something like 35%. Even if the causes of this cost gap are identified, it is likely to take a year to bring costs down and then a further two years before these lower costs translate into anything like the level of construction the country needs.

So don’t be surprised if there’s a similar-sounding piece this time next year!

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This piece originally appeared in the Sunday Independent on January 8th, 2017.

Supply, supply, supply: the new housing mantra

Below is my commentary to the latest Daft.ie Sales Report, which reviews the market in 2016. Its overall point is that Ireland needs roughly three times as many new homes to be built per year as is currently the case.

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Nationally, the average list price rose by 8% in 2016, very similar to the 8.5% seen in 2015. Compared with static prices in 2013 – although this masked huge regional differences – and an increase of almost 15% in 2014, perhaps this, then, is the new normal. The graph below shows the number of markets (out of a total of 54) that fall into one of four categories: falling prices (in year-on-year terms), rising slightly (0-5%), strongly (5-10%) or unsustainably (above 10%). As you can see, the most common change has gone from falling (the blue line; pre-2014) to 10% increases (red line; 2014 and 2015) to 5-10% increases in the last couple of quarters. The green line (0-5% increases) only briefly emerged as “normal” before fading away in recent quarters.

House price changes, by market, quarter and inflation bracket
House price changes, by market, quarter and inflation bracket

Normal does not mean healthy, however. We know that in a healthy housing system, any extra demand for more housing is offset by more supply – in other words, the real price of housing should be stable, once general inflation is taken account of. In Ireland, general inflation has effectively been zero not just over the last 12 months but indeed over the last decade.

So Ireland is currently trapped in a situation where housing prices are increasing far faster than prices in the rest of the economy. This is not sustainable but the latest indications are that this high rate of inflation is embedded in the market, due to strong demand and weak supply.

We know from the initial Census results that the country added 170,000 extra people between 2011 and 2016. Given the likely composition of new households – between 2 and 2.5 people per household on average – this means that the country added almost 75,000 new households in those five years.

We know from the same source, the Census, that there were just 17,000 new homes added to the stock of dwellings in the last five years, once holiday homes are excluded. In other words, for every ten new families formed, just two new dwellings were built, for the entire period from 2011 to 2016. (Completions numbers were much higher than this, but this includes properties built during the bubble and only connected to the electricity grid more recently. It is also a measure of “gross” construction and doesn’t account for buildings going obsolete.)

Bad as that may seem, the picture is worse again. Firstly, the period 2011-2016 was largely one of net emigration, with 125,000 people leaving between 2011 and 2015. There is a clear move toward net immigration, though, emigration falling from 90,000 to 75,000 since 2013 while immigration has risen from slightly more than 50,000 in 2012 to 80,000 this year.

Migration is driven by those in their 20s and 30s, in other words the very groups forming households and starting families. Based on the 2011 Census, we know that every additional 10,000 migrants require on average 4,000 dwellings, so even if net migration remains relatively low – at say 20,000 a year over the next few years – that will add 8,000 to the number of new homes required annually.

This is in addition to the core demand resulting from “natural increase”, in other words a surplus of families being formed over families dying. A fast way of checking the size of this natural increase is to compare the size of the cohorts of women aged 30 and 80. There are roughly 35,000 women aged 30 in Ireland currently, which gives a good baseline of household formation – ultimately, the vast majority of these women are likely to be part of one household each. There are just 10,000 women aged 80. Thus, there is a natural increase in number of households each year of at least 20,000 and closer to 25,000.

On top of this, demographics are changing – not least, people are living longer. Coupled with other factors, including a greater fraction of people who do not have any children, separation and divorce, Ireland’s average household size has fallen from more than 4 people in 1971 to roughly 2.7 people today. However, it is still the highest in Europe, where the average is just 2.3.

This may sound like a small difference but it is hugely important for how many new homes are needed per year. For example, if Ireland’s population did not increase but the average household size fell from 2.7 to 2.3, an additional 300,000 dwellings would be needed. Realistically, that convergence will take time, but it is likely that declining household size will add at least 10,000, if not 15,000, to the number of new homes needed each year.

The last factor when figuring out how many new homes are needed each year is one that is most often forgotten: obsolescence. The Department of Housing and CSO estimate that roughly 0.8% of the housing stock goes obsolete each year: in other words, the typical dwelling lasts about 125 years. This means that, every year, about 16,000 dwellings fall out of use.

That figure seems somewhat high and, while 125 years may be an accurate guide for rural cottages, urban properties typically remain in use due to renovations. But even a depreciation rate of 0.5% a year would mean 10,000 dwellings are needed annually just to stand still.

Adding all these up, there are roughly 10,000 dwellings needed each year to offset obsolescence, a further 10,000-15,000 needed to accommodate Ireland’s smaller households, between 20,000 and 25,000 on top of that to house the natural increase – and to top it all off, likely a further 8,000 or so due to net migration.

In total, Ireland needs at least 40,000 new dwellings a year and probably closer to 50,000. These will be concentrated in and near the urban centres and will be disproportionately homes for one- and two-person households, such as apartments, downsizer homes and student accommodation. As the latest figures show, without this kind of supply, we will all have to spend more and more of our income just to have a home.