Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

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.


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

Leave a comment