Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Ireland’s housing crisis: Is it all the market’s fault?

Ireland’s housing woes can be summarised adequately by the phrase ‘plenty of people, not enough homes’. The country enjoys a rapidly growing population. This is due to a substantial surplus of births over deaths, something that most other high-income countries would love to have. It is also due to net migration, again a symptom of economic success.

That’s why it’s ‘plenty of people’, rather than ‘too many people’. I’m a bit of a demand fundamentalist, when it comes to housing. We shouldn’t have to turn away anyone simply because we don’t have enough property.

This is true not only for permanent residents but also businesses, who need office space, and visitors, whether short-term tourists or longer-term visitors, such as international students. All demand is good demand, in that sense, because this demand for housing goes hand in hand with job creation and thus livelihoods for those of us that call Ireland home.

Why ‘not enough homes’, though? Where have things gone wrong? In recent months, it has become something of a conventional wisdom that the lack of new homes being built is down to the failure of the market. Over-reliance on the market, this line of thought goes, has left us bereft of the full range of homes we need.

The logical conclusion most commentators making this point arrive at is that the State must step in and get building new homes. If we set aside, for the moment, quibbles about housing should be provided by Local Authorities or by Approved Housing Bodies, like Cluid or Tuath, then I agree with the conclusion.

But I think the path to getting there is not only wrong but dangerous in terms of its policy implications. A look at some of the numbers will hopefully explain my point.

Taking into account the various sources of demand, it’s clear that the Greater Dublin Area needs at least 1,200 new homes a month – and probably more if it enjoys sustained net migration. But over the last five years, it has seen about one quarter of this level of activity.

Are those who argue that the problem here is over-reliance on the market honestly suggesting that the State should make up three quarters of all home-building? Of course not.

I personally would favour a situation where about one third of housing is supported by the State, targeted at those in the lowest third of the income distribution. But in a country that needs 50,000 homes per year, this means new social housing provision each year of roughly 17,000. Given that only 13,000 new homes were started in 2016, the majority of which were one-off houses, this leaves a missing market of 20,000 new homes. Why are these not being built?

One argument is that the developers simply don’t have the capital to build. This simply doesn’t stack up against reality. In a world of zero interest rates, capital is on a global hunt for a return. We have seen the fruits of this in Dublin’s office sector, where half a million square metres are currently being built – with the same again ready to be built once the first chunk is occupied. The same is now true for Dublin’s hotel sector, where rising room rates have made it viable again to build. And, while there are clearly issues with the planning system (as I discussed last week), the student accommodation sector also shows no signs of being capital starved.

The final piece of the jigsaw is that the organisations that fund or build offices, hotels and student accommodation are the same ones that fund or build apartments – the single greatest need when it comes to housing in Ireland. So if it’s not a lack of capital, what sort of market failure is it? All good students of economics are taught to look out for two types of failure when considering outcomes: market failure and policy failure.

One clear policy failure is the dereliction of duty on the part of government, both central and local, to provide social housing. It is simply not credible to expect the market to provide housing for people with incomes so low they can’t cover the cost of building their home. And it is simply not fair to expect, as Part V does, that the occupiers of newly built homes should pay for new social housing. The cost of new social housing should be borne by all members of society, not delegated to the inhabitants of new homes.

But this is about the 17,000 or so homes needed each year for social housing. When it comes to the 35,000 or so market-built homes needed in Ireland each year, the evidence from the rest of the construction sector is clear: there is no market failure in getting funds to where building is viable.

The problem is that building is not viable, particularly for apartments – where the need is greatest. From the lack of a land tax to well-intentioned regulations that simply stifle new supply, policymakers at all levels need to stop blaming the market and take a long hard look at their role in creating Ireland’s housing crisis.

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An edited version of this post was originally published in my column in the Sunday Independent.

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