Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

Property Market

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 Daft.ie 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.

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Versions of this post were published in the Sunday Independent and in the 2018Q2 Daft.ie 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.

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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 Daft.ie 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. Daft.ie’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.

Delivering an extra 20 homes an acre in Dublin

Ireland’s housing challenge over coming decades is substantial. Within that, though, the need for new housing supply is not spread evenly. As things stand currently, Dublin will be, regardless of how tough the politicians talk, the centre of Irish economic and population growth in the 21st century.

Let’s put some numbers on it. Over the coming half-century, the country will need almost two million new apartments. This is needed to accommodate changing demographics and increasing urbanization, as well as regular population growth.

Dublin will need about 600,000 of those apartments. For apartments, think everything from purpose-built student accommodation and urban medium- to high-rise right the way through to suburban low-rise for downsizers, as well as independent and assisted living complexes. The number includes both market and social housing need – ideally integrated in the same developments.

Over half a million new apartments – principally to accommodate households of one or two persons – is a housing challenge unlike anything the city has faced before. It is effectively an apartment block of 200 homes every week in the city for the next 3,000 plus weeks… in other words, every week until after most of Ireland’s adults currently are long dead.

An obvious concern you might have, upon hearing these numbers, is where these apartments are going to go. The contiguous city of Dublin houses 1.2 million people currently in its 11,500 hectares, or a little under 30,000 acres in ‘old money’.

Adding an extra 600,000 homes to the city’s 30,000 acres means an average of 20 new homes per acre. But this kind of abstract maths hides the rather important detail that many of these acres already have homes on them, and policymakers can’t simply kick out existing residents and bring the builders in.

This means that the ‘Parisian dream’ of high density without tall buildings – espoused by, for example, the Green Party – is simply not possible. In this dream, Dublin can accommodate all its new residents by simply building to a height of six storeys.

This might work – but only if you could CPO existing homes and demolish them. I don’t see that happening.

What the city needs to do instead is start a detailed plan of where the 600,000 new apartments will go over the coming decades. To do this, the four local authorities will need to work together and identify sites where 10 or 12 storeys – and higher closer to the centre – can work.

There are lots of options, not least Dublin Port, which is over 600 acres of prime land that could house as many as 60,000 of the homes needed. But that is just 10% of the total needed – and it would come with a fight, as Dublin Port has longed resisted any attempts to move again.

The green fields around Dunsink are an extraordinary opportunity for the city to grow inside the M50. Given it’s not in a central location, though, densities would be lower. The 1,000 acres or so there could add another 60,000 homes.

But that’s still only 20% of the city’s growth need.  A further 20%-30% is likely to come from density near the urban rail infrastructure outside the core city.

But that leaves city planners trying to find space for hundreds of thousands of apartments on brownfield sites all around the city. We need to think creatively, as a city, about re-using space. This means army barracks set up by the British two hundred years ago – and golf clubs established a hundred years ago – may not be the best use of space today.

In addition to thinking creatively, Dublin needs to grab opportunities when they present themselves. DIT’s move to Grangegorman frees up a bundles of city-centre sites for redevelopment. The college on Cathal Brugha Street is very likely to become part of a renovated Gresham hotel and add much needed hotel space in the city.

But other sites could help address the city’s chronic shortage of apartments. Take the Kevin Street campus. The block bounded by Bride Street, Camden Row, Liberty Lane and Kevin Street is roughly six acres and is located in one of the most fashionable parts of the city, just west of Camden Street and just north of Portobello.

Granted, one acre of the six is St Kevin’s Park, a hidden gem of the city. But five acres becomes seven, as there are also two acres just across Camden Row, currently split between a cash-and-carry and another DIT building.

So the Council should consider zoning the lands for high density mixed use, including residential, and imposing a land tax instead of development levies and commercial stamp duties. This way, those seven acres could easily act as a test case for integrated social and market housing, at relatively high densities, and using a cost-rental model.

“If I were you, I wouldn’t start from here” runs the joke about the Irishman’s reply to a tourist asking for directions. If we could start all over again, the high-density low-height model in Paris and Barcelona could work for Dublin too. But that option is not open to us – so we will need to rethink and reuse land, and build up.

The need for Dublin is an extra 20 dwellings on every acre of the city. What is the plan?

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

Will Irish house prices fall?

A couple of weeks ago, Philip Lane, the Governor of the Ireland’s Central Bank, suggested while appearing before an Oireachtas committee that Irish house prices could fall in coming years. The comments generated a lot of interest, given his role. In particular, he said that a combination of factors could combine to not only halt price rises but even bring down sale and rental prices. These factors, he suggested, were increased housing supply, including of student accommodation, higher interest rates, and potentially higher unemployment due to Brexit.

How much weight should we put on the Governor’s comments? Some thought the Governor even mentioning price falls means that he sees this as likely. Others, however, see in his remarks the typical economist’s way of seeing the world: many possible outcomes – one of which is falling prices – so why deny that?

To get a sense of just how much weight to put on the potential of housing prices – either sale or rental – falling in the coming years, it is important to understand the forces that push them up and down. In brief, there are five forces that affect average house prices, three of which also affect rents. The first three factors affect both sale and rental prices and are what you might term fundamentals, as they reflect the real economy. The first is household income. This captures both average income per worker and also the number of workers per household (i.e. unemployment).

When the Governor spoke of Brexit being a force for lower house prices, he was referring to this channel: that due to the British economy cutting itself off from its closest trading partners, the Irish economy – as its single closest trading partner – would be affected enough that incomes would fall and unemployment would rise.

The second factor, again a fundamental one affecting both sale and rental prices, is demographics. This is best measured as the number of persons per household. In Ireland, there has been a steady fall in the average household size over the past half-century, although one that has paused in recent years, due to a lack of housing.

But in big picture terms, it is hard to see how Ireland will do any other than slowly follow all its peers towards a smaller average household size. If over coming decades Ireland’s average household size falls from 2.75 people to something like 2.25 people, this creates a need to produce over 10,000 new homes – mostly urban apartments – each year.

The third and final fundamental is housing supply. This is best thought of in euro terms, rather than in number of dwellings, as a rural cottage and an urban apartment may have very different values.

But for simplicity, let’s think of housing supply as the number of dwellings. Construction is simply the addition to the stock of dwellings. Although it is important to remember that at least some construction merely offsets the obsolescence of other, older properties. In Ireland, a country with roughly 2 million dwellings, at least 10,000 – and perhaps as many as 15,000 – homes are likely to fall into disrepair each year.

Adding obsolescence on top of the various sources of demand, the country needs at least 40,000 and closer to 50,000 new homes a year. Granted, this is certainly less than the 80,000 or so new homes built at the peak of the Celtic Tiger. But it is more than twice the number of new homes started in 2017.

So for an over-supply to contribute to price falls, rather than a shortage contributing to price rises as has been the case since 2012, the building of new homes would need to more than double in the coming two years. And this itself is assuming that none of the backlog in unmet demand since 2012, either sale or rental, needs to be met for prices to fall.

Various commentators believe such an increase in housing construction is simply not possible, given capacity constraints in the sector. Where would all the new construction workers live, for example?

The final factor mentioned by the Governor is interest rates. And this brings up the difference between sale and rental segments. Unlike rental homes, owner-occupied homes are assets as well as consumer goods. Given the favourable tax treatment of the family home, it can be very profitable to concentrate your wealth into housing.

This potential for capital gain – or indeed capital loss – looms large in the minds of would-be buyers and sellers. In surveys over the last 15 years, those active in the Irish housing market have expected everything from 10% gains a year for the next five years to 10% falls per year.

This are huge numbers compared to the equivalent changes in interest rates over the same time. Mortgage interest rates have barely budged since 2008 and have been between 3% and 5%. This is not to say that mortgage rates are irrelevant. Far from it.

But mortgage rates are only one part of the ‘user cost’ of housing and have to be offset by potential capital gains. Since the 1980s, Ireland – and Dublin in particular – has been building far too few homes relative to the underlying need. This has created an expectation of capital gains that may prove tough to shift, even with the bubble and crash we’ve witnessed.

The fifth and final factor affecting housing prices is the one Professor Lane did not mention: credit conditions. This was the one that was most responsible for the bubble and subsequent crash in property prices in Ireland 1995-2012. Think of it as the typical deposit required by the first-time buyer.

The typical deposit fell from over 25% in 2000 to just 5% in 2006. But since the introduction of the Central Bank’s mortgage rules in 2015, this property price lever has largely been removed from the equation. Banks may have a greater appetite for lending now than in 2013 but the rules prevent them from repeating the mistakes of the past.

The Governor is right to highlight that property prices are not a one-way bet. However, looking into the detail of the Irish housing system, it is tough to argue – given the tight control the Central Bank itself has over credit conditions and the large gap between supply and demand, that prices will fall soon.

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

In defence of clustering: “Student City”

It seems in Ireland that we are not too fond of clustering. We are the least urbanised country in Europe – on a par with Portugal – with less than two thirds of the population living in cities. Elsewhere in the high-income world, typically more than 80% of the population live in cities.

It is important to remember, though, that this is not because we have a different economic structure. Previously, we might have been less urban because we were a more agricultural society. Now, though, over 85% of our jobs are in our main cities.

So we have a huge mismatch between where we work and where we live. These leaves us with some of the longest commutes in Europe. The number of people commuting more than an hour each way on a daily basis went up by more than a third between the 2011 and 2016 Censuses.

You might think that this is just because Irish people are different. “We want our patch of land”, the argument goes. Funnily enough, this is also what people in the UK say – even though they are one of the most urbanised countries.

It’s unlikely that our poorly placed homes are as a result of our preferences, therefore. And if it’s not demand-led, then it must be supply-led. Planning and zoning rules are one of the principal determinants of housing supply.

Indeed, the best research shows that, in response to a 10% increase in demand for housing, as long as land-use regulations do not stop supply from responding, prices need not increase at all.

But Ireland’s housing market is, as we all know, a heavily regulated one. This week, Apple scrapped its plans to build a data centre in Athenry. This news came as a surprise to nobody. In the time it took Apple to open the doors to a data centre in Denmark, and start planning a second one there, it was still facing court challenges here.

Fortunately, it looks as though the Government is finally seeing the harm that land-use regulations can bring. Its Ireland 2040 plan is the first government strategy to acknowledge the cities, and city centres specifically, will have to be the driver of population growth in the future.

Public policy, therefore, is turning – however slowly – in favour of density. But another fight still remains – in favour of clustering. Density is about how many people in a certain neighbourhood. Clustering means the same kind of activity in the certain neighbourhood.

Don’t get me wrong – diversity is important. Jane Jacobs – who wrote one of the bibles of urban economics back in the early 1960s – explained in simple terms how having a mix on the street keeps it safe. But in large cities, there is scope for both diversity and clustering.

We know that clustering is a natural human tendency. Just look at the oldest street names in our cities. In Dublin, the old Viking city includes Winetavern Street, Cook Street and Fishamble Street.

Last year, Dublin City Council changed its rules in order to make it harder for student accommodation to cluster in and around higher education institutes. This is as daft as it sounds: by making it harder to build new accommodation for them, they will continue to band together in fours and fives and – with a budget of up to €600 each in central Dublin – easily displace low-income renters.

Instead, the city council – and its peers elsewhere in the country with higher education institutes in or near areas they control – need to think about where its “Student City” will be.

Over the next decade, full-time student numbers are set to rise by roughly one third. On top of this, the Government has made higher education as an export one of its priorities. This will increase student numbers even further.

All of these students will need somewhere to live. And if we don’t have purpose-built student accommodation for them, they will gobble up more and more of the existing stock of dwellings – which are disproportionately family homes.

In addition, purpose-built student accommodation doubles up as tourist accommodation in the summer. So meeting the needs for student housing will also ease the pressure on the short-term lettings market, the so-called Airbnb effect in the rental market.

I’m sure we could all think of potential locations for Dublin’s “Student City”. An obvious one is Dublin’s fruit markets, between Smithfield and Capel Street. This area is close to 17 acres of prime urban land, within walking distance of the Luas, both main train stations, and the DIT and Trinity campuses.

Most of it is currently used as single-floor warehouses for fruit and veg. While those businesses would certainly need to be accommodated – could they use the basements in a new set-up for example? – it is important to keep perspective on the size of prospective benefits as well as the costs.

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

Where’s hot and where’s cold in the rental market?

During the week, the latest Daft.ie Rental Report was released. Its main findings were not unexpected: market rents continue to rise and at a rate above 10% on average. At least in the long term, that is an unsustainable rate of rental growth.

Indeed, in a healthy rental market, rents would have increased by roughly zero over the last few years – in line with general prices and in line with the idea that new supply can emerge to satisfy demand.

But we have far from a healthy market. Countrywide, rents are now 11.5% higher than a year ago – and up 70% on average from their lowest point over five years ago. There is a third relevant comparison – with the peak. In almost all parts of the country, rents are now well above their Celtic Tiger peak, which occurred in the rental market in early 2008.

Rents have now increased every quarter for the last 23 quarters – nearly six years – and for each of the last eight quarters, year-on-year inflation has been above 10% and a new all-time record rent has been set nationwide.

This picture is remarkably similar around the country. The year-on-year change in rents is 10% in Dublin 4, 12% North County Dublin, 10% in county Galway and 11% in Wexford. So the mismatch between supply and demand is countrywide.

But those changes in the last 12 months are only part of the story. The turning point – when rents went from falling to rising – was different around the country. So the cumulative rise in rents from their lowest point varies quite a bit depending on which market you’re looking at.

The table alongside this piece shows the five hottest and five coldest rental markets in the country, using an exclusive new set of figures drilling into nearly 400 rental micro-markets around the country.

The hottest markets are those that have seen not only one of the largest increases in the last year but also from their last lowest point. It’s clear that Dublin dominates – but equally that it’s not necessarily the fanciest areas.

Alongside Sandycove, one of the country’s most expensive markets, is Dublin 17 (near Darndale and Clongriffin) and Dublin 20 (Palmerstown). In those hottest markets, rents have effectively doubled from their lows in 2012/2013.

Hottest Rental Markets Coldest Rental Markets
Market Increase from low Market Increase from low
N Circular Rd (D7) 99.7% Ballyshannon (DL) 17.1%
Christchurch (D8) 99.1% Lifford/Raphoe (DL) 14.0%
Sandycove 96.4% Ballybofay/Stranorlar (DL) 13.7%
Dublin 17 91.7% NW Mayo 12.6%
Dublin 20 91.1% Ardagh (LK) 10.9%

 

At the other end of the market, it is Donegal that dominates. Three of the five coldest markets – defined by the change in rents over the last 12 months and since the low – are in the county. The other two are in north-west Mayo and Ardagh and the north-west of Limerick.

In the coldest markets, rents have only risen by less than 20% from their lows. And in many of those markets, rents only bottomed out in 2014 rather than in 2011.

It is worth digging into those colder markets a little more. Of the 389 micro-markets around the country, 11 are currently showing falling rents– not rising. Eight of those are in the north-west, furthest away from urban centres.

And seven are in Donegal, where the nearest urban centre – if you don’t count Letterkenny – is across a border whose future is extraordinarily uncertain right now. There are 14 micro-markets in Donegal in total – so what can we tell from the others?

Whereas rents near Derry are falling and have only 15% higher than their lowest point, rents in Letterkenny are up – albeit modestly, by 3.5% – in the last year. They are also roughly one third higher than four years ago.

What do we take from all this detail? There is an obvious point – Brexit uncertainty is incredibly detrimental to the local economies that will be most affected.

And there is a deeper point. While Letterkenny is not a large town – its population in 2016 was roughly 20,000 – even that can act as an economic centre for the area nearby. In particular, the location of jobs is what matters.

Ireland is in the somewhat unusual position of having a growing urbanised labour market – but a static and sprawled housing market. Solving sprawl will take time and a diversity of housing options, not just another ring of 3-4 bed semis on greenfield sites.

Solving static housing supply doesn’t have to take time, though. As it has been for the last five or so years, the mantra must be: supply, supply, supply.

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

Redevelopment and the right to remain

Gentrification has become something of a dirty word. It wasn’t always this way. Most cities worried about the opposite – what you might call “slumification” – until quite recently, as those with the money moved to the newer suburbs. But in the last 20 years or so, older areas – in particular city centres – have become fashionable again. There are lots of theories about why. Some people credit the TV show Friends with making cities cool again. But if you ask me, it’s about pollution.

Take Dublin. Up to the late 1980s, there was an obvious reason you moved outside the canals once you had the means: the city was dirty. Once the city made the move to smokeless fuels, though, it was no longer the no-brainer it had once been.

And since then, areas like Portobello from the 1990s, Stoneybatter from the 2000s and more recently Cabra and Newmarket have prospered. With higher-income households moving in, a variety of new amenities – shops, bars, cafes, restaurants and pubs – have followed suit.

But how then has gentrification become a dirty word? It’s because, with a fixed supply of housing, for higher-income households to move in, it means that lower-income households are priced out. And that is where opposition to gentrification – understandably – comes from.

It doesn’t have to be this at all, of course. Like so many cities across the high-income world, Dublin has boxed itself into a corner with land-use restrictions. By placing very strict limits on how much housing can be put everywhere within the city limits, and what kind of housing, Dublin has gone from being no more expensive than the rest of the country as recently as the 1980s to almost twice as expensive today.

The outlook for Dublin and other Irish cities is for very strong demand for apartments over coming decades. As household size declines, and as urbanization continues, the cities will need to accommodate these smaller households in more central locations. This means we have to get good at “brownfield” redevelopment – as opposed to new development on greenfield sites even further away from jobs.

A sure-fire way to lose political support for redevelopment is to create a cohort of people who lose out from the process. And the most obvious group that could lose out are existing residents of inner city areas, many of whom are on average or below-average incomes.

One potential solution is for city councils to offer permission for redevelopment but insist that existing residents have a right to remain. Not in their existing homes, obviously – other redevelopment could occur – but in a new home built in the same neighbourhood and no smaller than their existing home.

Take Clanbrassil Street, on Dublin’s south side. It is an ugly hotch-potch of a street, riddled with the scars of the 1980s, when planners sought to drive a highway through the heart of old Dublin. But it is in the middle of areas that are regenerating.

Given how wide it is, there have been developments of up to 8 storeys in recent years. These sit awkwardly opposite or beside two- and three-storey low-density social housing, built long after social housing won awards for design but before it was energy efficient.

In the grand scheme of things, it is easy to see what should happen. The City Council should want Clanbrassil Street to fully redevelop and take advantage of the opportunity it has to become an urban hub. But the grand scheme of things doesn’t take into account how individuals’ lives will be affected.

So, rather than sell off the social housing and wish its existing residents the best for the future, the Council should instead put out a call for expressions of interest, where parties can propose what they would do with the site. But every proposal for the site would have to include accommodation for all existing residents.

Why would this be in the interests of a for-profit developer? Suppose in the ordinary scheme of things, a developer was allowed to build to a height of eight storeys in the area. Under a “right-of-residency”, with two storeys already there, the developer would be given permission to build to 10 storeys.

This way, everyone wins: the Council gets some of the redevelopment it (hopefully) wants to see, its tenants get far nicer accommodation, and new residents get to live where they want, instead of being pushed further down the motorway network.

There is, of course, nothing to stop a brave Council extending such a scheme beyond its own housing stock. In principle, a developer could woo the owners and residents of ten existing houses to sell up, knowing that they would find a new home in the new accommodation.

Gentrification has become a dirty word because it creates losers as well as winners. But it doesn’t have to. A smart policy system can ensure win-win. Tying redevelopment with a right to remain is one way of doing that.

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

Building tall – are our policymakers mixing up supply and demand?

Last week, the Department of Housing released three different reports on the cost of building on the same day. The viability of construction is, arguably, the single biggest policy challenge facing the country right now – given just how severe the housing shortage has become.

Therefore, the information ‘dump’ at least shows that the subject has been the focus of policymakers’ attention. Nonetheless, there are some peculiar findings contained in those three reports. One – the questionable claim that building here is not expensive – was the subject of last week’s column.

Today, though, I’d like to focus on another claim in these reports, one contained in the report ‘Review of Delivery Costs and Viability for Affordable Residential Developments’. Its executive summary states that building six storeys, or higher, is more expensive, “contrary to common understanding”.

This last part sounds like a Trump-ism. Whenever Donald Trump says, “Not many people know this but…”, you know he just found out whatever he’s about to say next – which may be common knowledge to many.

I am not aware of anyone with even a passing knowledge of construction who thought, before this report was published, that building fifteen storeys was cheaper or simpler than building three. Certainly, some fixed costs scale down the more units are built – such as the site cost per unit (assuming the site is already purchased), or the lifts.

Indeed, this last point is not trivial. Suppose a developer is allowed to build eight storeys rather than five. Given that public policy specifies the maximum number of apartments that can share a lift on a particular floor, the extra 60% of apartments will dramatically reduce the cost per unit of the lifts.

However, in general, the structural works required for a building of 15 or 18 storeys is completely different – and more expensive – than those required for a building or four or five storeys.

OK, so some policymakers thought building taller was cheaper and found out it isn’t. What harm, you may wonder? Unfortunately, the report goes on to conclude “6-storeys is an optimum height… for the delivery of apartments”.

And this is where the report falls foul of making a classic error in economics: mistaking supply for demand.

Suppose the government came out with a new policy in relation to travel agents: because it is so expensive to fly to Australia and New Zealand, a new ban will be put in place on package holidays to those destinations. Why would they ever do such a thing? To increase viability of holidays, of course.

Nonsense, you might think. Even if something is more expensive, there could still be demand. Plenty of people might be able to afford Australia or New Zealand. In fact, for some, one of those destinations may have been their first choice and now they have to go somewhere else.

With housing, the exact same principle holds. But the effect is even more acute. Because housing is limited in supply, every household has to have at least one dwelling. (Not every household has to have one holiday – and of course the supply of holidays is by no means fixed.)

Making it viable to build a home for a household on an income of €50,000 should never mean making it impossible to build a home that would cater for a household on an income of €150,000.

Indeed, one of the basic insights of economics is that, if you want housing to be affordable, building expensive homes helps – as long as it is in sufficient quantity.

Suppose it was impossible to build a home for anyone on less than €50,000 – but that the construction sector built a new home for every single household on an income above that. What would happen rents for those earning less than €50,000? They would, of course, go down – because the competition for the homes they can afford has been diverted away.

So, by all means, officials should do their best to change policy so that good-quality apartments can be made for just €100,000, rather than the €300,000 or more it takes currently. But they should be equally in favour of new supply for those on higher incomes – including supply on an 8th, 10th or 20th floor.

A second cousin of the “don’t build tall because it’s expensive” argument is also doing the rounds currently. It goes along the following lines: regardless of the merits of building tall, don’t change the rules now because all the plans that are live now will go back to the drawing boards.

Ironically, you are most likely to hear this argument from someone who also believes that what we are building, we are building for decades, possibly centuries, and therefore we need to get it right now.

As it happens, with demographic trends, the country needs roughly 1.8m apartments built over the next six decades. That 22,000 per year, or over 420 every week until the 2080s! This is simply not going to happen at four or five storeys, so at some point the rules will have to change.

Not only that, but given that so little is on the plans right now, there has probably never been a worse time to use the “don’t build tall because it’ll set things back” argument. On top of that, developers are already factoring in a change in the rules and putting stronger foundations than their six-storey buildings need, so that once the rules change, they can add an extra two or three storeys.

The point of building twice as tall is not that those extra units are, themselves, cheaper. In fact, with the views, they are likely to command a premium. The point of building twice as tall is that, with twice as many new homes built, the downward effect on prices and rents will be twice as large.

Don’t ban holidays to Oz and don’t ban building tall!

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

New reports do little to ease concerns about build costs

This week, a flurry of new reports came out about the housing sector. One, published by the Housing Agency, compares residential construction costs in Ireland to other European countries. It compares the cost of building in Ireland with costs in the UK, France, Germany and the Netherlands. Given that the cost of construction is arguably the single biggest contributor to the housing supply crisis, it is worth delving into this report in a little detail.

The underlying data come from CEEC, the European Council of Construction Economists and Eurostat, as well as country-specific data sources, such as the Society of Chartered Surveyors and the CSO in Ireland. The figures ultimately come from 30 completed projects across the five countries, with most projects completed earlier in the decade and ‘scaled up’ by cost indices. As is true of any cost comparison, it had to make a number of assumptions in order to come up with results. In this instance, it only focused on what are known as ‘base construction costs’. In other words, in addition to excluding site costs, profit and VAT, a host of other costs – integral to the provision of regular housing – had to be excluded too.

Professional design fees, as well as sales, marketing and legal costs, are not included in the study. In addition, substructures – especially basements – are specifically excluded, as are all external works – roads, paths and fencing – and site utilities. While the exclusion of site costs and VAT is perfectly understandable, it is less obvious that professionals’ fees and the cost of a basement should be excluded. This is particularly true if the construction of a basement is mandatory in Ireland but not in other countries. As basements are very expensive to dig, what may look like similar costs could be very different once plans meet reality.

Similarly, the choice of countries is somewhat unfortunate in both scale and scope. A comparison with four other countries is not nearly as useful as a comparison with 14 (the number of CEEC members) or 40 (not far from the total reported by Eurostat).

More worryingly, the countries chosen were done specifically because they have the labour costs that are “broadly comparable” to Ireland. This is somewhat cart before horse. If labour makes up roughly two thirds of base construction costs, then to focus only on countries with a similar labour cost will drive the results.

How does Ireland compare with Denmark, Sweden, Estonia or Austria? Those are not meaningless comparisons. In fact, it may be more meaningful to compare with countries of a similar size, rather than with the UK, France and Germany. Perhaps just as importantly, the idea of comparing countries with each other is also of limited value. Within the UK, as the report itself notes, construction costs are almost twice as high in London than in Belfast. A more natural unit of analysis is the city, not the country. Large cities do appear to have more expensive building costs than small ones. And this study has put Dublin – and Cork and Galway – in with some of Europe’s biggest cities.

It is therefore not as surprising as it may seem that the headline finding of the report is that construction costs in Ireland are similar to the UK, France and Germany. They are, however, almost 20% more expensive that in the Netherlands, something that the report is oddly silent about.

But perhaps the single biggest limitation of the report is that it is only in index form. Costs in Ireland are expressed as the number “100” and other countries are given relative to this. It is impossible to convert this into affordability and into policy.

We know, for example, from reports by Turner and Townsend, that inflation in Dublin build costs is higher than almost anywhere else they analyse in their reports. (Istanbul and Buenos Aires were the only cities – of 43 covered – with higher cost inflation than Dublin.) Thus, it is somewhat hard to believe the findings of this report that say costs haven’t changed since 2010.

But we also know something from Turner & Townsend reports that is not reported in the Housing Agency’s study: the level of costs. The Turner & Townsend report for 2017 estimates that the cost of building low-rise apartments in Dublin was almost €2,000 per square metre in 2016. Once you have per-square-metre costs, it is possible to work out a baseline for overall costs and therefore for the minimum rent needed for a project to break-even. Crucially, this break-even rent can be compared to incomes in the real economy. But with an index, none of this is possible.

And this is where further concerns arise with the Housing Agency figures: they just don’t seem to tally with anyone’s experience of the construction sector right now.

Going back to that Turner & Townsend report, it believed that based on prevailing inflation, the per-square-metre cost was expected to rise to above €2,100 in 2017 and, if pressures in the market do not change, to almost €2,300 this year. This would put costs in Dublin almost 50% higher than in Paris or Amsterdam, 70% more expensive than Munich and over twice the level in Madrid.

The report released this week by the Housing Agency is so starkly at odds with both sentiment in the sector and other reports such as the one cited above. For that reason alone, it would have been helpful for the report to dig into those differences.

Without that analysis, it is likely that this report will generate more heat than light – on a subject about which much ink has already been spilled. If vision drives strategy, then details drive tactics. Unfortunately, the new costs report does not have the detail that can enable policy to boost housing supply.

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