Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Complements and substitutes: Housing as a piece in the jigsaw

As a policy area, housing does not stand on its own. It sits in a system full of links and feedback loops. At a very basic level, money spent on housing has to compete with money spent in other areas. In this sense, housing policy – at least where it involves money, not simply regulations – has a number of substitutes.

But it’s not just about competition. Economists see the world in a slightly different way to most people. To an economist, one of the things they are most interested in is how changes in one good – like housing – affect others, and vice versa. And the two key terms are complements and substitutes.

A complement is a good that goes hand in hand with another. Lecturers struggling to come up with imaginative examples often resort to gin and tonic, when explaining the concept to first-year undergraduates. (We can relax for a while, as gin is once again very fashionable!) A substitute is something that, as the name suggests, can fill in for the original good. The same lecturer might give the example of two types of beer, when explaining the concept to first-years: drinking one brand of beer won’t heighten the enjoyment of drinking the other (arguably!).

This may seem very obvious but it has deep implications, as it is applicable to all types of goods and services we enjoy, public and private, including housing. What is concerning at the moment is that the public policy system in Ireland does not yet seem to have connected up housing with its complements and substitutes.

One obvious example is housing and commuting. When choosing a home, these are substitutes: you can live in House A and you walk or cycle to work, or House B, which is further away and cheaper but involves a 30-minute drive each way.

The Central Bank clearly missed this substitutability when devising the mortgage rules. By focusing on the ratio between the mortgage and gross income, they have incentivised further sprawl. People who hit the limit of the mortgage rules can extend themselves by buying further out and paying in fuel, not mortgages.

The Central Bank is not alone. Local authorities too miss the link between housing and other parts of the system. Take housing and office space. These are complements. For society to get full enjoyment out of one, it needs the other too: put simply, all workers need somewhere to live. The current office-building boom in central Dublin, therefore, creates a need for new housing.

It is estimated that there is office space for 60,000 new workers being built in Dublin currently. Almost all of this is taking place in central Dublin, well within the City Council’s limits. And yet, fewer than 1,000 apartments are being built. In fact, in the last seven years, just 3,000 apartments have been built in Dublin – many of those completions of legacy projects from the bubble.

Professional developers, many of them new to Ireland, are adding perhaps 25% to the stock of office in Dublin in just five or six years. This scale of development clearly indicates the demand for offices is there. Therefore, Dublin City Council must connect the dots and see that more offices need more homes.

This is definitely not a call for the Council to limit the development of office space. Nor is it a call for the Council to demand from those developing office space that they develop residential instead.

Rather, it is a call to understand why development of the residential accommodation that is so badly needed in the country – and in particular in Dublin – is not taking place. I suspect that this is because construction costs in Ireland are so high, compared to other countries, but what role does regulation play in this?

Related to this is the need to move beyond “building for families”. Fewer than half of the households in Ireland are family units (one or two parents with children). In Dublin, the fraction is even smaller and the city has more family-sized homes than families.

But without enough apartments or student homes, those without the right kind of homes end up living in imperfect substitutes: family homes. This has led to an artificial shortage of family homes in a city that has too many!

The implications for local authorities are clear. Where there are offers to build, for example, student accommodation, the city – whether it is Dublin or any other Irish city – should take it. Dublin alone needs to approve one hundred blocks with an average of 300 student units by 2024 to meet existing and new demand. That’s one block of student units every month for the next eight years, if demand is to be met.

We currently have the bizarre situation of local authorities looking askance at proposals to build student accommodation or suburban apartments, while welcoming all new office space. It is time for them to revise their Econ101 and the basics of complements and substitutes.


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

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