Ronan Lyons | Personal Website
Ronan Lyons | Personal Website

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Value capture and grasping the nettle on property tax

Value capture is the latest buzzword for city officials around the world. The term refers to the idea that social investment – from maintaining urban parks, national monuments and Blue Flag beaches to putting brand new transport infrastructure – creates value and this value can be captured.

The most obvious – and in most countries, the easiest – way to capture some of the value of social investments is through an annual property tax.

Think about the Phoenix Park. In work undertaken by ESRI researchers a few years ago, they found that the park adds significant value to properties nearby. Indeed, they found that all urban green space has this effect – but that the Phoenix Park, probably due to its size, has an even bigger effect than a regular park.

The Office of Public Works is responsible for the Park. To them, or indeed to any of the City or County Councils that run their own parks and green spaces, this finding is incredibly valuable. Why? Because it helps to quantify, in monetary terms, the minimum social benefits due to the park.

Imagine being an official in the Parks Service of the OPW or a local authority and being constantly told that they are a cost centre. Deep down, though, everyone knows that parks create value. And the housing market tells us the minimum value created.

With a system where property taxes reflect market values, it is possible to go one step further and create a link between that value and the running costs of those parks. In other words, cities can set aside a fraction of property tax revenues that reflects the value of, for example, an amenity like parks, in order to pay for the cost of maintaining those parks.

For some Irish people, admittedly, this would be an about-turn in how to think about property tax and their local authorities. Recently, I came across someone on Twitter wondering out loud what property tax is for, given they pay for their own bin service and given Irish Water is a separate body.

But this is to miss the point entirely: property taxes are rarely used to cover the cost of household-by-household utilities like water and waste. They are instead used for the general amenities. Those general amenities are, ultimately, where the value of the land under a dwelling comes from.

So far, so good. We could apply the ESRI research to the Irish housing market, work out what fraction of the value of housing in our cities comes from urban green space, and give that fraction to the people responsible for maintaining those parks.

But what happens when the amenities provided by society change? Once that happens, it is critical that the property tax change too. And this is why Ireland’s Local Property Tax, as currently set up, is far from ideal.

LPT is based on market values five years ago. Much of the focus has been on the overall change in property values since then. As the Daft.ie Report out a week ago shows, values in Dublin have risen by 50% in those same five years.

One of the main advantages of a sizeable property tax – say a tax of 1% of the value per year, as is common elsewhere, rather than less than one fifth of that – is to moderate swings in property values. Thus, it is likely that if the property tax had been bigger, and had been increased every 1 or 2 years, property prices would have risen by less than 50% over the last five years.

But, as the saying goes, we are where we are. And electorally, I can’t see anyone coming to power with the slogan “We’ll Triple Your Property Tax”. So the big upswing in values can be overcome by reverse engineering the rate of property tax, perhaps relative to a national minimum.

So, if Dublin City Council needs an annual budget of €1bn and 5% of that comes from LPT, then as the value of property within the DCC area goes up, the rate of LPT can go down to compensate.

But what about new amenities? A classic example is new transport infrastructure and Dublin is experiencing that at the moment. The cross-city Luas has changed the economic geography of Dublin for the rest of the century.

Cabra, largely ignored by many house-hunters, is now one of the hottest markets in the country, because of the cross-city Luas on its door. Across the north-west inner city, the cross-city Luas is having a huge impact on property values.

But is it fair for taxpayers in Roscommon and Kerry – and Tallaght – to pay for an investment that creates €100,000 in extra wealth for each homeowner in Cabra? (Lest there be any doubt, the exact same argument holds for earlier investments including in the Green Luas through Ranelagh and the DART to Howth and Killiney!)

A fair property tax system would adjust the relative values so that people who have seen their wealth boosted by public investments pay a small bit more each year. LPT is set-up backwards: the Minister for Finance effectively has to sanction a revaluation – and when is it in his interest, politically, to do that?

What we need instead is a revised LPT that automatically revalues every two years, no exceptions, so that no-one has to grasp the nettle and decide to revalue. If nothing else, it might get politicians more serious about restraining – and ultimately bringing back down – high property prices in this country.

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

On balanced regional development: Why Leitrim should root for Dublin

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

Can cost-rental kickstart home-building?

Last week, a Dáil motion on cost rental housing was successfully passed. Proposed by Green Party TDs Eamon Ryan and Catherine Martin, it gained coverage primarily because of the locations suggested by the Green Party for pilots: Cathal Brugha Barracks and the Broadstone Depot. Both of those sites are near the epicentre of the housing crisis. Over the last three decades, there has been a return to urban centres across the world, including in Ireland. This likely has a number of contributory factors, one of which is the banning of smoky fuels, which made urban centres visibly dirty.

This move back to city centres was hidden from view somewhat in Ireland during the Celtic Tiger, as policymakers and private sector were more comfortable with extending the cities, through motorways and greenfield developments, than recycling the cities. But reusing the same site for a new purpose – what is known in the business as brownfield development – is central to what keeps a city thriving.

And this is where Cathal Brugha Barracks and the Broadstone Depot come in. Cathal Brugha Barracks – or Portobello South, as it would no doubt become – is a sprawling 17-hectare site. It is situated between Dublin 6 and Dublin 8, both areas in very high demand in recent years. In Dublin 6, rents have risen 82% from their lowest point, while in Dublin 8, they have almost doubled in a few short years. The picture is not much better near Broadstone Depot, or Stoneybatter East, as I’m sure it would be known. Rents in Dublin 7 have risen by over 94% from their lowest point.

So how could cost-rental help? The idea behind cost rental is that the rent paid by the tenant relates to the cost of making their home, not its market value. This is a crucial distinction. Social housing supports that are based on market values, such as market rents, merely pit the so-called “working tenant” against the so-called “welfare tenant”. There is no guarantee that market rents are enough to encourage new supply.

Social housing supports that are based on the cost of providing new homes, however, are – by definition – linked to new supply. And thus, if we as a society want to guarantee a right to a home for all our residents, then cost-rental is a key ingredient. Social housing must be in addition to market housing, not a chunk taken out of it.

There is likely to be a significant positive spill-over from such a system. In particular, once they are meaningfully involved in the provision of new homes, local authorities are much more likely to be cost-conscious.

A raft of new regulations pertaining to newly built homes were introduced in the aftermath of the Celtic Tiger. They are most commonly justified with reference to what was built during the Celtic Tiger. However, if the regulations that had been in place had been actively enforced, the various shoddy developments that spring to mind would never have occurred.

The answer to poorly enforced regulation is not to bring in lots more – it is to enforce what is there in the first place.

The net result is that cost-rental would be very expensive if introduced tomorrow. The likely break-even rent for a two-bedroom apartment in the market today is at least €350,000, or €1,800 per month given the yield needed by the ultimate owner.

Setting profits and the cost of land to zero, it is still in the region of €1,250. Scrapping local authority levies and VAT also, and taking advantage of low interest rates available to the State, the up-front cost is still in excess of €175,000.

These rents are simply not affordable to those in need of social housing. But that huge gap in itself may make local authorities and national policymakers finally pay attention to what housing market commentators such as me have been saying for close to five years now: lowering costs, not increasing rents, is the best way to solve the lack of housing supply.

Suppose policymakers do finally grasp the nettle and bring housing costs down by, say, one quarter. The break-even or ‘cost rent’ for a two-bed is still likely to be in the region of €1,000 per month. For many – indeed perhaps most in need of social housing – this will still not be affordable.

This is where the second key element of social housing kicks in. Cost rental is just one part of the solution – the other is an income-varying subsidy. Typically, this works by taking a fraction of the disposable income of the tenants, usually about one third.

So a household with a monthly disposable income of €1,800 would pay €600 to their housing body for rent. If the cost-rent is €1,000, this means that the taxpayer covers the remaining €400. If the household’s income increased to €2,100, their contribution to the rent would increase to €700 and the subsidy falls to €300.

There are many attractive features to such a system. It means that those in most need – for example those with disposable income close to zero – get the most help. It means that there is no disincentive to getting a job, overtime or a promotion. If, in the example above, the tenants’ income went above €3,000 a month, they would simply pay their cost rent of €1,000, with no help from the taxpayer.

And social housing, by being based on cost rents, not market rents, means it is no longer the afterthought in the housing sector. In fact, if done through non-profit housing bodies, rather than local authorities, social housing can be first on the page, rather than last. This would be where non-profit housing bodies partner with for-profit developers, to bring a mix of social and market housing to a site.

And all the while, the local authority can retain ownership (and ground rents) on the site. But first and foremost, such as system would focus those same local authorities on costs, the root problem of Ireland’s housing crisis.

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

Recycling the city – our problem with vacant homes

This week, one of the co-founders of Twitter – Biz Stone – was in Dublin and, while here, helped launch an online mapping tool called Reusing Dublin. The tool is a collaboration between Space Engagers, a social enterprise, and the Peter McVerry Trust, one of the country’s leading housing non-profits.

The tool is online, at reusingdublin.ie, and is pretty straightforward in its design: if you know of a derelict or vacant home, you can go on to the site and post it. I’m lucky enough to be able to walk into work most days and it’s amazing how many empty homes – or flats above shops – there are once you take the time to look.

If successful, it will identify thousands of empty homes around the city, as well as sites that could be used. This in turn will help the city tackle what is a persistent issue, not just in Dublin but in Ireland’s other cities: high vacancy rates.

Seven or eight years ago, if you asked someone on the street to picture vacant homes in Ireland, they would probably describe a ghost estate. But ghost estates have by-and-large faded from relevance. Figures out this week show that the number of ghost estates in the country is down over 90% since 2010.

There are now 256 ghost estates nationwide and the majority of those are at least partially occupied. Indeed, of the 180,000 units in ghost estates back in 2010, the vast majority were either homes that had not even been started or else homes that were already occupied.

There are, in total, just 678 homes in the country that are in ghost estate, complete but sitting empty. That is about five days worth of housing demand.

But the paradox, though, is that despite the ghost estate issuing largely being resolved, vacancy is still a huge issue in a country with a housing shortage. In the 2016 Census, 13% of homes were vacant. If they are not in ghost estates, though, what are they?

The answer is that Ireland’s vacant homes fall roughly into three categories. Two of those categories are rural. In rural Ireland, there are one-off homes built during the Celtic Tiger – often adjacent to another dwelling – that are empty.

And there are also the older rural cottages, many of which have sadly passed their sell-by date. Ireland’s rural population is shrinking – and will continue to do so over coming decades. Those that remain in rural locations are likely to want a payoff, in terms of living space, for being far away from most amenities.

The final category are Ireland’s empty urban homes. And here is where things get weird. Strictly speaking, we know almost nothing about, for example, Dublin’s empty homes. What we do know is that the vacancy rate is higher in Dublin City Council than in the other local authorities. This suggests that the problem is related to older urban homes.

What is particularly frustrating is that Dublin – and indeed all Irish towns and cities – lack the basic information needed to manage their housing stock effectively. Across Europe, municipalities and city councils have complete registers of who owns what and who lives where. Irish cities have neither.

There is a Land Registry, in other words a register of who owns what, but it is incomplete, especially in the cities, where an older system, the Registry of Deeds, was used until recently. The Registry of Deeds is not map-based so finding out who owns what is a very complicated affair.

Not only that, while the Land Registry is now compulsory for transactions, this compounds the problem. If ownership is unclear or unknown, a dwelling or a site will never be transacted and thus never go on the Land Registry.

And Irish local authorities do not know who lives where. I remember distinctly, while an undergrad on Erasmus, being required to register with the Aliens Office in Cologne. I remember it so clearly because I took offence at the name! But whatever you call it, it makes sense for a city to know who many residents it has and where they live.

Of course, the principal reason cities around the world keep track of who owns what and who lives where is that they levy a property tax and thus want to make sure that everyone pays. Indeed, a reasonable number of homes are foreclosed each year in the US not by banks but by the city, for unpaid property taxes.

Our local authorities don’t have a property tax, at least not one on the same scale as the rest of the developed world. Therefore, if you don’t have the stick, you need to use the carrot.

The ‘Reusing Dublin’ app is one such carrot, because it highlights the opportunities being wasted in front of our eyes. Let’s all look around and take a note of empty or derelict sites and homes. This will at least give information to policymakers that their peers in other countries take for granted.

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

What the snow tells us about how we live

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Lessons from Moldova: don’t take growth for granted

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rental market shows underlying urban pull

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Aim, not effect, of new mortgage scheme a concern

Earlier this week, the Government announced a new home loan scheme. The new scheme, which will be effective from the start of February, is targeted at those who earn no more than €75,000 as a couple – or €50,000 as a single earner.

In particular, those wishing to avail of the scheme have to provide proof not only of continuous employment over the past two years but also that other mortgage lenders refused to fund them or at least fund them adequately enough to purchase the home.  Perhaps the most attractive part of the scheme is the interest rate: if you choose to fix for the full term, the interest rate is just 2% over 25 years or 2.25% over 30 years.

On the one hand, this is nothing new. Dublin City Council, for example, already offer almost the exact same deal. It seems, though, that very few people knew about it. This may extend to banks, who may view those interest rates as something of a shock. For someone borrowing at an LTV of more than 80% as a first-time buyer from one of the mainstream mortgage providers, variable interest rates currently range from 3.15% at AIB to 4.5% at Bank of Ireland.

So the government has effectively shaken up the mortgage market in two ways. The first is that, by dramatically lowering the price of credit, they have introduced an incentive for people to get turned down by a bank when applying for a mortgage. If you’re borrowing €250,000 for a property worth €275,000, would you rather a monthly mortgage repayment of €1,582 (at 4.5%) or €955 at 2.25%?

This is likely to have a few positive spin-offs from a government point of view. The first reason is that it is likely to bring out of the woodwork mortgage applications from people who believe that they would be refused but who, it subsequently turns out, the banks  will lend to. The second reason is that this is likely to encourage further interest rate cuts by the banks. It is hard to justify charging twice what the government is for the same product.

The single biggest positive side-effect of this move, though, is that it brings term-length fixed rate mortgages to the mass market. Almost no other country in the world relies on the variable rate mortgage to the extent that Ireland does. Unsurprisingly, we are the ones out of step – not the rest of the world.

Indeed, in the US, ‘adjustable rate mortgages’ (as they are known there) are viewed with the same disgust as mortgage-backed securities, collateralized debt obligations and all the other financial chicanery produced in the run-up to the Great Recession a decade ago. What financial system would leave vulnerable households exposed to the vagaries of the market for decades on end?

My hope is that, by bringing a scheme that already existed at the local authority level to everyone’s attention, it shakes up the mortgage market enough to bring down interest rates and make term-length fixed-rate available more broadly.

There are a couple of caveats to what sounds above like good news, however. The first is capacity. The government has only set aside €200 million for this so, if the average mortgage is €200,000, there will only be 1,000 households that will benefit this year.

The second is funding: one presumes that this is being funded by the State itself borrowing – and not setting aside current tax revenues. If the Government is borrowing to fund this, it is effectively using its power in the capital markets to pass on low interest rates to individual households. As long as capital markets are hungry for Irish debt, this is a cheap substitute for a tax cut.

If however, this is from tax revenues set aside, then the opportunity cost is potentially substantial – not least if those whose incomes is just above the cut-off see themselves pipped in the housing market by those with Government help.

And it is this last element – the boost to demand – that is most concerning. For over three years now, the consensus is that Ireland’s housing market is suffering from an acute shortage of supply – especially in Dublin and especially in the rental sector.

Making credit more readily available is the single most effective way of boosting demand, not supply. I understand the political need to be seen to be doing something but this does nothing to address supply shortages. Here’s hoping future months see more focus on boosting housing supply, not demand.

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

Should we ban house-building inside the M50?

The housing woes of Ireland – and Dublin in particular – at this stage well document and largely well understood. There are few who think we are fighting the last war. As the ESRI said last week, the housing market not undergoing the kind of credit-fuelled bubble that afflicted it in the early 2000s.

Nonetheless, just because it is not a credit bubble doesn’t mean that it’s a healthy housing market. Far from it. New CSO figures out this week confirm that the stock of dwellings, measured in euro terms, had been largely stagnant the past decade. While this may have made sense for the period 2007-2012 – when the country as a whole had too much, rather than too little housing – the lack of new housing supply over the last five years has cost the country.

This cost has a number of elements. Probably the most visible cost to society is rising homelessness – especially of lower-income families. Another long-term cost is the impact the lack of housing is having on competitiveness, especially in Dublin. The American Chamber of Commerce recently published a report, which I was involved in, highlighting the challenges faced by their members as they seek to expand and create new jobs in the city.

But I was involved in another report – for Activate Capital, a financer of developers joint-funded by the taxpayer through ISIF. This report found that the bulk of Ireland’s housing need is not actually for the type of housing we are used to seeing built.

There are significantly more family homes in Ireland than there are families: almost 25% too many, when you compare the 700,000 families in Ireland with the 900,000 dwellings to fit families. This is not even a problem in the greater Dublin area, where there is a 10% surplus.

Instead, the country’s housing shortage is entirely driven by apartments, or homes for 1-2 persons, and not by 3-4 bedroom houses. The term ‘apartment’ is a bit narrow. Ireland’s roughly 500,000 missing apartments does include medium-to-high rise apartments in urban cores for young professionals – and low-to-medium rise suburban apartments for empty-nesters.

But Ireland’s missing homes also includes tens of thousands of units in purpose-built student accommodation and co-living developments for key workers and young professionals. It also includes a similar number of missing homes in our largely non-existent independent living and assisted living segments for the country’s older residents.

These half a million missing homes represent a backlog – but it is not even a simple matter of meeting the backlog and then returning to ‘business as usual’ and building lots of family houses. When it comes to Ireland’s demographics, the outlook for the rest of the twenty-first century will be driven by three main forces: population growth, urbanisation and falling household size.

Unlike any other European country, Ireland will experience faster population growth in the 21st century than in either the 19th or 20th. For the century and a half to 1990, Ireland typically lost 5% of its population each decade. During the 21st century, the country will gain 5%. Every other European country is experiencing a slowdown.

You could argue that, since the Famine, the country has been a late bloomer, not only in terms of living standards but also population densities. This argument holds true for urbanization also. Ireland is now roughly as urban as the typical Western European country was 50 years ago. Over the next half-century, the country will go from 65% urban to 80% or more urban.

And lastly, there is household size. Once again, we are behind the curve. All European countries are on a journey from 4 persons or more in the typical household to just 2, or maybe slightly above. Ireland remains well above our peers, with 2.8 persons currently in the typical household. But this number has been falling steadily in Ireland since the 1960s. And it will continue to fall over coming decades.

Add these three factors together, and by 2080, you have a population of perhaps 6.3 million people living in Ireland, 80% or more of whom living in the cities and with the vast majority of households comprising just one or two persons. This is not a recipe for strong demand for housing estates even further out from our urban cores.

This is a recipe for building hundreds of apartments – of whatever type – in Dublin and throughout the country, every month for decades. Just taking Dublin alone, the city will in rough terms 2,500 apartment blocks with an average of 200 apartments built over the next half-century.

With a need for apartments this size, it certainly seems perverse of local authorities to favour commercial – especially office space – over residential. And it also seems perverse to allow development of estates of family houses when the city has an abundance of them already and when there is such a scarcity of apartments.

Given this stark background, it would seem prudent for Dublin’s four local authorities come together and agree both on a long-term multi-decade goal for housing in the city. It also seems wise that residential development, where it happens in the city, should be primarily – almost exclusively – in the form of apartments, not houses.

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