Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Irish Economy

Yes, we are building more – but not the right type of homes

On the face of it, little appears to have changed in many of the figures in this House Price Report. Sale prices – whether measured by listed prices or using the Property Price Register – are up compared to three or 12 months ago.

And that’s true for pretty much everywhere in the country – Donegal once again the exception, as Brexit continues to kill confidence in much of the market there. Yet another quarter of rising prices is to be expected in a market characterised by strong demand but very weak supply of new homes.

Scratch a little bit beneath the surface and there are hints that the picture is slowly changing. Compared to a year ago, prices are just 5.6pc higher. Granted, this is well ahead of inflation, which is – give or take – zero. But 5.6pc is the lowest rate of inflation we’ve seen nationally in over four years, since the first quarter of 2014. And that was when inflation was on the way up, not the way down. The quarter before this, late 2013, annual inflation was 0.3pc and three months later it was 9.8pc.

The last time we saw a similar set of circumstances – inflation close to 5pc and falling – was actually over a decade ago, in the middle of 2007.

We know what happened next then. By the end of 2007, prices were falling and fell dramatically over the coming five years. This was due to a credit bubble collapsing, with both real and financial economic shocks hitting the housing market – including higher unemployment and higher deposits required by banks.

This time around, almost no one expects anything similar to the 55pc fall in prices we saw then. This is because Central Bank rules have dramatically reduced the potential impact of the most volatile parts of the house price equation. These are the so-called “asset factors”: expected capital gains and loose lending standards.

So what might be causing this slow-down in inflation? And can we expect it to continue? With asset factors no longer able to drive house prices changes, this means that the forces pushing prices up or down become more ordinary: supply and demand.

And the picture that is emerging – in the sales segment at least; no such trend has yet emerged in the rental segment – is that supply is slowly but surely coming on stream. The total stock available for sale in Dublin in June was just shy of 4,800. Together with the same time of year in 2015, this is the highest availability has been since prices bottomed out.

Outside Dublin, the shoots are even greener. The total number of homes available to buy on the market, excluding Dublin, reached a low of 16,800 in March this year – down from a high of almost 57,000 in mid-2009. There has been a jump in availability in the last three months, 16,800 to 18,800. But it is too early to tell if that is just seasonal or the start of a trend.

For Dublin, though, the increase in availability matches the increase in construction activity. Newly available – and accurate – housing completion figures show that 15,200 homes were finished in the 12 months to March. This is more than three times the number of homes completed during 2014.

While this is still well below the 40,000 or so new homes the country needs, that total includes all types of homes, including social and rental. The private sales market is inching closer to producing the number of new homes it needs each year, though, and this is likely to be seen in more moderate price increases in the coming years.

While one-offs still make up almost one-third of new homes, the majority of new homes built currently are in housing estates. Some 56pc of new homes now fall into this category – with just 15pc of new homes coming in apartments.

There are three big-picture trends that are expected to define housing demand in Ireland over the course of the 21st Century: growth in the population, especially over the age of 50; urbanisation; and falling household size. All these three point inevitably to a huge need for urban apartments, not houses.

So, the challenge for the country is that almost all the net new housing need over coming decades will be in the form of urban apartments.

But the vast majority of what is being built is not apartments. There is nothing wrong with scheme houses as an interim solution, while the policy system figures out how to fix apartment-building – as long as policymakers know that this is what is happening.


Versions of this post were published in the Sunday Independent and in the 2018Q2 House Price Report.

On balanced regional development: Why Leitrim should root for Dublin

The latest House Price Report is out today and, for most readers, its headline findings will be unsurprising. Prices rose in the first quarter of the year – compared to either the previous quarter or the same time last year – in almost all of the 54 markets covered by the report.

Closely related to this, the availability of property – especially outside the cities – continues to dwindle. While the number of homes on the market in Dublin is actually up, year-on-year, from roughly 2,700 to about 3,500, elsewhere it continues to fall.

Outside Dublin, there are just 16,800 homes on the market – the lowest ever recorded, since started recording the total number of properties on the market, back in January 2007.

The overall pattern is clear: given there is strong demand for housing countrywide, the lack of supply – especially of newly built homes – is driving prices up. But not everywhere is experiencing the same growth in housing demand.

Dublin is seeing increasing stock on the market – especially as the new homes segment shows on-going signs of recovery. But nonetheless, the increase in prices there in the last year, 8.4%, was greater than elsewhere in the country (6.5%).

This is each area of the country is really its own local market, with factors – such as proximity to jobs or to amenities like schools or transport – that determine whether demand is stronger or weaker than the national average.

The Report breaks down the country into almost 400 “micro-markets”. 117 of those are in Dublin, with a further 39 in the other four cities and the remaining 233 spread across the country – 89 in Leinster, 76 in Munster and 68 in Connacht-Ulster.

For each of these micro-markets, it is possible to trace the path of the average sale price of housing. These averages are independent of changes in the mix of properties listed for sale, so differences over time are not being driven by more four beds or fewer apartments on the market.

The figure accompanying this piece shows the twenty hottest and twenty coolest markets in the country, as measured by how much prices have increased in the last year. At the hottest end of the market, there is a real mix of areas. Some are in Dublin – in particular around Dublin 8, where the South Circular Road, Portobello, Rialto and Harold’s Cross are all seeing very strong increases.

Smithfield and Cabra, close to the new Luas, Rathgar and Loughlinstown are also among the areas seeing the biggest increases – but there are plenty of areas outside Dublin where prices are rising rapidly.

These include rural Westmeath, Mountbellew and Gort in Galway, and North Kerry, as well as Watergrasshill and Mitchelstown in Cork.

Switching to the coolest market, there are a number of areas where average list prices now are below those a year ago. While this may seem odd, given the strength of demand, when breaking up the country where prices are increasing by 7% a year into almost 400 markets, it is to be expected that there will be some with prices falling.

Some of the falls represent a market taking a step back, after very strong increases a year ago that – it seems from trends this year – were not sustainable. This includes the Beare Peninsula, Sligo’s suburbs, and Tara, in Meath, where prices a year ago were increasing at rates above 20% a year.

This alone should suggest some caution against assuming that the areas now seeing very fast growth will keep all that price growth in the quarters to come.

Nonetheless, like Dublin 8 in the hot markets, there are clear patterns among the cold markets. Six of the 20 coldest markets are in Donegal and a further four are near the border, including North-East Louth and Cootehill.

If this border turned hard with Brexit in the near future, these would be the areas most affected by being cut off from obvious trading partners down the road.

Of the other colder markets, one thing jumps out: distance from jobs. While the part of Tipperary closest to Limerick city is seeing prices grow strongly, there are parts of the same county further south where prices are falling back. Similarly, areas like Foxford or South Leitrim do not have good connections to major urban centres.

Irish politicians would like to be able to overturn the laws of economics and get lots of well-paying jobs in Ireland’s smaller towns. But clustering is everything in the modern economy. The best hope of bringing about a population increase in such locations is to make their closest cities bigger and closer.

But how can you move Leitrim closer to a city? Transport infrastructure is the only way that this can be done. House prices in Laois have risen much more than in Offaly in recent years, as it benefited from better motorway access than its neighbour.

Motorway-led development, though, brings sprawl, with personal and environmental costs that may be too high to make it worthwhile.

For that reason, it may be best to allow Ireland’s cities to continue to be successful. Bigger cities can sustain larger hinterlands around them. So it is in the interests of Leitrim and Tipperary to see Galway, Cork and Dublin continue to grab huge shares of the global FDI jobs on offer.


What the snow tells us about how we live

The week just gone has given Ireland its biggest snowfall over 35 years. The snow affected Ireland’s cities and towns as well as its fields and mountains and areas that have perhaps become a little bit inured to hearing about yellow and orange warnings got a reminder that we need to take our experts seriously.

This year, the Government is launching its “Ireland 2040” strategy. This comprises two elements. The first is a planning framework out to 2040, setting out the contours of population growth over the next two decades. The second is an investment plan for the next few years, in particular around transportation infrastructure.

Does the snowstorm and how it affected daily life here tell our policymakers something important for those plans? This can be thought about in terms of both causes and effects. There will perhaps be some discussion in the aftermath about the causes of events like this.

Expect a row about whether events like this will become more common due to climate change, for example. One thing that is certainly relevant, however, is that the Gulf Stream is our protector. Ireland lies between 52 and 55 degrees north of the equator, in line with parts of Alaska and Siberia.

To our east, the city of Omsk in Central Russia, which is 55 degrees north, has 144 snowy days a year. Vancouver, on the west coast of Canada and only 49 degrees north, gets roughly 40cm of snow a year. Dublin, on the other hand, has only a handful of snow days a year on average.

Ireland is a something of a weather freak. But this all depends on warm air blowing from the southeast. If that were to change, whether because of human activity or some other reason, we would need to be able to deal with more extreme weather – in particular colder winters – a lot more.

But the effects of the “Big Snow of 2018” are also relevant. As we take stock of the disruption caused by the snow, an obvious theme emerges. Where people have clustered together, the disruption was far less. Even on Friday morning, at the height of the snowstorm, life in Dublin went on despite the huge snow fall.

In the centre of the city, coffee shops served people on their way to work. The regular traffic – mostly pedestrian but some vehicular – meant that the main thoroughfares were navigable, if very snowy. An hour outside the city, however, and life had come to a complete standstill.

During the night, numerous vehicles got stuck on the country’s main roads. This includes ambulances, with one seeing a baby born on the side of the road near Kilkenny.

In other words, the snow caused the most disruption where we have set up our lives in a way that makes us dependent on travel. The implications for housing are obvious.

As Ed Glaeser, the world’s leading urban economist, has written, the research on density is clear. Cities make us not only richer – we can find jobs that match our skills better – they also make us happier and healthier. Services – including healthcare and education but also experiences like restaurants and sports event – are cheaper.

As a country, we have been living something of a lie the last thirty years. We have tried to convince ourselves we can have all the benefits of a modern – city-based – economy with actually have the density that cities require. We have spread out, rather than moved closer.

And this is getting worse, not better. The number of people commuting more than an hour each way grew by a third between 2011 and 2016 alone. A quarter of the working population of Leinster outside of Dublin now commutes to Dublin every day. And the picture is similar in Cork and Galway.

The lie we have been living as a country is that we can live where our parents did but enjoy a standard of living like we see on TV. One-off housing should not be banned – but the full cost of connecting the various utilities and services should be paid by those in one-off housing. Otherwise, we are punishing those who choose to live in the cities.

By 2040, based on our what our peers have done, Ireland will probably be a country that is 75% or perhaps 80% urban. This week’s snow confirms just how important it is for policy to facilitate that. Sprawl is certainly an option – but a very costly one.


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

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.


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 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.


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

Is David McWilliams right – are we in another housing bubble?

The current state of Ireland’s housing system is well known: plagued by a chronic and growing shortage, especially in Dublin, both sale and rental prices increase quarter on quarter. Since the third quarter of 2012, sale prices in the capital have increased in all but three quarters. In the rental market, they have increased in every single quarter.

The fact that both sale and rental prices have now been rising longer than they were falling has led some to argue that we are in another housing bubble. Among the most prominent of those arguing another bubble is coming is David McWilliams.

On the face of it, one would have to be brave to bet against him. David argued a housing bubble was coming down the tracks as early as the late 1990s. Some write this off as “a stopped clock is right twice a day”. However, watching on YouTube his debate with Austin Hughes in October 2003, it is not the prediction of a crash that is arresting, rather how eerily accurate the mechanisms and fallout.

A couple of weeks ago, David argued that he believes there is another bubble building ‘very rapidly’ and that a crash will happen in ‘the coming years’. Outlining his case, he made two main points. The first is that you don’t need credit to have a housing bubble. The second concerns the price of a home relative to incomes. David, and others, believe that is simply not sustainable for three-bed semis in Dublin to cost €450,000 when an average wage is one tenth of this.

There are two minor quibbles with this latter point. The first is that almost nobody buys a property on their own anymore. The average new mortgage has gone from having 1.3 incomes in the 1990s to 1.7 incomes now. So the proper income in David’s example would be the average household income of roughly €75,000, not a single earner.

Also, while appealing, the average property price is not the correct one to use in this case. First-time buyers don’t buy the average property. They typically buy newly built homes at the edge of the city, in other words far cheaper than the overall average. So instead of €450,000 to €45,000, the real comparison is probably more likely €325,000 to €75,000.

Still, that means that the house price is 4.3 times income, well above the typical level regarded as affordable, which is three times income. But t is important to distinguish between what is healthy and what is sustainable. It is not healthy to have high housing prices in major cities, compared to people’s incomes. But cities around the world have been living with this for close to fifty years in some cases.

In Ireland, the ‘Dublin premium’ is just 30 years old. Up until that point, the average price of a home in the capital was the same as the rest of the country. It probably had a bedroom less and a much smaller garden but the price was effectively the same.

But this point works both ways. This is a phenomenon that has been building up for 30 years. It stems from restrictions on land use – the hidden costs of planning and zoning – that prevent housing supply from meeting housing demand. Other cities have had similar supply shortages for 50 years, so it is not obvious to me that expensive housing per se is enough to cause a collapse.

David’s other point is that you don’t need credit for a housing bubble. This is presumably to pre-empt someone like me arguing that the new Central Bank mortgage rules effectively rule out the type of lending that cause the 2000s bubble and subsequent crash.

The godfather of studying bubbles, Charles Kindleberger, argued that a rush of capital (i.e. money) was a necessary ingredient for any bubble. Capital comes in two forms: credit or equity, in other words borrowing to buy or using up savings to buy.

There are plenty of examples of bubbles where people have cashed in their savings to buy at unsustainable prices. It is argued that the dot-com bubble is the best recent example of this. What makes David’s argument trickier to carry over to housing is that real estate is typically very highly leverage in the first place; in other words, there’s lots of debt associated with property.

A savings-fuelled housing bubble is a much rarer phenomenon. Nonetheless, Australia, New Zealand and Canada have found themselves worrying about this problem as their housing markets bear the brunt of Chinese savers’ desire for external assets. But it’s not just about ownership. The key thing about a bubble is the ratio of sale to rental prices.

In markets like Auckland, Sydney and Vancouver, foreign purchasers of property left their dwellings empty, effectively taking them out of the market. But if something should trigger a departure for these buyers, a flood of new homes would come on to the market.

Earlier, I mentioned that both sale and rental prices have been increasing. Indeed, since 2012, rental prices have actually increased by more, in percentage terms, than sale prices. Rental prices are up three quarters in Dublin and by half outside Dublin from their lowest point. Sale prices are up by 60% in the capital and 47% elsewhere.

The single best barometer of a housing bubble remains the ratio of sale to rental prices in housing. It is generally thought of as safe to pay 20-25 times the annual rent to buy a home. This is the same a home giving you a return of 4% to 5% a year. Those buying four-bedroom homes in West Dublin currently are spending 23 times the rent on average, right in the safe zone.

In the Celtic Tiger bubble, people were prepared to pay 40-50 times and in some cases up to 100 times the annual rent. That key difference tells me that we should not be fighting the last war, when it comes to housing. We have a shortage of housing and that gets tackled one way only: more homes.


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

A simple Budget can be a good Budget

This was Budget week, the week where fiscal nerds take the day off, stay at home in their pyjamas and shout at the politicians and pundits on TV. I suspect that this kind of person may have been somewhat disappointed by Tuesday’s affair, though.

I’d like to think my interest in Budget Day is a more work than pleasure. In particular, as an economist, a simple Budget can be a good Budget. This is for two reasons. First, ‘Santa Claus’ budgets are an anomaly, not the norm, elsewhere. Good fiscal policy is made by having on-going debates around the best decisions in relation to what is taxed and what is spent.

Secondly, politicians should not always use all fiscal space available to them. The standard rule for fiscal policy is that it should be counter-cyclical: when times are bad, spend more to stimulate the economy. And when times are good, step back.

The last few years have seen Ireland grow faster than any of its European neighbours. Employment has risen so fast that unemployment has fallen by ten percentage points in five years, an astonishing improvement.

And, before all this, Ireland had ‘enjoyed’ massive fiscal stimulus during the Crash when its peers, through the Troika, allowed it to borrow very large deficits, rather than have to balance the books. Looking at this year’s Budget, one might ask the question: if we don’t run a surplus now, when is Ireland ever going to run a surplus again?

But those decisions are of course made at a pay grade higher than mine. Focusing specifically on housing, the construction industry certainly got one of its wishes: this was by and large a simple budget with few substantive changes.

In particular, fears on the part of house-builders that Help-to-Buy would be scrapped did not materialise. My own prediction that it would be tweaked, just so that policymakers could say that had reviewed and ‘fixed’ the scheme was also wide of the mark.

There were a couple of missed tricks, however. In particular, build-to-rent is still treated anomalously for VAT: if you build but never sell something, why should you pay VAT on it? If this had been changed, viability of urban rental apartments would have improved significantly – and this is where the shortage of housing is most acute.

But by far the biggest headline from the Budget, when it came to property, was the change in commercial stamp duty. Commercial real estate transactions are now subject to a 6% stamp duty rate, compared to a 2% rate before the Budget.

Bizarrely, the Minister justified this decision by saying it had been even higher in the mid-2000s. I would have hoped that we can all agree with hindsight that fiscally policy in the second half of the Celtic Tiger was extraordinarily reckless.

It is a relatively fundamental rule of fiscal policy, for example, that you don’t make permanent spending commitments – such as ‘benchmarked’ public sector pay increases – on the back of temporary revenue sources. And taxing transactions, aka stamp duty, is the ultimate temporary revenue source.

I have no doubt that there is every chance this will look a smart move in 12 or 24 months. The Budget also tweaked the Capital Gains Tax exemption, which meant that someone who bought certain forms of commercial property (including sites) between 2011 and 2014 could pay no CGT as long as they held it for at least seven years. That has been cut to four years.

This means that those who bought in 2012 or 2013 expecting to have to hold until 2019 or 2020 can now get out. With Brexit increasingly looking like an economic car-crash, foreign investors may well be tempted to realise existing gains rather than hope for more. A 6% stamp duty rate may look small if your site has trebled in value since 2012.

But this is finite stock of revenues. Commercial stamp duty returns are likely to increase dramatically – probably more than three-fold – next year and the year after. But we should not expect that to continue, in the same way that we should not have expected the €10bn or so in revenues associated with a housing bubble to continue ad infinitum,

Policymakers should look to tax stocks, not transactions. This means reforming commercial rates, not hiking stamp duty. In particular, there are anomalies with the rates system that exclude public bodies and encourage vacancy. Replacing rates – and commercial stamp duty and developer contributions – with a land value tax on all forms of land, other than private homes and farms, would generate more revenues but without the dangers.


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

When does a housing bubble start?

Yesterday, former Minister for Finance Charlie McCreevy appeared before the Oireachtas banking enquiry. His refusal to answer whether or not he believed Ireland suffered a property bubble that burst in 2007 was not only great TV, it also brings up some important issues. For example, the Irish Independent reports:

The conflict arose when Mr Doherty asked the former minister if he believed there had been a property bubble in the previous 15 years before the financial crisis. Mr McCreevy insisted he would only answer for his time in office and there had been no property bubble during that time… [after legal advice] Mr McCreevy said from 2003 to 2007 house prices grew at an extraordinary rate. He supposed that was a bubble. But he said: “I don’t believe the policies I pursued helped to create that bubble.”

The clear implication is that Mr McCreevy believes that, if there was any housing bubble at all, its roots do not lie in decisions made in the period 1997-2004, and that in reality there was no bubble at all. Given the title of my doctorate at Oxford was called “The Economics of Ireland’s Housing Market Bubble”, you might not be surprised to learn that I disagree.

First, I think it is important to note that there are two ways of diagnosing bubbles. They can be thought of as statistical bubbles and economic bubbles. A statistical bubble is one where the growth rate in the price of an asset, such as housing, grows at a rate that is unsustainable for any reasonable period of time. Between 1995 and 2007, house prices in Dublin increased by 300% in real terms (i.e. stripping out inflation), or 12.2% a year. Between 1997 and 2004, McCreevy’s term in office, the increase was 136%, or 13.1% a year. (Nationwide figures are comparable, although slightly lower for the period as a whole, although not necessarily in every year.) Thus, by any statisticians metric, it was a bubble – put another way, if 12% growth had continued for 25 years, a house costing €100,000 in 1995 would have cost €1.7m by 2020.

Economists like to get at causes, though, and a 10% increase due to – for example – a lack of supply has very different implications for what policymakers should do than a 10% increase due solely to first-time buyers needing a smaller deposit and thus being lent more. To economists, a bubble in asset prices is not just any old increase in prices, it’s an increase in prices due to excess capital/money. In the housing market, this means too much mortgage credit. Of course, to sustain people borrowing and lending too much, you need expectations. So the two ingredients for an economic bubble are over-optimistic expectations and excessive credit.

The graph below is, in effect, the one-chart summary of one of my D.Phil. chapters: what drove real house prices in Ireland during different market cycles (measured in changes per annum). Falling income (measure here relative to supply), pushed down house prices in the 1980s, together with higher real interest rates (a term that includes house price expectations). This reversed somewhat during the period 1987-1995, which income, as well as demographics (fewer people per household) pushing up prices by nearly 5% a year. Note, however, that credit conditions – measured by the ratio of mortgage credit to deposits – were not pushing up house prices as this time.

Irish annual house price growth, by driving factor, 1975-2012

The period 1995-2001 saw very strong house price growth, driven by a combination of tailwinds, including incomes growing proportionately faster than housing supply. By the time these supply constraints were removed – through the follow-up to the Bacon reports and other measures – borrowers and lenders now expected rapid house price growth. These unrealistic expectations were facilitated by rapidly easing credit conditions. Crucially, almost all house price growth from 2001 to 2007 was driven by a relaxing of credit conditions.

What this means for Mr McCreevy is that it is simply not credible for him say that there was no housing bubble on his watch. Bubbles, driven by asset factors in particular expectations and credit, grow out of booms, when demand outstrips supply. The 1995-2001 boom created the 2001-2007 bubble. A Minister for Finance in 2004 could have tried to burst the bubble, but not prevent it. To do that, the Central Bank mortgage rules would have had to have come in not in the mid-2010s but in the late 1990s.

A post-script. Mr McCreevy has come to be known as a man who strongly believes in pro-cyclical fiscal policy. As he clarified yesterday, as Minister, he believed “When you have it, you spend it.” Exhibit B below is a graph I show my first-year Economics students. It is the average all-in tax rate paid by a household on an average income, by country and year from 2000 to 2007 (source: OECD). At a time when the Irish economy was growing more rapidly  than ever before, the state took a declining share of these higher incomes. I think a strong case can be made that much of the austerity undertaken by Ireland in the period since 2007 would not have been necessary if tax rates had been in line with other developed countries and that Ireland sorely missed a Minister for Finance able to spot that Irish fiscal policy was increasingly unsustainable and take the steps necessary to correct the path.

Average all-in tax rates, by country and year


Construction, not rent control, the solution to the housing crisis

Today sees the publication of the latest Rental Report. The full report is available here, while below are my thoughts on what the latest report tells us.

Most analysis of the housing market – both sales and rental – is currently done through the lens of the last housing bubble and where it was when it burst in 2007. However, that is a point of view that is increasingly out of date. In the rental market, for example, rents bottomed out in Dublin and Cork cities in late 2010 and had actually bottomed out a year earlier in Galway city. Ireland’s urban centres are four years into a new housing market cycle – and yet there is still very little evidence that anything is being done about what is now a chronic shortage of accommodation in Irish cities.

With local and European elections just a couple of weeks away, a number of candidates – particularly in the Dublin constituency – have been talking about rent control as a necessary remedy for the ills of rising rents. However, while the desire to simply make illegal what you don’t like is understandable, it mistakes the symptom for the underlying disease.

On the one hand, tenants already have reasonable security of tenure. Since the Residential Tenancies Act 2004, once a 6-month probationary period has been passed, tenants have security of tenure in four-year cycles, something that is known as a “Part 4 Tenancy”. (To ensure this is the case, tenants who have signed one-year leases need to notify their landlord about their intention to stay – more here.) There are a certain number of conditions under which a landlord can terminate a tenancy, but getting higher-paying tenants is not one of these.

On the other hand, rising rents are caused by a lack of accommodation in urban centres and reducing rents will discourage the provision of new accommodation, thereby making the problem worse. What we have seen in both sales and rental markets is reasonably robust demand for accommodation in Dublin and other cities, which has pushed up both rents and prices. These should be acting as a signal to bring about new supply – so why has significant new building not started in Ireland’s cities?

Whether construction of new homes takes place depends on whether revenues exceed costs. Revenues come from rents and house prices, which both appear to be at the cusp of affordability given incomes in Ireland. Therefore, if rents and prices are high enough, the solution is about reducing costs in construction – not about capping rents and thus further discouraging the very construction that would alleviate the accommodation crisis.

The cost base in construction includes capital, labour, land and regulation, as well as materials, whose prices are typically set on world markets. What is needed now is for the Government to go through each element in the cost base and develop actions to lower costs. It may surprise some readers to learn that the cost of building a house is 3.3% higher now than in 2007.

Labour costs in construction fell once, in March 2011, when hourly rates were reduced by 7.5%. But in an economy where the average disposable income fell by 25% between 2006 and 2012, and where there are significant numbers of long-term unemployed construction workers, is that enough? More importantly, the minimum hourly rate for a basic operative in Ireland at €13.77 remains a quarter higher than in West Germany (€11.05, a figure which will rise to €11.30 by 2017). Department of Environment figures indicate that for every €1 of materials, €2 is paid in wages, so the wage rate in construction has a real effect on levels of construction.

Just as important is the cost and supply of land. If people are allowed to hoard land or sit on derelict or vacant sites, this imposes a cost on the rest of society. Dublin City Council’s proposed levy on derelict and vacant sites may help encourage unused land to be used, but it can do nothing to encourage land to be used better and its biggest effect may be just a clamour to have some activity – any activity – on these sites to avoid tax.

Related to this, various levels of government currently deploy a bewildering array of planning and building regulations and charges, each of which increases the cost of building. While standards of quality should not be sacrificed for political expediency, many of the regulations – such as minimum sizes – appear to very little connection to quality and instead look like the preferences of planners and policymakers trumping those of households.

How the system currently treats land and planning regulations needs, at the very least, to be streamlined. Overhauling a dated and complicated system of stamp duties, development levies, commercial and industrial rates and amenity contributions, not to mention the Local Property Tax, with a single unified Site Value Tax is clearly the best solution to join up the very disjointed Government system that underpins Ireland’s construction sector.

The Government’s new strategy for the construction sector will be published shortly. No dobut the headline measures will relate to capital, with a fund for construction projects or targets for the pillar banks featuring prominently. But capital is only one part of the puzzle. Labour, land and regulation are just as important. It is to be hoped that the new strategy will contain specific measures to lower the cost of both labour and land, as well as streamline the Byzantine system of planning and building regulations. Only a holistic approach will be good enough if Ireland’s latest housing crisis is to be stopped.

Slow and steady: Ireland’s competitiveness, five years on

One of the mantras of Celtic Tiger Ireland was that it was a rip-off Republic. And indeed, by 2006, Ireland had overtaken Finland to become the most expensive place in the eurozone for consumer goods.

Mid-2008 marked a turning point, however, and the combination of global economic turmoil and local economic depression meant that prices fell for over 18 months from until early 2010. Regaining competitiveness with our currency peers does not necessarily involve deflation, however. It can instead be brought about by more moderate inflation in Ireland than in other parts of the eurozone.

And since 2010, that is what has been happening. The first graph below shows consumer price levels (as measured by HICP, which is designed to be comparable across EU member states) in four economic groupings. In addition to the eurozone core and Ireland, also shown are the PIGS countries (the “I” here refers to Italy) and the new EU member states (largely outside the Euro for the period shown).

Consumer prices in selected EU regions, 1999-2012

In the first period, from 1999 to early 2004, Ireland acted like a new EU member state. Consumer prices increased by 22% in that period in Ireland, compared to 20% on average in the new EU states, 14% in the PIGS and 9% in the eurozone core. The second period, from early 2004 to mid-2008, Ireland actually saw more moderate growth in prices: 14%, in line with other PIGS (15%), below the new EU states (21%) but above the core (11%).

In the 50-odd months since August 2008, Ireland has been unique. Prices in Ireland have actually fallen by 1% in that period, while they have risen by almost 10% in both the PIGS and the new EU member states. In the Eurozone core, they have risen by 6% in the same period.

A direct comparison of Ireland and the eurozone core shows this competitive readjustment more clearly. The second graph below shows prices in Ireland relative to the eurozone core (=100) from 1999 on. Ireland’s price competitiveness worsened by 12 percentage points in that early period (up to 2003) and by another four percentage points (roughly) between then and 2008. In other words, it was the early years of the eurozone when the damage was done to Ireland’s cost competitiveness.

Prices in Ireland relative to Eurozone core (1999:1=100)

Of that 16-percentage point worsening in Ireland’s competitiveness, roughly half has since been eroded away. Compared to 1999, Ireland’s price levels have risen by 8 percentage points more than the Eurozone core. (This hides differences by particular categories of goods and services – a subtlety that matters a lot!)

In truth, that 8% figure probably overstates things slightly, as HICP excludes accommodation costs, which are the single biggest component of consumer expenditure.  Both rents and house prices in Ireland at currently at levels comparable to 2000, which is unlikely to be the case in any other European economy. Perhaps the only other candidate for such stable figures is Germany, but its property market has heated up the last two years, meaning costs are a good bit above 1999 levels.

In short, it has not been fun – as inflation is associated with expansion and deflation with contraction – but Ireland has put in five hard years of competitive readjustment. With prices on hold, so are wages, which boosts Ireland’s attractiveness for FDI. The sting in the tail is that with inflation throughout the eurozone so low, any further competitive gains are going to be even tougher and slower.