Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

February 2018

Lessons from Moldova: don’t take growth for granted

This week, your correspondent is writing to you from Chisinau, the capital of Moldova. Moldova is not like Ireland in many ways. True, it is a small country – a population of roughly 3.5m people. And true, like Dublin, its capital and largest city makes up about one third of the country in terms of people and economic activity.

But in almost all other respects, Moldova and Ireland have little in common. Ireland is an island, Moldova is landlocked. Ireland is in the north-west corner of Europe, Moldova in the south-east. We have our own tongue, that we by-and-large ignore. They are happily bilingual, speaking both Romanian and Russian: their trick was to simply call Romanian “Moldovan”.

While Ireland is one of Europe’s richest countries, in terms of living standards, Moldova is one of Europe’s poorest. Related to this, while Ireland has one of Europe’s fastest growing populations, Moldova has one of its fastest shrinking ones. Ireland enjoys both a natural increase in its population each year and, once again, net immigration. In Moldova, more people die each year than are born – and it exports its people.

Moldova is, in short, the opposite of Ireland. And yet, its very difference to Ireland makes it rich in lessons.

For a start, it shows us that there is no inevitability to success. For most of the first 75 years of the Irish state, the question was often asked – sometimes louder and sometimes more quietly – whether independence was a failed experiment. That was in large part because Ireland was both shrinking in population and steadfastly refusing to converge in living standards.

That changed in the 1990s when a combination of external factors – in particular the dawn of the European Single Market – gave Ireland a new purpose. From now on, it could act as a springboard for non-EU firms, especially American ones, to access the world’s largest consumer market.

Fans of alternate history fictions could write, no doubt, an opposite tale. Suppose the USSR had won the Cold War. In such a version of the world, it is easy to see how Ireland would languish economically on the far reaches of the economic centre of gravity – while Moldova became a bridge between East and West.

What’s all this got to do with housing, you might wonder. Last week, the government announced its “Ireland 2040” plan, which includes both a planning framework and a schedule of public investments. So much of the debate since has been about whether Dublin is too big and whether there is enough in the plan for County X or County Y.

Too often, it seems our politicians – and perhaps also our voters – have a zero-sum view of the world: if Dublin gains, it must be at the cost of Cork or Longford or Donegal. However, this is sustained by feeling, not science. Economic geography is clear on this point: if you want Cork or Longford or Donegal to be larger, you need Dublin to be larger.

It is true that large cities are taking a bigger share of population growth. But this is true across the world and it is naïve to think Ireland can be different – while someone expecting living standards to rise inexorably. The reason large cities are growing faster than smaller ones is because for people to find the right job, now that most have a degree, they need a thick labour market.

The same is true for the cost of utilities, like broadband and electricity, and for vital and more discretionary services, like education, healthcare, restaurants and sports events. It’s all very well to say that we need to stop Dublin’s growth, but who do we turn away?

More importantly, if we limit Dublin’s growth, or the growth of our other major cities, there is less surplus to be shared around the rest of the country. It is an uncomfortable truth that the Cork and Dublin economies subsidise the rest of the country. If allowed to growth, this gives more for the rest of the country.

The pull of the city is, to a skilled workforce, close to irresistible. The strong push factor away from cities at the moment – in Ireland and across the developed world – is the high cost of housing. This is currently happening in the housing market, only, though, and not in the labour market. The result is long commutes, with time and environmental costs.

It is important to remember that the premium for living in Dublin is a new phenomenon. It did not exist 30 years ago. Even just five or ten years ago, the gap between the average property price in Dublin and one in Munster (outside its three cities) was just 50%. Now it is close to 100%.

Unlike Moldova, Ireland has a business model and one that has worked extraordinarily well for us over the last generation. But a lack of housing where it’s needed is threatening that business model. Bringing down the high cost of housing is simple: enable more homes to be built and built in urban centres where they are needed.

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

Rental market shows underlying urban pull

Another year of double-digit rent increases – that is the summary of 2017 in a few words. The figures in the latest Daft.ie Rental report show that, on average, listed rents increased by 10.4% during 2017. This compares with an increase of 13.5% in 2016, 9% in 2015 and 10.7% in 2014.

In Dublin, the streak is longer: rents have increased by 10% or more every year since 2013 – with the exception of 2015, when rents increased by 8.2%. This means that rents in the capital have increased by an average of 81% from their lowest point. That low was in late 2010, meaning that Dublin rents have risen, in year-on-year terms, for 26 consecutive quarters. This is twice as long as the previous market upswing, which lasted from early 2005 to mid-2008. It’s also twice as long as the downturn, which lasted the following four years.

The focus on Dublin is sometimes questioned but, at least in the rental market, is merited. Outside Dublin, rents have increased by 52% on average – well below the increase seen in the capital. And this figure itself is dragged up by areas within the functional Dublin economy: Meath and Louth, for example, have seen rents rise by 81% and 78% respectively since bottoming out. Cork, Galway and Limerick have also seen significantly larger rent increases than the ex-Dublin average – with increases of slightly more than 65% in each case.

These changes highlight the structural shifts at work in the economy. In particular, Ireland is converging to its economic peers in Europe and elsewhere, shifting away from agriculture (and manufacturing) and into services. A shift into services means a shift into cities and this is what is putting pressure on the housing market, especially in urban areas.

When it comes to living in urban or rural areas, Ireland is not different, just late. Currently, two thirds of its population lives in cities – compared to an average among our OECD peers of 80%. But this fraction has been creeping up over the last half-century and, given density is needed to make the services we enjoy viable, this pressure is not going to go away any time soon.

In the context of Ireland’s forthcoming National Planning Framework – dubbed “Ireland 2040” – this is central. If Ireland’s population were to grow by 1% a year between now and 2040, roughly the rate it has grown over the last few decades, its population would be 6 million by then. And if 80% of our population live in the cities in 2040, this means they will house 4.8 million people, up from 3.1 million currently.

The other 1.2m people in 2040 will live in rural areas. Currently, though, there are 1.7m people living in rural areas. So, our baseline scenario as a country is that, over the coming generation, urban areas will grow by something like 2% a year, while rural areas will see their populations shrink by 1.5% a year.

One typical reaction to this is that there must be some way for policymakers to stem the flow into cities. It is not obvious that this is desirable, though: if we want our young citizens to be well educated, then they will need to be able to use those skills – and this means clustering, in other words cities.

Perhaps more open to policymakers is the relative importance of Dublin compared to Ireland’s four other cities. Dublin can appear at first glance to be somewhat outsized relative to the country’s other cities – although once you factor in Belfast and Derry, Ireland looks very similar to most other countries in terms of the how the bigger cities compare to the smaller ones.

In fact, somewhat paradoxically, the best hope for rural Ireland lies in the success of the cities. The bigger Dublin and Ireland’s other cities grow, the bigger the population that can be sustained in rural areas. Or to put it another way, if rural Ireland appears consigned to 20% of the total, then it is in the interest of rural Ireland for the total to be as large as possible.

In the scenario for 2040 above, an average growth rate of 1% in the population was assumed. This led to a fall in the total rural population of almost half a million (or 30%). If Ireland were able to grow its population by 2% a year – an admittedly very tall order – this would mean its population in 2040 would be close to 7.5 million. In that case, a 20% rural share would mean a fall of just 200,000 in the numbers living in rural areas.

However, if Ireland were to grow by just 0.5% a year over the coming generation, the rural shrinkage would be even faster. This slower growth rate – more in line with how fast other high-income countries are growing – would mean a population of just 5.4 million in 2040. In this case, rural Ireland would shrink by 600,000 people in the same time.

There is one other way: sprawl. This is the model we have effectively adopted over the last twenty years. Even as our labour market concentrates, we spread our housing further and further out around the country. In principle, we could continue to do this over coming decades. But this kind of development comes with costs, in terms of time, family life and the environment, that hopefully we can agree is not an option.

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

Are we at risk of a demand ‘arms race’?

In recent weeks, there has been something of a push-back against the notion that true demand is a multiple of the number of homes being built each year. John McCartney from Savills referred to this as a demand ‘arms race’, with people vying to come up with ever-bigger estimates of the number of new homes needed.

More prominently, Conor Skehan, the embattled Chair of the Housing Agency, has gone further. Recently, he accused those who don’t agree with his own estimate of less than 25,000 new homes needed per year as having ulterior motives and putting the country at risk of another property bubble.

Some of this stems from not understanding what a bubble is. Ireland’s housing bubble was a credit-fuelled splurge of home-buying. There was a closely connected splurge in home-building, but to the extent that this led to homes built in areas without long-term demand, that was largely a product of extraordinary policy failures, in particular around tax breaks which made building in low-demand areas a free gamble.

In order to avoid a repeat of the 1995-2012 bubble and crash, the single most important ingredient the country needs is sensible mortgage rules. And, since the Central Bank intervened in early 2015, by and large it has these.

What the market is witnessing now – with increases in sale and rental prices of more than 75% in some parts of Dublin – should surely be evidence enough that demand falls well short of supply. So the solution is more supply.

The question is just how much. There are four sources of demand. Most commentators start – and some finish – by just looking at the natural increase in the population. This is the amount by which births exceed deaths.

Over the last 15 years, this has been an average of 40,000 but it is fair to say that this has been falling recently. In 2017, the estimated natural increase was just over 33,000 and it is not unreasonable to think that the natural increase will fall below 30,000, perhaps to 25,000, in the next few years.

But this does not mean to say that the country needs 33,000 or indeed 25,000 homes each year. These raw numbers have to be converted into households. Based on trends across the developed world, it is prudent to divide the natural increase by 2, and not a larger number, to reflect the fact that average household size is declining. This means that natural increase will add something like 15,000 households a year into the medium-term.

That, of course, is something of a crude approximation of how new households are formed. Infant children do not require a home of their own. It is more appropriate to look at the average annual gap between 25-34 year-old women and their 75-84 year-old counterparts.

This ‘generational surplus’ has been on average 22,000 a year since 1990 – and indeed was at that level in 2017. Like the natural increase, it has been falling, but again, it would be prudent to plan on needing at least 15,000 and probably closer to 20,000 homes a year.

In addition to the natural increase, though, there is also net migration. While this was negative from 2010 to 2014, it is now strongly positive, with 20,000 people moving here – net – in 2017. This is in line with the post-2000 average, and – dividing it by two, to reflect household size – adds another 10,000 to housing demand every year.

So far, so good. We have a total of between 25,000 and 30,000 new homes needed per year, based on the fact that Ireland’s population is growing. Job done? It turns out that this is only half the way there.

In addition to natural increase and net migration, there is also changing household size and obsolescence. Each year, in every economy in the world, a small fraction of homes fall out of use and into disrepair. The fraction is typically estimated at between half a percent and 0.8%.

In Ireland, that means we need between 10,000 and 16,000 homes a year just to offset homes falling out of use. This is the true starting point of housing demand – and applies even in countries with declining populations.

On top of that, though, there is the elephant in the house, so to speak: household size. Ireland has seen its average household size fall from 4 people in the 1960s to 2.75 people today. In this, it is undergoing the same transition that all other high-income countries have done before us.

As we as a country converge to an average household size of 2.2, or close thereto, this will create huge additional demand – and for smaller homes. Whereas a country of 4 million people, split into households of four people, needs one million homes – the vast majority of them houses, the same country split into households of two persons needs twice as many homes – the vast of them apartments.

This is the journey that Ireland is on. To facilitate Ireland converging with its peers, the country needs a further 10,000 homes a year – almost entirely urban apartments. These two latter parts – obsolescence and demographics – and the ones left out by some commentators. Adding them in, it is hard to see how the country needs less than 45,000 homes a year.

We need to stop arguing about whether the demand is there and start focusing on supply.

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