Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Property Market

Is there any hope for Rent Pressure Zones?

The figures from the latest Rental Report earlier this week confirm the growing divide between the fortunes of the country’s sale and rental markets. In the sale market, new construction is starting to bear fruit. The additional supply, together with Central Bank rules that link sale prices to the real economy, is leading to a slowdown in inflation in the sale segment.

In the rental market, no such relief is being seen. Availability on the market is tighter now than at any point over the past decade. While availability is up slightly in Dublin compared to a year ago, both levels are well below anything like normality.

The evidence of the past decade suggests that Dublin needs at least 4,000 rental homes on the market for there to be enough choice among tenants that rents are pushed up. Currently in the capital, there are fewer than 1,500 homes to rent. This is a situation mirrored in other cities and indeed now countrywide.

In fact, that figure – 1,500 available when the city needs 4,000 – almost certainly understates the problem. The reason is that the rental sector now is so much more important than in the 2000s. In the 2016 Census, there were twice as many households in the private rental sector as in 2006 in Dublin – with even more growth in renting elsewhere in the country.

So, while 4,000 homes on the rental market may have been enough when Dublin was home to 60,000 renting households, that is unlikely to be enough when the city has 120,000 renting households.

The same holds true for the rest of the country – especially the four other major cities. Across Cork, Galway, Limerick and Galway cities combined, there were fewer than 250 rental properties on the market on November 1st. For urban areas with a combined population of almost half a million people, that is an astonishingly small number.

A shortage of rental homes did not emerge overnight. It was clear that this was an emerging issue as early as late 2009 in Dublin. Yet for a long time, policymakers did nothing as their primary focus when considering housing was on legacy problems of excess – such as ghost estates, negative equity and mortgage arrears – rather than on forward-looking problems of scarcity.

When a response came, it came not in the form of boosting rental supply, rather in the form of controlling rental prices. It may be tempting to think of Rent Pressure Zones as the rental segment’s equivalent of Central Bank rules on mortgages. However, the Central Bank rules are there to ensure that sale prices remain linked to fundamentals, rather than driven by credit or expectations.

In contrast, Rent Pressure Zone rules are an attempt to hide fundamentals. Remember, increasing prices are just a signal that there is more demand than supply. In a healthy market, that signal draws out new supply, driving prices back down.

But the nearly doubling of rents in Dublin has had almost no effect in drawing out new rental supply. The implication for policymakers should be obvious: tackle the underlying causes, not the symptoms.

Does that mean that Rent Pressure Zones should be scrapped? Many economies have perfectly healthy rental sectors and also have controls on rental inflation. Ireland could be one of those. However, rent inflation controls are, typically, the final element in those healthy housing systems, not the foundation.

In rental systems with an adequate supply of all the kinds of homes a diverse society needs, rent inflation controls act as a check on bargaining power within a lease. They are not a substitute for a prospective tenant’s lack of bargaining power in trying to find a lease.

I am ambivalent about whether Rent Pressure Zones should stay or go. Given inflation for new leases has been higher in the two years since they’ve come in than in the previous two years, it doesn’t seem like there’s much to keep.

But one key element could at least help rebalance the scales a little in a renter’s favour. That is the publication of a Rent Register, the counterpart to the Property Price Register. The PPR can never overturn the dynamic in the market – but it does give a prospective buyer peace of mind.

A Rent Register could do the same – with or without Rent Pressure Zones. No doubt there will be those who argue that this is violation of people’s privacy. That was argued before the PPR was published.

But ultimately, we live in a society where we share certain things for the greater good. While the rental sector waits for policymakers to fix rental supply, knowing what renters pay belongs in that category.

Light at the end of the tunnel

As the year has progressed, the story of the property market has evolved. This time last year, the easiest way to summarize the Irish housing market – across sale and rental segments, in Dublin and elsewhere – was one of chronic shortages pushing of prices across the board.

With 2019 drawing near, though, the story is evolving. It remains far from a healthy market – but the uniform description of the market no longer seems to apply. In particular, the sales market is starting to show some signs of normality.

Given it’s so long since we had anything resembling normality, perhaps it is no harm to set out what that might look like. In a healthy housing system, new housing supply comes on stream to meet new demand. That should hold true for all types and tenures of housing: owner-occupied, market rental and social housing.

It is also a point that needs to hold in times of growth, not times of decline. Suppose housing demand goes down – for example due to unemployment or emigration. Then, because the existing stock of housing is fixed, all society needs to do is sit tight, build less and wait for things to come back into balance while enjoying cheaper housing.

There is no such opportunity in times of growth. Every year of under-provision of new housing means that it becomes more and more expensive relative to everything else in the economy. Over the past five years, there has been effectively no increase in general prices – but rents have almost doubled in Dublin while the increase in sale prices has been almost as large.

The parallel paths of sale and rental markets, though, appears to be at an end. Annual inflation in the sales market was below 6% in the middle of the year, down from 12% a year previously and below the inflation figures for 2014, 2015 and 2016 to boot.

Meanwhile, in the rental segment, rental inflation if anything is getting worse. As of mid-year, rental inflation nationwide stood at 12.4%, up slightly from 11.8% in 2017 and also above figures for 2013-2016, which range from 6% to 11%.

The answer to why sale and rental segments are diverging lies in supply. Whereas the volume of sale listings has improved significantly over the past 18 months, no such improvement has occurred in the rental market.

In the first half of 2018, there were on average fewer than 1,400 properties available to rent at any one time in Dublin. That’s 100 fewer than in the same period in 2017 and one-fifth of the level of availability seen in 2009. My estimate is that Dublin needs at least 5,000 properties put up to rent every month and it is currently well below half that.

For the sale segment, however, steadily increasing numbers of properties are available to buy. In mid-2018, there were almost 5,000 properties for sale in Dublin – up almost 50% in just 12 months. The improvement in availability in Dublin is starting to spread, with increased stock on the market in Leinster (outside Dublin) and most recently in the other major cities.

These differences in availability reflect differences in construction. Over 7,200 estate houses were completed in the Greater Dublin Area, Cork and Galway in the year to mid-2018. This is 2,500 more than were completed in the preceding year, or over 200 extra new houses each month.

In a market that is currently processing perhaps 4,500 transactions every month, an extra 200 estate houses – while hardly game-changing – is certainly not insignificant. Contrast this with the construction of new apartments, where just 2,000 were completed in the same period, up less than 700.

An extra 50 rental properties per month – and even then that is assuming that apartments are being built for rent, not sale – is simply far too small to make even a small dent in the supply-demand imbalance in Ireland’s rental sector currently.

We can see somewhat into the future by looking at planning permissions. Based on what’s happened over the past few years, planning permissions for estate houses typically take six quarters to convert into homes that are completed. For apartments, the lag appears to be longer – more like ten quarters – but also weaker, especially as apartments are an ‘all or nothing’ completion. (No apartment is ready until they all are.)

Those lags mean that we can look at planning permissions registered this year and have some reasonable expectation of completions in 2019 and even into 2020 for apartments. We are likely to see over 13,000 estate houses completed next year – up from 10,000 this year. That increase will further cool off the sales market, by bringing into balance supply and demand.

However, the picture remains bleak for the rental segment. We are likely to see just 4,200 apartments built next year. While that’s an increase on 3,000 this year, it is important to note that many new apartment complexes are aimed at downsizers in affluent areas.

While all supply is welcome – tempting wealthy empty-nesters out of larger dwellings will free them up for families – the signals from the housing market are that the split between a steadily improving sales segment and a rental segment bereft of supply will persist over coming years.

How we spend, not what we spend, is key

This year’s Budget is something of a Rorschach test: asking people what they think of it will tell you more about them than it does about the Budget itself. The government itself tried to portray the Budget as a pre-Brexit exercise in caution. As Conall MacCoille pointed out, though, any budget where government expenditure grows year-on-year by 6% can hardly be described as cautious.

When it comes to housing, it struck me that a lot of the anger – where there was anger – related to mortgage interest relief for residential landlords being extended to 100%. The optics of this, of course, are not good. But in essence, this is part of a much-needed professionalisation of Ireland’s rental sector.

If you run any other business venture in Ireland, any costs you incur – including costs of capital borrowed – are not counted when the government calculates your income. If your business happened to be renting out residential property, however, that was not the case.

There is no good reason to handicap the rental sector – and by extension, Ireland’s renters – by discouraging professional business through discriminatory measures.

What makes it a bit messier, of course, is that these investors overlap, at least to some extent, with owner-occupier buyers. Thus, any move that affects one group affects the other. But, as it happens, owner-occupiers are already incredibly favoured by the tax system – and remain so despite the latest changes.

If you are an owner-occupier, you do not pay any income tax, for example, on the property you rent out to yourself. This may sound outlandish but there are numerous countries where such imputed income is taxed.

To see why, consider a situation where Mr Murphy and Ms Kelly live in next door to each other. In one version of the world, they own the homes they live in and do not pay any income tax. In another version, they live in the home that the other person owns.

Society should be completely indifferent to these almost identical situations but instead, in this second version, both Mr Murphy and Ms Kelly would be liable for income tax – and indeed for capital gains tax when they finally sell. (Owner occupiers are exempt from CGT too.)

The ideal system for housing would be where all mortgage debt is eligible for tax relief – just as it would be for any other business – but where all income from property, including imputed income enjoyed by owner occupiers, is eligible for income tax.

Viewed from that perspective, the relatively small change to mortgage interest relief is not at all the key Budget measure on housing.

Indeed, I would argue that to judge the Budget on housing, we need to start by looking at health. Gerard Brady, economist at IBEC, outlined during the week the extraordinary increase in public funding of healthcare in recent years.

In 2015, it was planned that the Government would spend €12.7bn on healthcare. The actual figure turned out to be €13.3bn and the 2016 plans were based on growing that higher number. The same pattern has played out each year since and the 2019 healthcare budget is an eye-watering €17bn.

That’s a €4.3bn increase – an increase of one third – at a time of zero inflation. Roughly half that increase has been entirely unbudgeted and the response of policymakers was to reward those overruns, not punish them, with even more public monies in subsequent years.

Language is not our friend here: using the word billion hides the magnitude of this. €4,300 million is probably a better way. That’s almost €1,000 extra for every man, woman and child in the country for a health system that few would describe as one third better now than in 2015.

Perhaps we’re just catching up with our peers? Far from it. Since 1999, despite having one of Europe’s youngest populations, we spend more per capita on healthcare than the OECD average. We spend almost €3,600 per person on healthcare. The average for high-income countries is just €2,000 per person.

What has this got to do with housing? Healthcare and housing are recognised as the two areas most in need of a “fix”. And yet the level of spending in one completely dwarfs the other.

For example, the increase for the Department of Housing in 2019 is €421m. This will be spread principally across a ‘capital’ budget – money to be spent directly on building homes – and the Housing Assistant Payment (HAP). The budget for HAP will increase by €121m. Written as €0.1bn, you can see how this kind of budget would hardly be noticed in healthcare.

Of course, as Ireland’s bloated healthcare budget shows, it is not just about how much you spend –how you spend it is just as important. And here, sadly, Ireland remains some distance from best practice in relation to social housing.

Taxpayer money should never be spent on new houses up-front – rather it should be used to borrow to build what is a long-lived asset. And taxpayer assistance to social tenants should not be tied to market rents, but rather to the cost of building new homes.

Unfortunately, those two features – spent up-front and based on market rents – underpin most of the budget for social housing.

Could you imagine a world where the €2bn over-run in healthcare over the last three years had instead been spent on a cost-rental scheme? Cost-rental works off the basis of linking assistance for social tenants to the cost of providing them with homes (not market rents).

The standard cost-rent system takes a set fraction of disposable income – such as 30% – so that the more you earn, the smaller the subsidy. And when a household’s income rises high enough to cover the rent, they receive no subsidy. This makes cost-rent systems incredibly efficient with taxpayer money.

If the taxpayer had to subsidise the bottom third of the income distribution – roughly 650,000 households – a two-billion euro budget would stretch to an average subsidy of more than €3,000 per household each year. And that budget would be tied to new construction, not to market rents.

Even with high construction costs in Ireland, that subsidy would be enough to cover the cost of adding a whole host of badly needed housing across Ireland – including options for downsizers as well as independent and assisted living complexes.

Many arm-chair pundits talk about what we could do with the Apple money currently tied up in an escrow account. We have actually had a corporate tax windfall of nearly the same amount – €11bn. But instead of spending it on getting the social housing system we need, we have largely spent it on propping up the dysfunctional healthcare system we have.

Downsizing central to our housing solutions

Earlier this week, it was reported that the Independent Alliance TDs – who form part of the Government – are proposing a ‘granny flat grant’, that would help convert family homes into two units, as one of their flagship measures for Budget 2019.

As with all policy measures, the first question should be on what problem this measure is trying to solve. If the problem is real, then the follow-on question is whether this particular solution makes things better or worse, or whether there are better alternatives.

This means that one should not be distracted too much – at first anyway – by the amount. (Newspapers reported that the grant would be €15,000. Given current costs in the construction sector, that would pay for no more than the renovation of a couple of square metres.)

The problem that this proposed measure attempts to address is real. There is a complete mismatch between our housing stock, which is skewed towards family houses, and the current and future make-up of population – which is increasingly made up of one- and two-person households.

The 2016 Census highlights this in stark terms. There are over 900,000 dwellings in this country that would suit a family of 3-5 persons (i.e. with 5-7 principal rooms). But there are only 740,000 families in this country. This means that there are 160,000 more family homes than families.

And this is not a problem of homes in the wrong location: even in the Greater Dublin Area, there are more family homes (225,000) than families (208,000).

This is also not a problem that will go away over time. As we proceed to mid-century, our population will grow to over 6 million – but more and more of the population will be in one- and two-person households. A reasonable estimate of how many family homes we will need by the 2050s is about 930,000.

Instead, the country will need 1.9 million homes for smaller households. Our current stock is a paltry 350,000. Ireland Inc needs to learn – and rapidly – how to build urban apartments.

Consider that for a minute. We need almost no new family homes to be built over the coming decades. But that is precisely what we are building. Just 14% of homes built in the last year were urban apartments.

This is where the Independent Alliance proposal comes in. For as long as Ireland as a country seem entirely unable to meet its housing need the normal way – i.e. by building what it needs – it will need work-arounds. One of those work-arounds is to take the existing housing stock and split it into two – or more – homes.

We know from past experience, of course, that this is far from the first-best solution. Homes built for one family in the 18th century became mini-villages for the poor in the 19th century. And homes built in the 19th century – in places like Rathmines and Stoneybatter – became the bedsits and flats of the 20th century. It seems that, unless and until we learn how to build apartments properly, history is destined to repeat itself.

Many homes of the 20th century are already de facto split into many homes for many people. One quarter of the population growth seen in Ireland between the 2011 and 2016 Censuses was in what I term ‘crammer’ households – households comprising people none of whom are related to each other.

Going back to the two questions asked at the start, the Independents Alliance proposal is most definitely getting to the heart of a real problem. And it is likely to more good, than harm, certainly – even if the proposed amount may seem paltry to a quantity surveyor.

The real solution, of course, would be to provide significantly more options for those with empty nests. Work I was part of in 2016 for the Housing Agency and the Irish Smart Aging Exchange found that older residents love their area, not their dwelling.

This means that housing policy should seek to ensure a ready supply of regular apartments – in 3-5 storey complexes – on infill and corner sites throughout the suburbs. In addition, policy should support the construction of independent living and assisted living complexes as a major part of the country’s housing stock.

For too long, it has been the family home and then nothing until the nursing home or funeral home. Everything in between has been ignored. Hopefully the Independent Alliance proposal is the start of a long-needed change in direction.

No need for hot and cold seasons in property

The figures from today’s Daft Report confirm both that the country’s housing shortage persists but also that – at least for the family home segment in and around Dublin – things are improving steadily.

There was almost no increase in property prices between June and September. And year-on-year, inflation continues to cool, with prices in Dublin 5.9% higher than a year ago. Inflation has been 9.9% this time last year so while a 6% rise is still well above healthy, it is far better than things were.

Having a stable mortgage rules system takes some of the guesswork out of understanding the housing market. The cooling off of inflation relates directly to supply. The total number of homes available in the Dublin market in September was almost 5,000, compared to just 3,400 a year ago.

But those same mortgage rules that pin down the relationship between housing prices and the real economy have also had a secondary effect in the market. The fine print of the rules has meant that market has become an extremely seasonal one.

To see this, it is worth taking a bigger picture. Between 1996 and 2006, housing prices rose steadily – and those increases were more or less the same regardless of the time of year. In the first, second and third quarters of the year, the average three-month increase 1996-2006 was close to 3.5%. Only in the final three months of the year did any kind of seasonal effect kick in.

That market is long gone and what is emerging in its place is a see-saw market, where prices surge forward in the first half of the year and then tread water between July and December. Nationwide, the average quarter-on-quarter increase in the first half of the year since the Central Bank rules were introduced has been 3.3%. In the second half of the year, the increase has been just 0.7%.

The root cause of this is a wrinkle in the mortgage rules. The overall make-up of the rules is not under question. While I have separate reservations about the effect of loan-to-income restrictions, they and their loan-to-value counterparts ensure that Ireland will never again suffer a housing bubble and crash episode like the one seen 1995-2012.

In the fine print, under Central Bank rules, individual banks have exemptions in relation to loan-to-income and loan-to-value caps. Specifically, for first-time buyers, one in five first-time borrowers – technically 20% of the value of new mortgage lending – can be above the LTI cap. For other owner-occupier buyers, the fraction is 10% (since the start of this year).

But, crucially, those exemptions are based on a calendar year. The obvious result is that bank employees, keen to meet their sales targets, frontload their exemptions into the start of the year.

Using overall targets for lending by their bank that year, it is not difficult to estimate how many exempted mortgages they can give that year. Once they know that, it is simply a case of trying to lend out those exemptions as fast as possible once New Year’s Day hits.

And borrowers know this too. Anyone who has a good prospect of an exemption will wait until late in the year, get their paperwork in order, and then make sure they are good to go once January rolls around.

This of course feeds through to the sale side. Estate agents advise their clients that, if at all possible, they should wait until January when the fresh batch of exemptions comes through. (No point in being on the market all that time as, to homebuyers at least, houses “go off” after a couple of viewings.)

All of this is, of course, completely unnecessary. A simple tweak would fix this oddity. The Central Bank merely has to change the basis of their LTI exemptions from being done on a calendar year basis to being done on a rolling 12-month basis. This would move the market away from being a see-saw one without in any way undermining the effectiveness of the mortgage rules.

None of this should take away from the challenges still facing the Irish housing system. The mortgage rules are, by and large, right. And the one segment of Irish housing that is – at least when you compare demographics to the stock of buildings – not under-supplied is starting to show signs of life.

But that still leaves a huge challenge to get the right type of housing built, given how we are going to live in ten, thirty and fifty years time. In particular, we will be living more in cities and more in households of one to two persons. Therefore, the policy priority must remain on increasing the supply of urban apartments, so that our housing stock better matches the likely future path of our accommodation needs.

Taking back control

This week saw protests on the streets of Dublin about the housing shortage. It was prompted by the eviction of protesters occupying an empty building on North Frederick Street. Later in the same week, the Government launched the Land Development Agency. The agency’s remit is to facilitate the development of 150,000 homes on at least 40 sites in Dublin and Cork, the vast bulk State-owned land.

While very different, both are responses to the persistent and growing shortage of housing in this country – in particular in our cities and affecting those on lower incomes most. It is perhaps tempting to think of this shortage of housing as a recent phenomenon, dating back three or maybe five years. But in truth, this is a problem that has been building for a generation. In that sense, the bubble-crash episode of 1995-2012 is a distraction. If a straight line were to join those two years, it would be easier to spot that the true time-span of this problem is closer to 30 years.

Three decades ago, there was effectively no difference between average property prices in Dublin and those elsewhere in the country. Certainly, the Dublin property would have been smaller – both in dwelling size and site size – but, to the couple on an average income, the city was affordable. Since then, Dublin properties have inched up and up in price – either sale price or rental price. This mirrors what has happened in many other high-income cities. Supply has simply not been able to keep pace with demand.

The protesters in the streets this week – and the Government talking about tens of thousands of homes on State-owned lands – are responding to a problem that is three decades in the making, not three years. By political inclination, or perhaps cynicism born of weariness, many of the protestors on the streets of Dublin this week are likely to view the Government’s new land agency with scepticism. One early response was why the private sector was needed at all. As someone on Twitter asked, why couldn’t the Government build all the homes and make them all affordable?

My fellow academic-columnist, Eoin O’Malley of DCU, had a related argument: why can’t the state just keep the land, like is done in Singapore and Hong Kong?
I interpret the Singaporean and Hong Kong models somewhat differently. Both states effectively as ground landlords and they can direct what happens on the ground they own without ever having to take on that risk.

There’s a lesson here for the Irish government. By adopting a land tax, they effectively nationalise the entire stock of land in one go, without ever having to own any of it. With a land tax, the State (or municipality) levies a charge each year on land based on what its best use is. That value of that best use comes from the market, certainly, but is determined entirely by State regulations on what would be allowed on that land.

If a strategic land bank is required for defence purposes, then zoning that reflects this will mean its value is very low and the Army will not have to sell up. However, if you are the Army and you own half of Rathmines – or Portobello South, as the marketeers will no doubt be calling it – then if that land were better used for residential and mixed-use purposes, all the Government needs to do is zone it as such and, in a land value tax system, the market does the rest.

Land value tax is popular with left-wingers, who like the power it gives government, but also right-wingers, who like that the government sets out it stall and then lets the market do its thing. It is also popular with (real) farmers, as it typically gets ‘hobby farmers’ off valuable land, and with environmentalists. In fact, it is popular with almost every political group apart from the centre. It is, therefore, something of a test for those who call themselves Ireland’s left wing. Are they interested in government ownership for its own sake? Or are they interested in results, even if it means governments direct, rather than own?


PS. I still remain somewhat concerned that, this long into our housing shortage, senior Government figures are talking about long-run demand of 30,000 homes a year. If this figure refers only to market supply, then perhaps – if we can get a sense of what the Government believes social adds on top – this can be compared to aggregate estimates. But I’m not sure that this is the case. As ever, I remain happy to meet up with policymakers and outline the true level of housing demand and construction activity needed in the country over coming decades.

Worrying about soft or hard landing misses the point

Earlier this week, the ratings agency S&P issued a report on Ireland. That report included a diagnosis of the housing market that was interpreted as predicting a “soft landing”. Sure enough, many scoffed – remembering similar predictions from the mid-2000s. You could be forgiven for thinking of Michael Gove’s infamous line, just before Brexit, that “people in this country have had enough of experts”.

Whatever our opinions on ratings agencies and how they performed in the run-up to the Great Recession, the S&P report should not be dismissed as external analysts making the same mistakes all over again. Rather, our reaction to the report might tell us more about ourselves than the rating agencies. In particular, we need to ensure we are not fighting the last war. To explain, what happened the Irish housing market 1995-2012 was a classic credit-fuelled bubble and crash. It is understandable – indeed important – that we should be very careful not to make the same mistake again.

But those steps have largely already been taken. The Central Bank mortgage rules effectively bring the Irish mortgage market back to the system it had, quite successfully, under the Building Societies from the mid-19th century all the way through to the 1990s. Lenders and borrowers must link mortgages, and thus housing prices, to the real economy, as measured by savings and incomes. What is happening now is a scarcity of housing driving up the price of housing. There is strong demand but not enough supply. The big difference between the 2010s increase in prices and the 2000s one is that, then, sale prices roses but rents did not (or at least not nearly to the same extent). That is a classic sign of a bubble.

Now however, rent and sale prices are rising almost one-for-one in line with each other. This is why it is important to distinguish between bubble-crash cycles and more regular boom-bust cycles. Don’t believe anyone who tells you that they can end boom-bust cycles. As long as humans are humans, their confidence in the future will ebb and flow and those changes will drive rises and falls in economic activity.

We can be more confident, though, about bubble-crash cycles. I need to be careful here, too, as I wouldn’t feel comfortable in stating that we can stop them entirely. But we can make sure that the mistakes that happened 1995-2012 – in particular allowing people to borrow too much relative to their income and to the value of the property – don’t happen again. This is why there should be no link between S&P talking about supply and demand in the Irish housing market now and headlines from 12 or 14 years ago. If you’re fighting a different war, it makes no sense to be thinking about how you might have done better in the last one.

Up to the mid-1980s, there was effectively no “Dublin premium”. Granted, properties in the capital may have been a bedroom fewer and a smaller garden. But the price paid in Dublin was effectively the same as elsewhere. Since the 1990s, though, a growing Dublin premium has emerged. If current trends continue, it is likely that Dublin property prices will be twice as expensive as those elsewhere in the country by 2020. This is a hugely important trend that has, by and large, been missed by the vast majority of commentators and policymakers in recent years.

Suppose you could draw a straight line from 1995 to 2012 and ignore the credit bubble and crash. What would stick out then in a graph of housing prices? It would be that, over the last few decades, prices have risen above inflation – especially in the capital. This is a new phenomenon but not one unique to Ireland. Our high-income peers have also seen prices increase steadily in recent decades after typically a century of ups and downs but no overall trend. Detailed research into this reveals is that zoning restrictions have limited the ability of housing supply to meet demand.

In Ireland’s case, things were fine in the housing market… as long as we didn’t have significant population growth. If there’s little or no new demand, it’s easy for supply to meet that target. The last generation has shown – credit bubble and extraordinary tax breaks aside – that housing supply is fundamentally incapable of meeting demand in Ireland. Where supply has come on stream, it has typically been new housing estates on greenfield sites at the edges of cities or further down the national road network.

This is completely unsustainable. We already have far more family homes than families in this country. But we do not have nearly enough homes for our households of one or two persons. These smaller households are now the majority in this country. But apartments form only one in seven of our housing stock.

The recent bubble should not distract us from the huge challenges that lie ahead.

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.

Good news or bad news? Housing and the latest population figures

Five years ago, as many wondered whether the green shoots were actually emerging, the Central Statistics Office published its population projections for the future. The numbers were based on a detailed analysis of the 2011 Census figures.

When forecasting population, there are three main moving parts: births, deaths and net migration. So to plan ahead, the CSO used scenarios for these factors. For example, they had two fertility scenarios.

The optimistic scenario was that Ireland would maintain its 2010 fertility rate of 2.1, just enough to replace the population. The more pessimistic scenario was that this rate would fall to 1.8 by the mid-2020s and remain there into the 2040s. This would leave Ireland on a par with North European countries, whose fertility rates have actually risen since the 1980s.

The flip-side of the natural increase is death. For mortality rates, there were no scenarios – simply an assumption that life expectancy would increase by 7 years for men between 2010 and 2046 (to 85 years) and by almost 6 years for women (to 88.5).

By far the trickiest element to forecast for Ireland, though, is net migration. Whereas the annual natural increase has been quite steady, net migration jumps around. Ireland’s people are unusually mobile.

Five years ago, the CSO adopted three migration scenarios. In each of the three, Ireland was expected to lose population each year to 2016 – by 19,000 a year in the most optimistic scenario and by 25,000 a year in the most pessimistic. After that, the three scenarios diverged – ranging from a loss of 5,000 persons a year to a gain of 30,000 as the average annual change from the 2020s through to the 2040s.

The net effect of all this was that Ireland’s population in the low-fertility medium-migration scenario would rise from 4.6 million in 2011 to 5.6 million by 2046. These numbers in turn underpin Eurostat’s bolder predictions of population out to 2080. Eurostat’s central forecast is that Ireland’s population would reach 6.2 million by 2080.

Fast forward to 2018 and the latest population projections have been released by the CSO. Ireland’s fertility rate is already at 1.8 and the optimistic scenario now is the pessimistic one from five years ago: that it stays there. The pessimistic scenario, in turn, has been downgraded and plans for fertility to fall to 1.6.

Projections around mortality are largely unchanged – with the expert group behind the report still seeing a 1.5% improvement in in mortality rates each year, as they did five years ago.

But the joker in the pack for Ireland’s population is – as it always has been – net migration. Remember that Ireland was expected to lose 19,000 people in 2016? It gained 16,000 that year instead.

This has led the expert group to go back to the drawing board. Its most optimistic scenario has been bumped up. Instead of having to wait to the 2020s for 30,000 people a year will come here, this will happen from 2017. This change may seem small – but it’s an extra 50,000 people by 2021.

The medium and pessimistic scenarios are more radically changed. The medium scenario has been doubled – from net immigration of 5,000 a year to 10,000. And the pessimistic scenario has changed entirely: even in this scenario, Ireland will be a net recipient of people – 5,000 per year.

What is the effect of all these changes? Substantial, it turns out. In the “baseline” scenario – lower fertility and medium migration – Ireland’s population by 2046 would be 6.1 million, not 5.6 million.

Think about that. Our economic circumstances have changed so much in the last five years, that the thirty-year outlook has gone up by 50%!

Or to put it another way, Eurostat thought – based on how things looked back in 2011 – that it would take Ireland over 60 years for its population to go above 6 million. Now, that milestone is just 25 years away – or so our best guess goes.

How does this relate to housing? One of the clearest ways I can find to summarize our housing shortage had been that 2080 target. Thinking that far ahead allows people to stop worrying about elections or their own circumstances and focus instead on the bigger picture.

With a population of 6.2 million by 2080 – and with something approaching normal levels of urbanization and household size – Ireland would need to build roughly 1.7 million apartments over six decades. (Its need for family homes is, contrary to popular perception, negligible as almost all population growth will come from households of 1-2 persons.)

Dublin alone would need an apartment block of 200 homes every week for decades. To be clear, by ‘apartment block’, I mean urban housing for 1-2 person households. This includes student accommodation and co-living spaces, core urban high-rise and suburban low-rise for downsizers.

It also includes independent and assisted living complexes for Ireland’s older residents. And that is a topic in and of itself – two thirds of Ireland’s 1.5 million extra inhabitants will be aged 65 or over.

Amazingly, though, Ireland’s timeline to build 1.7 timeline just got halved. The country is now expected to reach a population of 6.2 million by 2050, not 2080.

And even more amazingly, the expert group restrained themselves when thinking about net migration – due to housing shortages. So if housing weren’t an issue, we would get there faster.

If there were any doubt that housing is now the single biggest bottleneck facing the Irish economy, this week’s CSO report puts that to bed. The country needs to get building – in particular building urban homes for 1-2 person households. And twice as fast as we thought we needed to.


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

Brisk business at the top end of the housing market once more

The latest Wealth Report shows that – as prices continue to rise  – so does Ireland’s housing wealth. There were over 800 transactions of at least €1m during 2017 and by all accounts there will be even more seven-figure purchases this year.

When a property is transacted, of course, that wealth is – at least for an instant – liquid cash. Most of those selling a property soon buy another so the wealth becomes embodied once more in real estate form.

Another equally important question, though, is who is sitting on a property worth a million.’s Wealth Report is the only one of its kind to estimate the number of property millionaires in the country. It does this by using a detailed form of analysis, looking at the value of 25 different property types in almost 400 micro-markets around the country.

Of these nearly 10,000 segments, just 58 have an average value of over one million euro – from four-bed terraced homes in Sandycove to five-bed detached homes in Ballsbridge. These property segments cover an estimated 4,600 dwellings.

This is an increase of almost 20% in the number of property millionaires in the space of just one year. A year ago, there were just 3,800 property millionaires. In other words, rising property prices over the last year have created more than two new property millionaires every day!

How is the top end of the market holding up? The figure accompanying this piece shows the average annual change in property prices across Ireland’s top 20 markets. All are in South Dublin, with the exception of Howth and Enniskerry.

The pattern is clear: before the Central Bank rules came in, these markets were taking off, with prices in late 2014, just before the rules were announced, running at more than 20%. The rules coming in saw prices stabilise, with almost no change between the third quarter of 2014 and the first quarter of 2016.

Since then, though the lack of supply and strong demand have caused inflation at the premium end of the market to tick up again. And in early 2018, for the first time since the Central Bank rules were introduced, inflation at the top end of the market was higher than the national average: 8% compared to 7% nationally.

At least some of this push at the top end of the market is Brexit-induced. Anecdotally, architects will tell you stories of couples returning from London with a seven-figure budget buoyed by the extraordinary level of prices in the British capital.

On top of that, it seems clear that any Brexit dividend in terms of FDI jobs will be at least as large in the tech sector as in financial services. The on-going uncertainty around the nature of Brexit has meant that the ‘born online’ firms – most of who have large operations in both Dublin and London – are favouring the Irish capital for new projects.

This stems from an uncertainty about whether their highly-skilled and very multinational workforce will be able to enter and stay in the UK, once it leaves the EU. Ireland has remained explicitly open for business – issues around housing and visas aside – and that certainty appears to be reaping rewards.

The premium end of the market is always going to be the most illiquid. If you have a €5m home in Temple Gardens or Eglinton Road, your pool of buyers is always going to be far smaller than if you have a €500,000 home in Rathfarnham or Raheny.

That lack of liquidity can trick some commentators into thinking the market at the top is in trouble. The figures here show that this is not the case – at least not currently. The market for Ireland’s most expensive homes is booming currently.

What underpins the top end of the market? Looking through the list of areas that make up Ireland’s Top 20 markets – Killiney, Dalkey, Sandymount, Sandycove, Enniskerry, Howth and Rathmichael, for example – it is clear that nature is a luxury.

Natural features such as mountains and coastline are over-represented at the top end of the housing market. The richer we get, it seems, the more we want to be able to enjoy what nature provides for free, either as a picture out our window or as a playground outside our front door.

Nature may provide these things for free – but they don’t come cheap in the housing market. New research I have been working on, jointly with Stephen Hynes and Tom Gillespie at NUI Galway, finds that natural amenities add significantly to property values. The best located properties – those with not only the views but on the coast too – are on average a third more expensive than similar dwellings, at least in structure, but without the same amenities.

If nature is one of the luxuries at the top end of the Irish housing market, history is the other. Many of the areas I mentioned above – together with others in the Top 20 such as Ranelagh, Rathgar and Ballsbridge – are home to some of Ireland’s finest older homes.

By definition, you can’t build Victorian or Georgian property now, so this limited supply gives those homes added attraction in the market. One of the contradictions of the housing market is that both energy efficiency and age are prized in the market. Joint research with Sarah Stanley and Sean Lyons, of the ESRI, found that “vintage premiums” are understated if you don’t take into account energy efficiency. Compared to similar properties built in the 1990s, properties built before World War 2 is worth 20% more – but if you left out energy efficiency from the model, you might think the premium was just 15%.

Scarcity, in other words, is what drives the top end of the market. And with lots of demand – and based on Brexit uncertainty, this seems set to continue – it seems the coming year will create even more property millionaires.