Ronan Lyons | Personal Website
Ronan Lyons | Personal Website


Future-proofing our housing regulations

Last week’s column discussed some recent history, in particular the regulatory backlash to the building boom that took place between 2000 and 2007. Its main point was that many believe that the volume and quality of building was a result of the lack of regulation, rather than the wrong regulations (in particular tax incentives).

If you believe this, you are more likely to believe that the answer lies in lots more regulations, rather than simply enforcing the regulations that were there all along (and removing the tax incentives that distorted the market).

This is what most local authorities believe and we have seen the implications in a raft of new requirements for building, especially when it comes to apartments. Almost all of these new regulations come from good intentions, like the requirement in Dun Laoghaire Rathdown that all new homes are passive (i.e. they produce at least as much energy as they consume) or the requirement for all apartments to be fully accessible to those with limited mobility.

Who could argue with these regulations, you might ask? Take the analogy of a car. Suppose one of Ireland’s local authorities decided that any new car sold in its area had to be battery powered, rather than petrol-powered and, on top of this, all new cars had to fully wheelchair accessible.

A moment’s thought would reveal that these new regulations, while probably well meant, would clearly discriminate against those on lower incomes – and probably against everyone except those on highest incomes. The very same principle holds true in housing.

All the new regulations, specifications and minimum requirements that have been brought in in the last ten years are all things that would improve the quality of accommodation. However, they also increase the cost of new housing, putting it further out of the reach of ordinary households.

For example, a newly built two-bedroom apartment in central Dublin would cost at least €1,700 a month to rent – and that’s without any site costs. Allowing for reasonable city-centre site costs, the breakeven monthly rent is between €2,000 and €2,200.

To put that in perspective, suppose a couple with one child wanted to live in a newly built two-bedroom apartment. What income would they need to earn so that their rent accounted for no more than one third of their spending, as is recommended? With a rent of €2,000, their take-home pay would need to be €6,000 and thus their gross income would need to be over €100,000… just to afford a minimum-spec two-bedroom apartment!

When seen in this light, it is clear that local authorities have got things backwards with minimum standards. You don’t start with your list of desirables and make them the minimum allowable, regardless of the cost implications. You start with the spread of incomes in society and figure out what a reasonable breakeven rent is – and then what standards match that.

This is bad enough – but it gets worse if the regulations are forcing things to be built that aren’t needed anyway. One example relates to fire doors and corridors, which are typically mandatory in new Irish apartment buildings. These are expensive and more dangerous than sprinkler systems – and they also preclude the open-plan style of apartments that modern urbanites prefer. Why do we have these requirements?

Another example – and perhaps more responsible than any other factor for delaying the apartment boom that Dublin and Ireland’s other cities need – is basement car-parks. It is mandatory, with some exceptions, that any new apartment have an underground car-parking space. These cost €30,000 to build – digging deep is expensive – and thus add an extra €150 to the breakeven monthly rent.

There are two problems here. The first is the cost: such a regulation prices out poorer households. The second is the questionable benefit. If you go to a recently built apartment block – granted, there are few enough of them – you’ll see lots of empty spaces semi-permanently.

Who would want to own a car, if you live close to town or the Luas or DART? With groceries delivered, car-clubs like Go Car and on-demand taxis if the need arises, car ownership is increasingly viewed by younger generations as a burden.

So they are foregoing car ownership – but as they move into the 21st century, our local authorities are still stuck in the 20th. The same holds for the cookie-cutter approach to the layout of apartments. Increasingly, apartments are going to be built with shared facilities – similar to the new generation of student homes.

And yet our planners have introduced a byzantine set of requirements for the relative and absolute size of particular rooms in an apartment, as if the rooms we lived in forty years ago are sacrosanct. Have local authorities thought about how those requirements will change for every ancillary facility, from swimming pool and gym to office and cinema facilities, included in the development?

The country’s biggest housing need is not family homes. It is the need for roughly 250,000 apartments in Dublin and all other major urban centres. The current set of regulations for apartments are costly, making the small number of newly built ones the preserve of the wealthy. But they are also outdated, designed to fix the policy-driven deficiencies of a building boom that ended over a decade ago.


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

Diagnosing the problem with housing supply: too much regulation?

The dramatic housing bubble and crash that took place between 1995 and 2012 has left its footprint on Irish policymaking. One of the obvious signs of this is that the Central Bank has introduced macroprudential rules about how much households can borrow.

In part, this is just formalising the systems the Irish building societies had in places for over a century, from their establishment in the 1860s to the 1990s. The building societies, however, wanted to be more like banks and got their way in the late 1980s.

As the old saying goes, though, “Be careful what you wish for.” And less than a generation later, they are all gone. Most were gobbled up by the banks in the 1990s but the few that weren’t converted to become banks before disappearing when the bubble burst.

The banks that took over the mortgage market had – and perhaps one could argue still have – very little experience in sustainable mortgage lending. Thus, the Central Bank took the step of putting in place rules to make them act like the Building Societies of old.

This was how the system responded to the problems with credit supply that emerged in the bubble. A different problem emerged with housing supply. Whereas there is general agreement that the problem with credit with loose lending, there is less consensus on what happened construction.

To some, the principal problem in housing supply was a simple lack of regulation – allowing developers to build whatever they wanted wherever they wanted. If this is your preferred diagnosis, then the solution is to regulate more strictly what is built and where.

A closer examination, however, reveals that much of the problem of excess was not to do with allowing the free market to build what it wanted. Rather, it was skewing the tax system, through for example Section 23, to get the market to build what would never have been built otherwise.

How else, for example, can you explain the fact that more homes were built in Connacht and Ulster 2000-2008 than in Dublin – despite Connacht-Ulster having half the population of Dublin?

It is inconceivable that the parts of the country currently blighted with unfinished developments would be so badly affected if Section 23 had not been extended from its origins in urban renewal to a “one for every constituency” bonanza.

If you subscribe more to this diagnosis than the first, then the problem was government interference, skewing the market, rather than a lack of government interference and leaving the market to its down devices. This choice matters because it affects housing supply today.

The Irish housing policy system has, by and large, bought in to the former story. It believes that the State was not involved enough in the housing system in the 2000s and therefore needs to become more involved in what gets built are where.

In fact, and of central importance today, the same problem and diagnosis extends to Dublin and the cities too. If you look at the poor quality of apartments built in the late 1990s and early 2000s, it is easy to sit back and think: “This is what happens when developers are allowed to build unfettered by planners and the State.”

This is a complete misdiagnosis of the problem, however. The only reason construction took place, for example along Dublin’s quays, was the presence of tax reliefs. If you give people tax breaks to “rack ‘em and stack ‘em”, that is what they’ll do. If you want them to stop doing this, stop giving them the tax breaks.

Why does this matter? What harm can a few extra regulations do? The Irish housing market, where sale and rental prices have risen by up to 75% in the last six years, are living proof of the potential consequences.

Clearly, the fact that rents and prices have risen is first and foremost about demand. Between income growth, employment growth and population growth, the country needs more homes. But unless you want to stop people from having families or hiring workers, the focus has to be not on why there is so much demand but where there isn’t enough supply.

Currently, Dublin alone has a shortfall of at least 125,000 apartments and, being realistic about the next five years, closer to 150,000 apartments. This is astounding, when you think that the city has only roughly half a million households.

But to build an apartment in Dublin today means complying with what has become effectively a cookie-cutter specification. Regulations today cover everything from ceiling heights, window orientations and balcony depths to basement car parking, lifts per floor and – of course – the overall height of the building.

All these specifications bring benefits but also costs. To take just one example, the cheapest a basement car parking space can be built is roughly €30,000. For context, a city centre apartment would have a site cost of between €50,000 and €100,000. One regulation alone adds an extra 50% to site costs.

To make it even more concrete – if you’ll pardon the pun – every extra €1,000 in costs adds €50 to the breakeven monthly rent. So a basement car parking space adds €150 to the monthly rent. This is, of course, not a problem if you both can afford an extra €150 a month and need the space.

But many households cannot afford such a luxury. And more importantly, many more not need it in the first place. We are moving past the age of car ownership, in particular for those living in urban cores. Next week – the last before a summer break for this column – will look at how we can future-proof our regulations around housing.


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

Property tax is too low: the myth of the squeezed middle

Here’s a heresy for you: taxes in Ireland are too low. My guess is that most readers didn’t agree with that sentence. But, while it may jar with our sense of reality, it is undeniably true. Take income tax. The 2017 “Taxing Wages” report by the OECD compares the average tax paid by the same kinds of households in different countries.

Take a family, with one earner on the average wage and two children. In Ireland, once tax credits and cash benefits are accounted for, such a family pays just 8.3% of its income in tax (and USC). In the boom times, we actually had the crazy situation where such a family was a net recipient from the tax system. Things have improved since then, although only a bit.

As you can imagine, this is not how other countries operate. Across the OECD group of high-income countries, 27% of income is paid in tax by the average-earning family. Ireland’s low figure is nothing to do with a Boston vs. Berlin view of the world. There is a gap between these models, but it’s at a much higher level. In the US, the average-earning family pays 21% of its income in tax, while in the UK it’s 26%. In Germany, it’s 34% and in France it’s 40%.

How can that be, you might ask – particularly if you regularly read that Ireland has some of the highest marginal rates of taxation in the EU. Well, the key is the difference between average and marginal. Ireland’s very high marginal rates of taxation – you pay roughly half of your last euro over in tax, if you earn €35,000 a year – are needed to compensate for very generous tax credits.

What’s this got to do with property? There are three types of tax: income taxes, consumption taxes (like VAT) and wealth tax. Income tax, when done well, are very progressive – everyone pays something but richer households pay a bigger fraction.

Consumption taxes such as VAT are extremely regressive: they hit poorer households hardest. And Ireland’s VAT rate is one of the highest in the world.

When it comes to the last category – wealth tax – Ireland once again sticks out. By far the single biggest chunk of wealth in the economy, at least €400bn and probably closer to €500bn, is residential property. And, until recently, Ireland didn’t tax this at all!

Since 2013, though, Ireland has an annual Local Property Tax. This is set at a rate of 0.18% of the value of the property, although local authorities have some discretion and can vary it from 0.15% to 0.21%. Many authorities have already taken the chance to lower the rate as much as possible.

This week, Fine Gael leadership frontrunner – and thus, very likely Ireland’s next Taoiseach – Leo Varadkar proposed allowing local authorities to cut property tax further. To be fair, he couched it in terms of giving them greater freedom to set the rate.

However, the implication was clear – greater freedom for local authorities means greater freedom to lower property taxes. Unfortunately, this is precisely the wrong thing to do, if we want “strong and stable” local authorities, to borrow a phrase from across the water.

Compared to pretty much every other high-income country – including far smaller ones, like Cyprus and Malta – Ireland has the weakest local authorities. They lack financial autonomy and are thus hugely dependent on handouts from central government, who then dictate the terms.

In order to enable them to stand on their own two feet financially, Irish local authorities need to build up a far longer track record of a number of revenue source, with property tax chief among them. As it stands, the temptation will be far too great for local authorities to cut and wait for national government to fund a service instead.

In most other countries, property tax is at least four or five times the rate it is in Ireland. Having a property tax of 1% of the value of a home not only provides funds for local authorities, it also places a cap on property values – an in-built stabiliser on house prices.

It is obvious that Leo has one eye on 2019, when property tax bills are set to change as properties are revalued. They are currently frozen at 2013 values, almost exactly the bottom of the market, and market values have risen by 50% or more in and near Dublin, Cork and Galway cities.

This shows the obvious drawback to freezing tax bills – it creates an incentive to keep them frozen. The other drawback is that property tax can’t act as the brake on prices as it does in other countries. Dangling the carrot of lowering property tax runs the risk of 1970s auction politics, where various bits of government revenues are sold off.

We need to broaden and deepen the tax base – in particular when it comes to residential property, which makes up so much of all private wealth.

I am under no illusions that a “Tax Is Too Damn Low” Party will take off any time soon. But we as a country need to understand where our tax system is deficient and as a result both why our local authorities don’t have the funds they need and why our housing market will continue to swing more than most.


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

Complements and substitutes: Housing as a piece in the jigsaw

As a policy area, housing does not stand on its own. It sits in a system full of links and feedback loops. At a very basic level, money spent on housing has to compete with money spent in other areas. In this sense, housing policy – at least where it involves money, not simply regulations – has a number of substitutes.

But it’s not just about competition. Economists see the world in a slightly different way to most people. To an economist, one of the things they are most interested in is how changes in one good – like housing – affect others, and vice versa. And the two key terms are complements and substitutes.

A complement is a good that goes hand in hand with another. Lecturers struggling to come up with imaginative examples often resort to gin and tonic, when explaining the concept to first-year undergraduates. (We can relax for a while, as gin is once again very fashionable!) A substitute is something that, as the name suggests, can fill in for the original good. The same lecturer might give the example of two types of beer, when explaining the concept to first-years: drinking one brand of beer won’t heighten the enjoyment of drinking the other (arguably!).

This may seem very obvious but it has deep implications, as it is applicable to all types of goods and services we enjoy, public and private, including housing. What is concerning at the moment is that the public policy system in Ireland does not yet seem to have connected up housing with its complements and substitutes.

One obvious example is housing and commuting. When choosing a home, these are substitutes: you can live in House A and you walk or cycle to work, or House B, which is further away and cheaper but involves a 30-minute drive each way.

The Central Bank clearly missed this substitutability when devising the mortgage rules. By focusing on the ratio between the mortgage and gross income, they have incentivised further sprawl. People who hit the limit of the mortgage rules can extend themselves by buying further out and paying in fuel, not mortgages.

The Central Bank is not alone. Local authorities too miss the link between housing and other parts of the system. Take housing and office space. These are complements. For society to get full enjoyment out of one, it needs the other too: put simply, all workers need somewhere to live. The current office-building boom in central Dublin, therefore, creates a need for new housing.

It is estimated that there is office space for 60,000 new workers being built in Dublin currently. Almost all of this is taking place in central Dublin, well within the City Council’s limits. And yet, fewer than 1,000 apartments are being built. In fact, in the last seven years, just 3,000 apartments have been built in Dublin – many of those completions of legacy projects from the bubble.

Professional developers, many of them new to Ireland, are adding perhaps 25% to the stock of office in Dublin in just five or six years. This scale of development clearly indicates the demand for offices is there. Therefore, Dublin City Council must connect the dots and see that more offices need more homes.

This is definitely not a call for the Council to limit the development of office space. Nor is it a call for the Council to demand from those developing office space that they develop residential instead.

Rather, it is a call to understand why development of the residential accommodation that is so badly needed in the country – and in particular in Dublin – is not taking place. I suspect that this is because construction costs in Ireland are so high, compared to other countries, but what role does regulation play in this?

Related to this is the need to move beyond “building for families”. Fewer than half of the households in Ireland are family units (one or two parents with children). In Dublin, the fraction is even smaller and the city has more family-sized homes than families.

But without enough apartments or student homes, those without the right kind of homes end up living in imperfect substitutes: family homes. This has led to an artificial shortage of family homes in a city that has too many!

The implications for local authorities are clear. Where there are offers to build, for example, student accommodation, the city – whether it is Dublin or any other Irish city – should take it. Dublin alone needs to approve one hundred blocks with an average of 300 student units by 2024 to meet existing and new demand. That’s one block of student units every month for the next eight years, if demand is to be met.

We currently have the bizarre situation of local authorities looking askance at proposals to build student accommodation or suburban apartments, while welcoming all new office space. It is time for them to revise their Econ101 and the basics of complements and substitutes.


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

Information matters: why we need a public register of rents

With all the commotion of the last decade or so, markets are not very fashionable these days. We forget that markets work a lot of the time and when they work well, they are invaluable. They help identify who has the greatest need for something, as identified by how much they are willing to give up to get it, and transfer it to them.

Obviously, there are many instances where markets are not the solution. In most countries, you are not allowed sell your vital organs, for example, as there is a concern that the vulnerable will be tempted into making short-run decisions with long-run costs.

Less dramatically, we know that not all housing can be left to the market. As different households enjoy very different incomes at any given point in time, if housing was left completely to the market could mean that many households would not be able to afford housing. (Indeed, this has largely been the problem with social housing over the last two decades: it has been left to a market that was never going to provide it.)

For the bulk of people, though, the market is where they source their home. And for markets to work well, certain key ingredients are needed. One of those key ingredients is information. Those active in the housing market a decade ago or more will know all too well the feeling of not knowing whether you have overpaid for a property.

That fear may still exist, as those who buy today worry about overpaying compared to what it might be worth in two or ten years’ time. However, there was a more basic fear that existed: until the Residential Property Price Register was launched nearly five years ago, you had no idea if you were overpaying compared to the person who bought next door, a month or a year previously.

The Price Register helps solve that problem, by publishing information about property transactions in the country on one site. In truth, it is only halfway there. It includes only the most rudimentary information on transactions – the date, price and address. A proper Register would also include the Eircode and information about the dwelling itself, such as size, type, age and energy rating.

But even with it only halfway there, it is world away from the private rented sector. Last week, I wrote about how the system of Rent Pressure Zones will struggle to have any impact on the vast majority of tenants.

This is primarily because the system does nothing to address the lack of new rental homes that are needed – and indeed may make things worse by encouraging existing landlords to sell up.

However, the other reason RPZs are unlikely to work is that they require policing by tenants. Given how difficult it is for a tenant to get “shortlisted” by a landlord currently, it seems very unlikely that one lucky enough to get a home is going to then try to pick a fight with their landlord.

I suspect, though, that we will not see Rent Pressure Zones scrapped in the lifetime of this government. Thus, policymakers should be concerned with how to make them work as best as possible in minimising rent increases both tenants, old and new.

One thing that could help, at least in part, is to do as is done in the sales market: make publicly available information about all rents paid, by address. Some landlords would baulk, I am sure, but many more would be keen themselves to see if they are charging the right amount.

Such a change requires very little new work on anyone’s part: the Residential Tenancies Bureau already collects this information when the tenancy is registered, together with information on the type and size of the property. The one major tweak would be that landlords are required to notify the RTB when they change the rent, as the RTB currently only captures rents when the lease starts.

Again, Eircodes would come in handy here. If they were mandatory on RTB forms, this would allow a published register of rents to be linked up, by address, to online listings. This would bring an element of self-policing into the market. Anyone viewing the property online, on a site like, would be able to see the rents paid by the tenant leaving, and previous tenants.

Doing this will not level the playing field. The rental market will still be an insider-outsider one, where sitting tenants are unlikely to move because of the benefits and cheaper rents or staying put. But it will make things a little less unfair, as it would use public information – that is already collected – to establish a common ground for negotiating a rent.


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

Why Rent Pressure Zones can’t work

Earlier this week, the latest Rental Report confirmed that the streak of rising rents continues. In Dublin, rents have now risen for 23 consecutive quarters – nearly six years – and have risen a total of 66% since 2011. Outside Dublin, the increase has been somewhat smaller (40%) and shorter (17 quarters), but the trend is now common across the whole country.

It is important to put those trends in context. Adjusting for general inflation, the longest streak of rising rents that I can find in the post-World War II era in Ireland is at the start of the Celtic Tiger. Rents in Dublin rose by more than 100% in real terms in the seven years between 1995 and 2002. It is now looking likely that, in length if not in the size of the increase, that record will be broken in the very near future.

Ultimately, rents are rising because of the chronic mismatch between strong demand and weak supply. The country needs at least 15,000 and probably closer to 20,000 new rental homes built each year. But currently almost no new rental homes are being built.

The majority of new “completions” each year are either one-off homes (which never come on the market, sales or rental) or properties built during the bubble being inhabited for the first time now. And the bulk of the remaining new homes – perhaps no more than 3,000 in 2016 – are houses built in estates for sale, not apartments and not for rent.

In this kind of market, a system like Rent Pressure Zones could never work. Put yourself in the shoes of a landlord in the current market. You put up a home for rent in a Rent Pressure Zone, for €1,000 per month. You are inundated with enquiries and arrange for an open viewing. Thirty interested parties turn up.

The first prospective tenant says they are interested in the property. Fully aware of their rights, they ask for proof that the €1,000 a month rent is no more than 4% than the rent charged to the previous tenant a year ago. The landlord, new to this Rent Pressure Zone thing, says “OK, well, let me get through this and I’ll get back to you on that.”

Next in the queue says “Look, I don’t really care who was here a year ago or what they paid. I need somewhere to live and I can pay €1,000. I’ll pay €1,050 if needs be.” Who is the landlord going to go with, even with the best of intentions?

Rent Pressure Zones were introduced because rents were rising due a scarcity of supply. But they can never work for precisely the same reason: where tenants have no bargaining power, they are not going to police rent increases.

This is certainly true for new tenants. What is less clear is what has happened rents for sitting tenants. The headline indices of rents – both in the Report and in the RTB’s reports – measure rents for new lease. Until now, neither has been able to say anything about how often and how much rents are increases within a lease.

For this week’s Report, we organised a survey of over 4,000 tenants, asking them the path of rents they have paid in recent years. The findings are noteworthy: “sitting rents” have increased by an average of just 27% in the last five years, compared to over 50% for “market rents”.

This is even more damaging for the Rent Pressure Zones. Not only are they most unlikely to work, it seems that their prime beneficiaries – sitting tenants, who know exactly what the rent was a year ago – are the renters least in need of protection.

Indeed, if rents of sitting tenants were measured accurately, it may be the case that nowhere in the country is a Rent Pressure Zone currently.

Ultimately, the whole system of Rent Pressure Zones was based on a poor understanding of the housing system. It was the equivalent of a Minister for Health banning high human body temperatures, because of the danger they pose to our health.

The level of rents is effectively the temperature of the market. If you don’t like the symptoms, you can’t simply ban them. You have to tackle the underlying disease. The disease here is a lack of rental homes, in particular apartments, due to high construction costs. That is what policy should focus on.


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

Should we fear another property bubble?

In last week’s Sunday Independent, we learned that a substantial fraction of the population – almost two in five – are worried about another housing crash. The public have every right to be concerned about what’s happening in the housing sector. As each year passes with only a small fraction of the 50,000 or so new homes needed being built, we run into more and more bottlenecks.

However, what happened the Irish housing market – and indeed the wider economy – in the period 2001 to 2012 was a bubble, one of epic proportions that will be used in textbooks around the world for decades to come.

It has all the defining hallmarks of a bubble. The first part of a bubble is an initially benign economic boom. In Ireland’s case, this was the start of the Celtic Tiger in the mid-1990s, which brought about rising prices, especially for housing.

It is important to remember that, with two exceptions, house prices had been largely unchanged for twenty years from the 1970s. However, year after year of rapidly increasing prices created a new normal and this convinced both borrowers and lenders that things had changed.

A major driver of Ireland’s economic growth was a very benign global economic environment, following the end of the Cold War. Tied to this was the Single European Market and a period of financialization across the developed world.

Financialization meant in practice the rise of universal banks and, with them, the death of Building Societies. These specialist institutions were not ‘too big to fail’ and so had to lend prudently to survive. Ironically, Building Societies were among the loudest in calling for the deregulation that would see them gobbled up by the new larger banks.

Ireland’s banks, which had existed as banks for the commercial sector since the early 19th century, now had a new business arm – mortgages – and access to almost unlimited capital from overseas. It was partly this lack of experience that led them to scrap the requirement for a substantial down-payment from those taking out a mortgage.

As late as 2000, the typical first-time buyer deposit was over 30%, according to Central Bank figures. But by the mid-2000s, this had fallen to less than 10%. Indeed more than one quarter of first-time buyers in 2006 had no deposit at all.

And this is what was at the heart of the Irish bubble – and indeed all bubbles: a glut of capital. One of the main chapters in my doctorate looks at what drove the Irish bubble and crash and it found that easy lending was at the heart of pushing up house prices between 2001 and 2007. This is in contrast to the period from 1995 to 2001, where a mix of fundamentals drove up house prices.

The fall in house prices after 2007 reflected a combination of expectations realigning and prices finally reflecting all the new supply built in the bubble, particularly outside the main cities.

Probably the single best statistic to spot a bubble is not trends in house prices per se, but rather trends in sale prices relative to rental prices. Investors call this the yield and it can be thought of as the equivalent of an interest rate: what percentage of the value of the property is the annual rent? Or, flipped around, how many years rent do you need to buy a home?

This one measure is hopefully enough to show just how different the housing market is now to 12 or 15 years ago. In 2002, the average Dublin property sold for 20 years rent. This is in line with international norms, where a range of 15-25 years is typically given as normal.

However, by late 2006, the average Dublin property was now selling for 33 years rent. All the extra new homes that were built should have lowered housing prices – and they did have an impact on rents. But the glut of mortgage credit meant that, even when rents fell, price rose.

Since the peak of the market in 2007, though, yields on property in Dublin – and all across Ireland – have normalised. This happened because prices fell by far more (roughly 55%) than rents (roughly 30%). This was a much-needed correction and a much more sensible multiple of annual rents has prevailed in the market over the last five years.

With capital not running riot in the Irish housing market, and with yields at healthy levels, there is little risk of a crash similar to the one we have just seen. But does this mean that there is nothing to worry about when it comes to Irish housing?

Absolutely not! If anything, the problems in the housing sector now are the opposite of those from a decade ago. Instead of a glut of housing, there is a scarcity – an extreme scarcity in the cities.

If the country were at risk of a housing bubble bursting, there would be clear implications for policymakers. In particular, the Central Bank would need to take action. Instead, what we have is an acute lack of homes. I estimate that in Dublin, over the last six years, just one new dwelling has been built for every five new households formed.

Instead of the Central Bank, it is the Department of Housing that must lead the charge in tackling our current housing woes. Moves to control rents or help first-time buyers are really about demand. But the problem is in supply. That should be the focus until the country is building more than 40,000 new homes a year.


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

Ireland’s housing crisis: Is it all the market’s fault?

Ireland’s housing woes can be summarised adequately by the phrase ‘plenty of people, not enough homes’. The country enjoys a rapidly growing population. This is due to a substantial surplus of births over deaths, something that most other high-income countries would love to have. It is also due to net migration, again a symptom of economic success.

That’s why it’s ‘plenty of people’, rather than ‘too many people’. I’m a bit of a demand fundamentalist, when it comes to housing. We shouldn’t have to turn away anyone simply because we don’t have enough property.

This is true not only for permanent residents but also businesses, who need office space, and visitors, whether short-term tourists or longer-term visitors, such as international students. All demand is good demand, in that sense, because this demand for housing goes hand in hand with job creation and thus livelihoods for those of us that call Ireland home.

Why ‘not enough homes’, though? Where have things gone wrong? In recent months, it has become something of a conventional wisdom that the lack of new homes being built is down to the failure of the market. Over-reliance on the market, this line of thought goes, has left us bereft of the full range of homes we need.

The logical conclusion most commentators making this point arrive at is that the State must step in and get building new homes. If we set aside, for the moment, quibbles about housing should be provided by Local Authorities or by Approved Housing Bodies, like Cluid or Tuath, then I agree with the conclusion.

But I think the path to getting there is not only wrong but dangerous in terms of its policy implications. A look at some of the numbers will hopefully explain my point.

Taking into account the various sources of demand, it’s clear that the Greater Dublin Area needs at least 1,200 new homes a month – and probably more if it enjoys sustained net migration. But over the last five years, it has seen about one quarter of this level of activity.

Are those who argue that the problem here is over-reliance on the market honestly suggesting that the State should make up three quarters of all home-building? Of course not.

I personally would favour a situation where about one third of housing is supported by the State, targeted at those in the lowest third of the income distribution. But in a country that needs 50,000 homes per year, this means new social housing provision each year of roughly 17,000. Given that only 13,000 new homes were started in 2016, the majority of which were one-off houses, this leaves a missing market of 20,000 new homes. Why are these not being built?

One argument is that the developers simply don’t have the capital to build. This simply doesn’t stack up against reality. In a world of zero interest rates, capital is on a global hunt for a return. We have seen the fruits of this in Dublin’s office sector, where half a million square metres are currently being built – with the same again ready to be built once the first chunk is occupied. The same is now true for Dublin’s hotel sector, where rising room rates have made it viable again to build. And, while there are clearly issues with the planning system (as I discussed last week), the student accommodation sector also shows no signs of being capital starved.

The final piece of the jigsaw is that the organisations that fund or build offices, hotels and student accommodation are the same ones that fund or build apartments – the single greatest need when it comes to housing in Ireland. So if it’s not a lack of capital, what sort of market failure is it? All good students of economics are taught to look out for two types of failure when considering outcomes: market failure and policy failure.

One clear policy failure is the dereliction of duty on the part of government, both central and local, to provide social housing. It is simply not credible to expect the market to provide housing for people with incomes so low they can’t cover the cost of building their home. And it is simply not fair to expect, as Part V does, that the occupiers of newly built homes should pay for new social housing. The cost of new social housing should be borne by all members of society, not delegated to the inhabitants of new homes.

But this is about the 17,000 or so homes needed each year for social housing. When it comes to the 35,000 or so market-built homes needed in Ireland each year, the evidence from the rest of the construction sector is clear: there is no market failure in getting funds to where building is viable.

The problem is that building is not viable, particularly for apartments – where the need is greatest. From the lack of a land tax to well-intentioned regulations that simply stifle new supply, policymakers at all levels need to stop blaming the market and take a long hard look at their role in creating Ireland’s housing crisis.


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

Dublin’s student housing crisis

A couple of weeks ago, Dublin City Council sent back two planning applications for student accommodation near the new DIT Grangegorman campus in Dublin 7. Combined, the two private developments would have added about 1,000 new purpose-built student units.

In justifying its decision, the Council made two interesting – ok, baffling! – points. The first was that it feared an “overconcentration of student accommodation” in the area. It is as if, when agreeing to locate DIT on one site, nobody thought that these 20,000 students would need somewhere to live.

That is, to me, baffling enough. But follow this logic through. Economists are obsessed (rightly so, in my view!) with the concept of opportunity cost: what happens if you don’t do something is as important as what happens if you do something.

This is particularly important if we think about the fear of displacement. I should point out that I’m a local resident myself and neither I, nor anyone I’ve talked to, is worried about this if student accommodation is allowed to go ahead.

However, some local residents, according to media reports at the time of the decisions, fear the area will become overwhelmed with students. Again, this fate was largely sealed once it was decided to locate DIT on the site.

I studied the dynamics of the purpose-built student accommodation sector closely last summer and part of that work involved understanding how students live currently. It’s seems reasonable, based on the evidence, to allow for the about one third of Irish students living at home with their parents – this is about twice the UK fraction.

But the important stuff is what happens the other two thirds, not the ones who stay at home with Mammy. Currently, the typical student lives in a three- or four-bedroom house with a number of other students. Each has a budget of €500 a month – and closer to €600 if you live in Dublin.

This means that, once DIT is ready to go, a group of four students will have a budget of between €2,000 and €2,500 a month to rent a family home. How many 1- or 1.5-income households could compete with that?

In short, I can’t think of a way to displace local residents from Dublin 7 more rapidly than to put DIT there and not allow student accommodation to be built.

It gets worse, though. The Council goes on to question the need for student accommodation at all. It asks the developers to justify why they are building student accommodation at all, “rather than standard residential accommodation”.

Before we get into the numbers, think about that for a second. A private company does their market research. They are fully aware that DIT itself plans to provide student accommodation and they are acutely aware that their competitors are also at work building homes for students.

Nonetheless, they crunch the numbers and are happy that they will easily fill 500 new units. Not only this, they go off and raise capital to do the same. Raising capital means convincing quants people, probably in London or New York, that they are not going to back a loser. This will include articulating the need.

After all that process, the company have their funds, happy that not only have they vetted their own numbers but so have people who are putting savings on the line. Then, after all that, the Council turns around and questions why are they doing this in the first place!

We need to stop questioning the motives of those who want to develop. Their motives are pretty obvious: they spot a need and want to meet that need, in doing so making a profit. It doesn’t really get any more or less sinister than that.

But Dublin City Council’s response makes even less sense when you look at the numbers. The city is already grossly understocked when it comes to purpose-built student accommodation. In 2016, there were roughly 76,000 students in the city, of which 42,000 were “non-local” (from outside the city).

Only 11,000 of these students could be accommodated in purpose-built student accommodation, however. The other 30,000 “non-locals” (including Dublin’s many international students) had to find homes in the private rental market. This means 3- and 4-bed houses which could have accommodated families on lower incomes.

So, even in 2015, Dublin – and Ireland as a whole – desperately needed new student units. But the picture looks far worse as we scroll forward. Basic demographics tell us that the 18-22 year-old population will rise by 30% between 2014 and 2029.

On top this, you need to add in net migration, rising enrolment rates and a growing share of international students. Taking these into account, the total number of third-level students in Ireland is set to rise from 168,000 in 2014 to between 200,000 and 250,000 by 2024.

Focusing just on Dublin, and allowing for the fraction living at home with their parents – and even allowing for half of all students to still live in the wider rental sector – Dublin needs at least 30,000 new purpose-built student units in the next few years.

That’s 60 blocks similar to the ones the Council just sent back to developers. And we wonder why rents in Dublin 7 have risen by 75% in recent years!

It’s particularly concerning to hear the Council talk about “standard residential” vs student homes. Dublin has in recent years had a chronic shortage of each of the following: office space, hotel rooms, student accommodation, and apartments.

Starting with office space, and now spreading to hotel rooms, these problems have been righting themselves. This is what a smart city does: harness developers, and the capital they have access to, to meet its needs.

If there is a problem when it comes to the viability of building apartments in Ireland – and there definitely is! – then this needs to be tackled directly. Holding up much-needed student homes as hostage definitely won’t solve the problem.

In fact, it will make it worse. Rents in Dublin 7 will rise even further and locals will feel more displaced.


An edited version of this post was originally published in my column in the Sunday Independent. My view on the scale of demand has changed slightly, but I have left this as is in the interests of transaparency!

Navigating the 2017 housing market

Ireland’s housing market in 2017 is one of many conflicting signals. Depending on who you talk to, there are parallels with all sorts of past experiences. To some, we are still living in the crash, with masses of empty properties dotted around the country the elephant in the room.

To others, the dramatic increase in housing prices tells them that we are in a bubble. To them, the market is like Groundhog Day – and we are Bill Murray, doomed to repeat the same cycle we just exited.

I am not convinced by either narrative, however. True, there are some small pockets of the country where an excess of bubble-era building still swamps out demand. But by far the more important trend over the last six years has been an acute and growing shortage of supply.

It’s worth remembering that, in the bubble years of 2001-2008, Ireland’s cities did not build to excess. The over-hang, once the bubble popped, was to do with the increase in unemployment and emigration. Once this levelled off in 2010, so too did rental and later sale markets.

But if we are not back in 2011, neither are we back in 2001. The market then was characterised by increasingly reckless borrowing and lending. Central Bank of Ireland figures indicate that the typical first-time buyer went from having a 33% deposit in 2000 to less than a 10% deposit in 2006. More than 25% of first-time buyers that year had no deposit at all.

Back in 2014, when Dublin house prices were rising at a rate of 25% per year, I did worry that we were entering another expectations-driven bubble, fuelled by loose credit. And, true, the Central Bank has recently relaxed its mortgage rules, while the Government has decided to “help” first-time buyers.

But the key point is that the rules are there. It is not up to individual banks to decide how risky they should get when issuing mortgages: the Central Bank has given them a maximum level of risk. So what we have is a market where demand easily outstrips supply, in both sale and rental segments, but where credit is limited, reducing dramatically the risk of a bubble.

Strong demand – and weak supply – mean that some of the guessing is taken out of the market. Despite quarterly and perhaps annual blips, it is likely that prices will continue to rise in the coming years, although far less dramatically than in recent years. What does this mean for those thinking about buying or selling? For sellers, the key change is to move away from valuing your house based on what it was worth in the bubble or what your neighbour sold theirs for two or three years ago.

Sellers need to figure out the kind of buyer for their home: Who are they and what do they work as? Knowing whether your home is likely to appeal to a teacher or two law partners or someone downsizing is central. What is their household income? What sort of deposit might they have? This will determine their mortgage and thus the maximum they are willing to pay.

For example, suppose you think your home will be bought by an accountant and a teacher. Together, they earn €80,000 per year, before taxes. They are first-time buyers and, leaving aside money for solicitors’ fees and stamp duty, they have saved up €30,000. Under Central Bank rules, they would be allowed borrow €280,000 – unless they can secure an exemption from the loan-to-income restriction, in which case they could borrow €300,000. Either way, the most this couple would be able to spend on a house is €330,000.

What about buyers? It is tempting for buyers to just employ the same logic in reverse: “Whatever the bank will lend us is our stash and let’s go find something we like.” But the key question for buyers is to know how much an individual property is truly worth – and then tailor the search for a home based on that. This is done by applying an investor’s logic. As a homeowner, you are both an investor and a consumer. And a good investor will want to know what return they’re getting on their asset.

The rule of thumb is that bidders should not offer more than 20-25 times the annual rent for a property, without a very good reason why. A property that rents for €1,200 per month has an annual rental bill of almost €15,000. This translates into a value of between €300,000 and €375,000. The smaller the multiple of the annual rent, the better a deal you are getting for yourself as an investor. Many investors currently are only paying ten times the annual rent for one- and two-bedroom properties.

But going beyond 25 times the annual rent means that you are taking on risk. Remember, as the successful buyer of a property, you have just valued it more than anyone else on the planet. You should be able to explain why!


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