Ronan Lyons | Personal Website
Ronan Lyons | Personal Website


What the latest Census tells us: cramming into households

One of my favourite Republic of Telly sketches is Things your parents could say in the 1980s, which included things like “That young Bertie Ahern is a real go-getter – we’re voting for him!”

In one of the scenes, there’s a car with at least five children across the back seat, not a seat-belt between them. The father turns around and says to one of them, “Stand up here between Mammy and Daddy, you’ll see the road better.”

Cramming as many as you could into the back of the car may have been a way of life of the Irish back in the 1980s – but it seems 2010s Ireland is an apple that hasn’t landed far from the tree. The first of the detailed results from the 2016 Census were issued last week and it seems we are still cramming people into homes.

The top-level results of the Census are reasonably well known. There was a strong increase in the population between 2011 and 2016. The increase of over 165,000 people means the annual rate of population growth in recent years has been 0.7%.

This may sound small but, given the strong level of emigration, particularly early in the period, is a sign of just how fast the country will growth now that the flow of migration has turned inward again. (Immigration has risen from 53,000 a year in 2012 to almost 80,000 in 2016, while emigration fell from 90,000 to 75,000 in the same period.)

But, under the radar, there was something of a bombshell in the figures. Average household size – that is to say, the average number of people in the typical household in the country – actually rose between 2011 and 2016. It rose from 2.73 to 2.75.

Now, this may sound like a small change. But Ireland’s average household size has been falling steadily over the last fifty years. This reflects any number of social trends, including increased longevity, a small number of children in each family, and a greater share of adults not having children.

Between 1971 and 2011, average household size in Ireland fell from 4.1 to 2.7. To see why that matters for housing, let’s keep the size of the population the same and just vary the average household size. At 4.1 people per household, a population of 4.5 million needs 1.1m homes. But at 2.7 per household, it needs 1.67m – over 50% more!

It has been obvious that Ireland is on the same journey as other European countries – just slightly delayed. Average household size in Europe has been falling for decades and now averages 2.3. In 2011, household size in Ireland was higher than anywhere else in Europe, apart from the Balkans.

But at 2.3 people per household, a population of 4.5m would need just under two million dwellings – almost 300,000 more than it had in 2011! (And that’s with a static population… Ireland’s is growing by about 15,000 households a year.)

This, then, is the bombshell in the Census stats. Households can only form if there are dwellings for them to form in. And at a time when every social pressure was pushing Ireland towards lower household size, the lack of housing has forced us to cram more in a dwelling.

One commentator last week tried to put a brave spin on the figures, by suggesting it reflects Ireland’s on-going baby boom. Unfortunately, the stats do not back this up. The Census documents 17 different household types, from “One person” to the glamorously titled “Households comprised of unrelated persons only”.

But for practical purposes, these 17 types can be grouped into four headings: the “with children” family types; the “zero kids” family types; the “with other persons” household types – i.e. where unrelated people live with a family; and the “non-family” household types, i.e. where there is no obvious family unit in the dwelling.

The “with children” family types make up over 60% of the population. But their share of both the population and of the number of households actually fell slightly between 2011 and 2016. The same is true of the “zero kids” families, who make almost one quarter of the population.

Just to reiterate that: Ireland’s population grew by 166,000 people between 2011 and 2016 – but families and no-children couples/singles were under-represented in that growth. Neither the “we’re great at having kids” narrative nor the “we’re going the way of Western Europe” narrative applies.

Instead, over 40% of Ireland’s population growth in recent years has come from two traditionally small sources: families who have non-family members living with them, and households where there are no families at all.

These two categories account for about 15% of the population – but made up fully 35% of the growth in the population between the last two Censuses.

This reflects the complete failure of housing supply to respond to new demand over the last six years. Even with a stable population and stable household size, Ireland would need about 10,000 new homes built each year just to offset obsolescence – and this would largely be urban apartments replacing rural cottages.

With falling household size, something we now our population is trying to do, even keeping the population constant, Ireland needs an additional 15,000 homes per year. And again, this will be concentrated in cities and towns and in types other than the three- and four-bedroom house. This includes apartments for downsizers, studios for young professionals, purpose-built student accommodation and assisted living for older persons with care needs.

That means that even if our population were stable, Ireland would need 25,000 homes per year just to stand still. When you add in not only the natural increase – a further 15,000 a year – but also likely inward migration, it is clear that Ireland needs at least 40,000 and closer to 50,000 new homes per year.

The country has been getting one third of the new homes it needs. The Census is the wake-up call that until we understand how to build apartments better, we won’t be able meet our needs any time soon.


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

Housing, planning and the cluster economy

Fifteen years ago, the Irish Government published a National Spatial Strategy. Complete with gateways and hubs, it was supposed to be a cornerstone of Ireland’s development over the coming two decades – and indeed, if successful, well beyond that.

However, within a few months, it has been trumped, as the same Government announced its own plans to “decentralise” its Government. (As the OECD has noted, the so-called decentralization was no such thing: no powers were to be returned to local authorities. What happened instead was the fragmentation of central government.)

Particularly once government finances took a turn for the worse in 2008, ambitous plans for future decades had to take a back seat. Indeed, the fraction of government spending devoted to “voted capital”, i.e. infrastructure, is lower now than at any point since 1980. Even in the grim, fiscally austere mid-1980s, the country was investing more in its future.

The recent and dramatic improvement in economic conditions in this country, however, has finally convinced the government to have another look at planning for growth. The aim for the new National Planning Framework is to coordinate Government policies that relate to national and regional development. This will include housing but also water, transport, communications, energy, health and education.

Those crafting the new policy would do well to heed the lessons from other countries. I’d like to highlight three: relating to transport, to utilities and public services, and to housing.

Infrastructure – in particular transport infrastructure – has been shown to have long-lasting effects on the spread of people and jobs. To give one albeit extreme example, the US network of federal highways has allowed cities to grow, but in doing so it has depopulated the urban cores. This is in part due to the nature of highways in that country, which do not stop at ring-roads but penetrate to the heart of cities.

A second key lesson for Irish policymakers is making the link between where people live and the infrastructural services they consume. In practical terms, what do every 1,000 new residents translate into, in terms of hospital beds, school places and utility networks?

Ireland is constrained here on two fronts. The first is the lack of a meaningful property tax – its rate of 0.18% is less than one-fifth the standard rate in other countries, depriving local authorities of the revenues to invest. And the second, political poison it turns out, is the lack of a water charge. This has turned some parts of the country into “one in, one out” in terms of planning permissions, as the water infrastructure simply can’t cope.

The final point relates to housing. Economists, particularly those who focus on water, are very exercised by one number, what they term the elasticity of housing supply. In everyday language, this is how supply responds to new demand. If a region needs 10,000 new homes – due to job creation or demographics or some other factor – how many of those 10,000 new homes are built and how fast?

Given supply of new housing takes time, how the price of housing is changing across regions gives a good picture of the underlying demand for housing. And the figures from the latest Report, out today, are telling, if not surprising.

House price increases are back with a bang in Dublin, the area around it and in the other major cities. In Dublin and the four other major cities, prices have risen by roughly 55% from their lowest point nearly five years ago.

Dublin’s commuter counties, and other counties well connected to the capital by transport infrastructure – see point (1) above! – have also seen increases of 50% or more. But in those parts of Munster, Connacht and Ulster outside the cities, prices have increased by less than one third. And, unlike the urban centres, house price inflation in those parts of the country appears to be easing off, not hotting up.

What this means is that Irish people are similar as their counterparts in other high-income countries. They like to cluster and that means cities will drive future growth. I can understand the temptation for the National Planning Framework to become another Spatial Strategy, with cherrypicked market towns around the country somehow going to act as a counter balance to Dublin, Cork and the other major cities.

But the truth is that country rises and falls together. What is good for Dublin or Cork is also good for the market towns and rural Ireland. It is clear from the housing market that there is substantial unmet demand for new homes in and close to Ireland’s biggest cities. As a country, we need to make sure supply can meet this demand.


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

The opportunity in downsizers

There are two well-established facts that summarize the Irish housing market in its current state. Firstly, there is a shortage of accommodation. This is particularly true in Dublin – roughly speaking, for every ten new homes needed in the period 2011-2016, only one was built. This was a time of net emigration so, as the country returns to net immigration, the demand will only grow.

The second fact is that it is prohibitively expensive to build apartments in almost all segments of the market. The focus on apartments is not arbitrary – Ireland has Europe’s largest average household size currently. In the 2011 Census, there were 2.7 people in the typical household.

But household size is converging steadily with the rest of the continent, having fallen from over 4 in the early 1970s and over 3 in 2002. As Ireland’s average household size continues to converge to the European average, this will create significant amounts of new housing demand.

The logic behind this is simple, although often forgotten. Suppose Ireland had a fixed population (rather than a growing one) – for round numbers, take 5 million. If the typical household size is 4, the country needs 1.25 million homes (5 million divided by 4). If, however, the typical household size is 2.5, the country needs 2 million homes – 60% more!

A rise in the fraction of one- and two-person households is creating huge demand for a significant number of new dwellings. Let’s take more precise numbers for Ireland’s case currently, which has a population of roughly 4.8m. Relative to a 2.7 average household size, if the same population had an average household size of 2.5, this would mean the country needs 142,000 extra dwellings.

When the numbers are that big, it can be easy to be almost blasé about them. But let’s stop and think about that: 142,000 extra homes is the equivalent of 11 years of what was built in 2015! And if Ireland converges to the EU average (2.3), this would require an additional 300,000 dwellings.

An April 2014 report by Future Analytics for the Housing Agency confirms that these demographic trends have implications for the type of housing stock needed in Ireland and specifically in Dublin. Their findings – for the period 2014-2018 – indicated that three quarters of the new households added in Dublin in that period had at most three persons, with the large majority comprising just one or two persons.

So one- and two-person households comprise the bulk of new households being formed in the capital. You might expect that, in response, accommodation suitable for one- and two-person households would be built.

But that would only happen if costs could be recouped. Those active in the space confirm that the break-even cost of building a two-bedroom apartment currently is roughly €325,000 – excluding any land costs. There are two ways of looking at how affordable this is.

The first is to convert it into a monthly rent – this is what a developer would do if they were thinking of building to rent. An upfront cost of €325,000 converts into a monthly breakeven rent of roughly €1,650. Site costs per apartment of up to €100,000 would add another €500 to that.

It is clear that, with the exception of Dublin 2 and 4 – and a small range of other areas, like the North Docks and some parts of South County Dublin – this is completely unaffordable. Average monthly rents for a two-bed in West Dublin, for example, are just €1,200, well below viability.

One solution might be to build-to-sell, rather than build-to-rent. An upfront cost of €325,000 converts, given current interest rates and deposit rules, into a monthly mortgage of €1,300. However, the first-time buyer market has by and large turned off buying apartments. Such “property ladder” homes, typically bought in the bubble for 2-3 years before being sold, leave the owner open to the risk of a fall.

This is not the case when it comes to downsizers, though. In many parts of the city, the bulk of those over the age of 55 own their homes – and own them mortgage-free. Not only that, this generation have benefitted from a one-off increase in property values. This has happened in Ireland as in other countries: once you strip out inflation, most high-income countries have seen a one-time increase in prices at some point since the 1970s.

This gives them equity – and equity that could be used to downsize and to provide for their future. The average four-bedroom home in South County Dublin is worth €800,000 currently. The average two-bedroom apartment in the same part of the city is worth less than half that.

But currently, there is almost nothing for them to choose form. According to Eurostat, just 14% of households in the region that includes Dublin and Cork live in apartments. This is very low compared to other European city-regions, with almost half of the housing stock in apartments in the equivalent EU region containing Liverpool, two thirds in Copenhagen and over three quarters in Lisbon.

There is, therefore, a clear mismatch. In 2011, 256,000 of Dublin’s 467,000 households, in other words over 55%, had just one or two persons in the household. However, only 170,000 dwellings in Dublin contain four or fewer principal rooms – a two-bedroom apartment would typically have three principal rooms.

What the city needs is the densification of the suburbs: good-quality apartments built close where older people live and thus close to where their networks and amenities are. But time and again local politicians – including Cabinet ministers – object to the development of new apartments in areas where the buyers would disproportionately be older people.

If local authorities want to be age-friendly, they need to take a much firmer stance on objections to the development of apartments, particularly in suburban locations. If there is no supply of homes for people to downsize into, demand for downsizing becomes almost irrelevant.


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

Trusting rules of thumb about housing

There are a few rules of thumb that exist about how expensive housing should be. Three rules – about incomes, yields and affordability – are familiar to many people but what is perhaps less well understood is which are the sturdiest.

One rule of thumb is that the price of a house should be on average between three and three and a half times the income of those living in the house. A second is that the price of the house should be something like 20 times the annual rent for the same home.

And the third is that when renting, or indeed when thinking about a monthly mortgage payment, the amount spent on housing should be no more than a third of all disposable income. It turns out that we can rank these three rules by how useful they are – one is only marginally helpful, one is helpful once caveats are born in mind while one should be at the core of housing policy.

Rules of thumb are – as their names suggests – rough guides, not hard and fast rules. Nonetheless, it is interesting to note that the first of these has, in recent years in Ireland, gone from a rule of thumb to a cornerstone of macroprudential policy.

The mortgage rules introduced by the Central Bank in early 2015 include loan-to-income restrictions, in particular that the size of the mortgage can be no more than 3.5 times the household’s income. On the face of it, this seems sensible. For those of a certain vintage, it reminds them of the building society rules that lasted until the 1990s.

However, scratch at the surface of this rule and the justification is pretty slim. Whether a household on a €50,000 a year can afford a mortgage of €125,000 depends not only on those two numbers but on many other factors too. Two obvious ones include interest rates and tax rates.

Interest rates in Ireland switched from around 10% in the 1980s and early 1990s to around 5% (or indeed mostly below) since entering the Eurozone. Similarly, the tax rates that applied in the 1970s and 1980s would horrify workers today.

Even taking the housing market at a particular point in time, house prices – and thus mortgages – will vary by location far more than incomes do. So, while attractive in its simplicity, there is little foundation to the first rule of thumb.

The second rule of thumb, that what you should pay for a house should be something like 20 times the annual rent, is far more solid. If you think of that ratio the other way around – what percentage of the price is the annual rent – it is a percentage that you can compare to the return on other assets, like a savings account.

If house prices are 20 times the annual rent, the rent gives a yield of 5% of the price (five goes into 100% twenty times). Economists think of the yield of any asset – in this case housing – as being the sum of two bits. The first component is known as the “risk free rate”, the yield on the most secure asset in an economy.

Typically, this is the interest rate on government debt (unless of course there is a risk of the government defaulting). The second component is the specific risk attached to that asset. For example, if there is a risk of a falling rents because of slow economic growth, this should be priced in to the yield.

If the yield goes down to 3% or below – as it did during the Celtic Tiger bubble – this is a sign that the market has taken leave of its senses. The same applies for individual properties. Ultimately, if you paying more than 20 times the annual rent, you need to have a good reason why.

Another way of thinking about this is that if you are the highest bidder on a property, you value that property more than anyone else on the planet. Are you clear why?!

But it is not the case that there is one just one multiple that will hold in all cases. For investors, the yield that they will require will be different to an owner occupier, because they face an income tax bill that an owner occupier doesn’t.

And what a healthy yield is now, for any given buyer of a specific property, will be different to what it was a generation ago. A generation ago, the yield on property was closer to 8% – and a generation before that, it was at least 10%.

So while the link between rents and prices is a very useful barometer of the housing market, it is not set in stone. It varies with the ‘regime’ governing the housing market.

The final rule of thumb is about affordability: a household should not spend more than roughly one third its disposable income on housing. Unlike the rule about prices to incomes, it takes account of taxes and interest rates. If interest rates go up, this will reduce the amount of debt someone can borrow, even if their income stays the same.

But thinking in terms of monthly income and spending gets around this. It also gets around the prices vs. rents argument. It doesn’t really matter what the system is that governs the yield – whatever that system, if you are spending more than a third of your disposable income on housing, you are financial exposed.

This is by far the most robust of the three rules of thumb. It’s not a cliff-edge: going from a third to 35% – or even to 40% – is unlikely to bring financial ruin to a household. But it does increase their vulnerability.

Nonetheless, this rule of thumb should be at the heart of housing policy. Mortgage rules and construction costs should be designed with affordability for the average household in mind. And perhaps most importantly, housing subsidies should be too.

If a household earns enough that one third of their income is adequate to cover the cost of housing on the market, great. But if not, society should step in to top up their income so that they can.


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

Lessons from O’Devaney Gardens

For those who have never been, O’Devaney Gardens is located off the North Circular Road, next to the Phoenix Park and within a five minute walk of Heuston Station and the Luas. Indeed, it is walkable to work – I live next to it and walk to Trinity every morning.

It clearly enjoys a phenomenal location but its history is more potted. It was built in the 1950s as a social housing complex to house almost 300 families moving out of tenements. However, the blocks started becoming deserted in the 1980s and 1990s, as the country switched out of social housing and into private ownership, due to financial liberalisation.

The last of the residents moved out in 2016, although plans for its redevelopment long predated the clearing of the 12-acre site. A plan for regeneration of the site – on a public-private partnership basis – were shelved when the housing market collapsed.

More recently, the site has found fame due to it being used for filming on the series Love/Hate. But the site is really an emblem of what is wrong with the housing system in Ireland at the moment.

For five years, there has been a worsening shortage of residential accommodation in Dublin, with just 5,000 new homes added in the city between the 2011 and 2016 Censuses. By any thorough measure, this is roughly one tenth of the underlying demand, meaning that for every ten dwellings that Dublin needed in the last few years, it got just one.

And all this time, Dublin City Council has had to sit on the O’Devaney Gardens site because neither the public nor private sectors had the appetite to redevelop it. The site captures all three elements of what is wrong with housing in Ireland currently.

The first aspect is construction costs. Even if the public sector didn’t have the money to redevelop the site itself, if the city had a healthy private housing sector, private developers would have made the Council an offer it couldn’t refuse.

There are those who would view this as a loss to the city – and I’m sympathetic to this, as I’ll explain below. But ultimately even if it only private, for-profit housing had been built on the site, at least it would have helped redress some of that severe and chronic imbalance between supply and demand, with 90% of demand going unmet by new homes in Dublin.

However, nobody made an offer – as to do so would have meant building on the site, which would not be viable given just how expensive it is to build in Ireland currently. This is particularly the case for apartments, which are precisely what should be built, in the main, on central sites like O’Devaney Gardens.

Suppose, though, that costs were low enough that private developers did want to buy the site. A second issue that emerges is around land use. If home providers were interested in that site, they would sure be interested in the adjacent 6-acre military hospital or 4-acre derelict site owned by the Department of Defence.

Or indeed in the 35 acres of McKee Barracks, apparently used now mainly to house the army’s horses. But to bring all 60-odd acres into full use, this country needs an about-face on how its land is used.

Currently, we have a system of last use determines next use, with bus depots today in the same locations as tram depots back in the 1890s. What we need is a system where best use determines next use, with policymakers actively reconsidering what the optimal social use of a site is on a regular basis. As I’ve mentioned before, a land value tax internalises this, putting the onus on whoever owns the site currently, be they public or private sector.

But if construction costs were tackled and land use reformed, what would happen is that new homes would be built for those on average to above-average incomes. Nothing would be done for those on the lowest incomes.

A complete housing policy needs to tackle not just construction costs and land use but also housing subsidies too. I think it is reasonable to hope that people on all incomes could expect to afford accommodation on a site like O’Devaney Gardens – with ample green space and good transport facilities.

To do this, we need to drastically reform social housing and simplify it to one key principle: if you do not have the means to meet your accommodation needs, society will bridge that gap.

What this would mean on a site like O’Devaney is that it enables a non-profit Approved Housing Body, like Cluid or Respond, to open talks with a private developer. They would do so, leveraging the fact that they can offer the developer a 25-year lease – or indeed outright purchase – of, say, 200 of the 600 units that could go on the site.

The ‘win’ for the AHB is that by taking such a large quantity over such a long timeframe, the agreed rent is well below the market rent. The ‘win’ for the developer is that with this pre-letting agreement, they can go and raise the funds to build and rent or sell the remainder.

And the ‘win’ for the Council is that sites that they owned but couldn’t use effectively are being used to house people of all incomes, reducing the fear that social housing would create a ghetto of deprivation if unsuccessful.

As it happens, O’Devaney Gardens is a site with too many, rather than too few, plans. The latest is for roughly 600 homes, including 100 houses. But finding a one-off funding solution for the prominent sites is not the same as solving Ireland’s broken housing system.

To do that, construction costs, land use and housing subsidies all need fixing. And given the scale of the mismatch between supply and demand, particularly in Dublin, the sooner the better.


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

Housing and Ireland’s competitiveness jigsaw

Housing should always be primarily a social issue. If the country cannot house its own citizens, this should be disturbing enough for remedial action. However, most people would acknowledge that, with everything the last five years have revealed, when housing is only an issue of social justice, it doesn’t feature high enough on the agenda. What needed to happen was for housing to become an issue of international competitiveness. Unfortunately, this has now happened – but fortunately, this means that it is far more likely to feature on the radar of key Ministers, policymakers and the Cabinet.

Housing has traditionally been regarded as domestic issue. Just as firms based in Britain typically ignored EU bashing in the media, as they didn’t want to meddle in a local issue, so firms based in Ireland typically focused on more obvious inputs to competitiveness, such as corporate tax rates and membership of the European single market. No firm wants to get a reputation for meddling in domestic affairs. However, firms based in both countries have realised that ignoring a political issue can be precisely the worst course of action. In the UK, firms are now scrambling to respond to the referendum result on EU membership last year. The powerhouse of the entire British economy – the hub of financial services centred in the City of London – could have its foundations taken away in coming years.

And in Ireland, large employers here have become increasingly noisy on the issue of accommodation. To see why, you need look no further than the National Competitiveness Council’s ‘Cost of Doing Business’ profiles. The standard FDI project coming to Ireland now is a services, or perhaps R&D, facility and for such projects, labour costs make up three quarters of their overall costs. This is a sea change from the 1980s and 1990s, when the IDA’s main targets were large manufacturing facilities, where half of all costs were imported inputs.

And the single most important item of spending is housing, which typically makes up one third of disposable income in cities. So of the three quarters that relates to wages, one third is down to housing. This means, simply put, that housing is one quarter of Ireland’s competitiveness. Therefore, when rental prices in Dublin rise by 65% in less than six years – or sale prices rise by almost 50% in less than five years – this does not just put pressure on those on lower incomes. It also erodes a key source of wealth for this country: jobs serving foreign customers.

When Irish-based subsidiaries of foreign-owned firms have to take unusual steps, such as offering bonuses to existing employees to temporarily house new ones, while they find their own homes, it is only a matter of time before HQ finds out that Ireland has a problem. In a world where capital is chasing skilled labour, and where skilled labour wants to enjoy all the amenities offered by a vibrant city, it is the cities that can house growth which will win. Irish cities are hopeless at accommodating growth currently. Dublin has now been allowed to grow up and so, since the 1980s, has started to sprawl. Commuting, though, is consistently ranked as people’s least favourite use of time and is not a viable long-term way of life.

But it is not just Dublin that is suffering. Cork and Galway are home to very large employers, with thousands of workers, in particular in pharmaceuticals in Cork and in medical devices in Galway. But both cities are struggling to accommodate the growth. One home was completed in Galway City Council in May last year… and while this is an extreme example, only 52 new homes were started in the city in 2016. In a rapidly growing city of 80,000 people, it should be adding closer to 800 a year – over 15 times the current level of activity. In Cork, just 310 new homes were started. In a city with a population of 200,000 people, it should be adding 2,000 new homes per annum.

And the problem is not limited simply to the building of homes, although it is clearly at the heart of the issues. Access to schooling, childcare, public transport and infrastructure are all related to the decision of where to live and work. Back in Galway, traffic has become such an issue that there are stories of three-hour commutes after work from the east of the city, where most of the business parks are, to the west of city, where much of the housing is. Three hours to cover ten kilometres is not sustainable.

Housing is and always will be first and foremost an issue of human rights. In a modern, high-income country, access to housing should be guaranteed by a system of subsidies that top up a family’s means to meet their need, where appropriate. But housing is also a competitiveness issue. If we don’t figure out how to build enough homes quickly, it will start costing the country jobs.

Are tracker mortgages haunting Ireland’s mortgage market?

Why are mortgage interest rates in Ireland so high compared to other countries? The ECB collects information on the average interest rate of a new mortgage for all euro countries and, for December 2016, the average for the euro area was less than 1.8%. In France, it was 1.5% and in Finland it was just 1.1%. In Ireland, however, it was 3.2%, the most expensive of the 19 countries covered, quite a bit above the next most expensive countries, Cyprus (3%) and Greece (2.9%).

At one level, this seems to be nit-picking. Compared to the bad old days like the early 1980s, when mortgage interest rates were almost 20%, is there that much of a difference between 3.2% and 1.2%? Perhaps more importantly, is an average of less than 2% sustainable? If growth were to pick up in Europe – as has been happening over the last year or so – then the pressure would be on for the ECB to normalise its own rates, with knock-on effects in markets such as Finland and France.

Nonetheless, the “Programme for a Partnership Government” last May included a commitment to examine the structure of the market for mortgages in Ireland and see if there were policy options available to bring the cost of mortgages down. This week, the Competition & Consumer Protection Commission – the amalgam of the Competition Authority and the National Consumer Agency – launched a consultation on this topic, as its analysis starts. I have no doubt that there are many issues which will affect the cost of mortgage credit at the margin. This includes Ireland’s small market size, which may deter international banks from entering. This may also include regulations, which – for example – prevent credit unions from lending more than a certain fraction of their capital for more than ten years.

However, I suspect that deep down, the problem lies with the legacy of the bubble and, going deeper, Ireland’s predilection for variable, rather than fixed, rate mortgages. To explain, it wasn’t always the case that Ireland was an expensive place to borrow. The ECB figures go back to 2003 and for much of 2003, 2004 and 2005, Ireland was one of the cheapest places to borrow. And therein may lie the rub.

Ireland’s mortgage market is skewed towards variable rate mortgages and in the bubble, these were trackers. Irish banks fixed the margin that borrowers would pay above the ECB rate, for the lifetime of the mortgage. They then gambled – in spectacularly unsuccessful fashion – that they would be able to roll over their own debt at a cost close to the ECB rate. Of course, when the so-called “Great Moderation” came to an end, and the “Great Recession” started, Irish banks suddenly found that borrowing short to lend long was a recipe for wipe-out.

But the trackers that helped to destroy them still exist. So, with ECB rates currently at 0% (yes, zero!), there are plenty of Irish households who borrowed in the bubble who are paying 1% or less interest. Irish banks, however, struggle to borrow themselves at such low rates and cover costs associated with being a financial intermediary. And if their own lenders aren’t subsidising legacy trackers, there is only one other group that could: new borrowers. The reason Irish borrowing is expensive now is precisely because it was so cheap ten years ago.

Rolling the clock forward, bubble-era trackers will continue to exist right through the 2020s and into the 2030s. Bizarrely, an ECB president in 2035 will still be able to financially affect Irish households for decisions they made in 2005. A PhD in Economics is not required to see that this is hardly ideal.

In most other high-income countries, the typical mortgage product is a fixed rate mortgage. In Denmark, for example, Danish banks are required to borrow for as long as they lend. This turns them into warehouses, breaking up the journey from international capital markets to the individual borrower. Households borrow for rates that are fixed for the term. The best banks are those than can add on the slimmest margins.

This is hopefully where the CCPC’s study will take it. A good rule of thumb is that when Ireland sticks out in a graph, find out if it’s a good thing or a bad thing and then find out why. The answer might not be popular or a simple fix. But it’s better to be right than to make things worse by applying a quick fix.


This is a version of a piece that originally appeared in the Sunday Independent.

Will Rent Pressure Zones worsen the rental market logjam?

A point I’ve made a number of times before is that turnover in the residential sales market is a key measure of the health of the housing market. At one point, in the depths of the crash, the typical property in Connacht was changing hands roughly once every 100 years – which we know is far too long and thus the market was unhealthy. The same metric can be used to examine the rental market, particularly in light of the figures this week that rental inflation continues to climb, pushing average monthly rents to fresh new highs. Unfortunately, we don’t yet have the full figures from the 2016 Census but we can at least give a rough picture of turnover in the rental market.

For example, in 2006, there were about 145,000 homes in the country in the private rented sector. That year, just under 80,000 rental properties were listed on, suggesting that the typical property changed hands slightly more often than once every two years. In Dublin, indeed, the typical rented home came back on the market after 18 months. By 2011, this had slowed down a little, and of the 300,000 or so private rented homes in the country, just under half were listed on the market that year. In both Dublin and in the country at large, the typical lease length was two years. What is interesting is that, despite the huge growth in the sector – the number of private rented homes more than doubled in just five years – the turnover was similar.

It is likely that when the figures for 2016 come out, they will show that the private rented sector has not shrunk since 2011. So in other words, we are still looking at a sector with at least 300,000 homes in it – and possible more. Even if it were just 300,000, though, what has changed dramatically is the fraction that comes on the market every year. In 2016, there were less than 70,000 rental listings nationwide. What this means is that fewer than a quarter of rental homes came on the market. Flipping that stat around, the average lease length is now more than four years, having been two years in length as recently as 2011.

On the face of it, this may seem like good news: Ireland is becoming a nation of long-term renters. This is the benign interpretation. There is nothing at all wrong with people renting for longer (As long as they are also putting money away for their futures). However, the figures are also consistent with logjam in the market.

It is reasonable to think that the typical landlord in Ireland does not fully review the rent as often as they are legally allowed. What this means is that many tenants in Ireland enjoy below market rents. This creates an incentive to stay put, even if in other circumstances you might have moved. So when a group of students goes away for the summer, they may keep paying rent, so as not to “lose their place”. Or where a group of young professionals are sharing a house, this group may keep rotating, despite couples being formed or people change jobs.

This has become a much more pressing concern, now that Ireland has moved from a “rent resets when empty” model to system where whatever level of rents held in late 2016 is now frozen in, for at least a few years. The Rent Pressure Zones risk creating – or re-creating, for those with long enough memories in the Irish rental market – a two-tier rental market. This would be the case even if the entire country were deemed a Rent Pressure Zone (as increasingly seems likely, given the figures in this week’s Daft Report).

On one tier are those properties whose rents were increased steadily by landlords throughout the period 2011-2016. These are effectively market rents, albeit from now on the increases will be slightly capped. The other tier consists of those properties whose rents were not increased by landlords during the same few years, believing that they would get the chance to in the near future, once their tenant ultimately moved on. But the act of bringing in Rent Pressure Zones itself has made moving on less likely: why give up a low level of rent?

Not only that, when they do ultimately move on – for example, if they are buying a home to live in – tenant and landlord are likely to cooperate and find a new tenant through word of mouth. What landlord wants the hassle of 200 people turning up to view something that’s being rented at 40% below market rates?

Again, word-of-mouth may sound benign, but those who lose out will disproportionately be those on lower incomes, on some form of State support, or who have just moved to the country. Like many other aspects of life in Ireland, the dice in the rental market have just been loaded in favour of insiders.


This is a version of a piece that originally appeared in the Sunday Independent.

Nasty Nick and Decent Dave: how do you measure a problem like rental inflation?

Late last year, new measures were announced to try to limit rent increases, primarily to give tenants – and the Government – some breathing space while issues inhibiting the supply of new homes are addressed. On the face of it, the measures were straightforward: in any area where rental inflation is above 7% for a year and a half, rent increases are now capped at 4% per annum.

There was a bit of a kerfuffle in the first few days, when there was confusion about the formula used to define 4% per annum. And there continues to be political football played with which areas were to be granted ‘Rent Pressure Zone’ status immediately.

Of course, when something becomes legislation, nothing is ever straightforward. What does “area” mean, for example? In everyday conversation, it is fine to talk about Dublin rents increasing by a certain fraction and to include Bray and Greystones in that definition of Dublin, but it an entirely different thing if the law has designated Dublin a rent pressure zone but not Wicklow.

Even if we were clear on what each area meant, things remain less than ideal. What if the Galway market is starved of apartments but has enough family homes? Rental inflation for apartments in Galway could be well above 7% but for houses it might be close to zero. Can rent pressure zones distinguish between the two markets in the same location?

But whatever about these technical worries, there are two more fundamental problems that threaten to undermine the system of Rent Pressure Zones just as it gets underway. The first is that it effectively attempts to control the price of apples while measuring the price of oranges. The motivation for this measure is to protect sitting tenants. However, rent inflation is benchmarked not against rents paid within leases, i.e. by sitting tenants. The RTB measures rents and rent inflation by looking at rents paid by new tenants. These are completely different beasts.

Secondly, what makes this policy such a substantial change from previous policy around rent control is the fact that it applies across tenancies as well as within tenancies. It has been standard, for more than a decade, that while landlords are limited in their ability to increase rents for sitting tenants, when those tenants move on, the rent can effectively ‘reset’ to the market level. This new system shatters that link.

The end result of both these features is best described by the parable of Nasty Nick and Decent Dave. Nick and Dave both own adjoining semi-detached properties as investments and rented them out in 2010 for €1,000 per month. Dave, being a decent bloke, has gone easy on his tenant – a family with young children – and only increased the rent twice in the following six years. The family now pay €1,200 a month for their home.

Meanwhile, Nick, being a different sort of character altogether, has increased the rent as often as the law allowed. The family living there in 2010 are long gone, priced out and living somewhere further out but more affordable. In their stead are four young professionals, who collectively pay €1,700 a month for the house.

Nick’s property, having been on the market a few times since 2010, is what is used to measure rent inflation. Dave’s should enter the calculations for cost of living – after all, his tenants are people too – but the way rents are measured in Ireland currently, the stable rent he offers is not reflected at all in the headline measures.

And the worse the situation gets on the open market, the more tenants in situations like Dave’s are going to stay in their home and enjoy their below-market rent under the radar. This means that, while it may have been the case 15 years ago that the typical rented property changed hands every 12-18 months, many renters are now staying put for 3-5 years. In other words, the more measured inflation in rents goes higher, the greater the pressure to stay put – exacerbating the problem with measured inflation.

It gets worse. Suppose the family living in Dave’s house are moving out to buy their own home. One of the reasons Dave was so lenient with his tenants was that he knew, once they were gone, he would be back to the market rent. This has now been taken away from him. Even though his tenants have moved on, and even though his next-door neighbour is charging a rent €500 more than he is for the same property, the most he charge his new tenants is 4% a year more.

We should not be surprised, then, if Dave decides to sell up. The problem is that, if he sells to another investor, they face the same level of rental income as Dave does. The new system of Rent Pressure Zones has effectively devalued Dave’s investment… unless he sells to an owner-occupier.

Now that Rent Pressure Zones have been introduced, there is likely to be a silent exit from the market of landlords who were muddling through and who thought they were doing the right thing by being nice to their tenants. If they stay in the market, their asset is devalued, so they have a strong incentive to leave by selling to an owner-occupier.

If Rent Pressure Zones are here to stay, the first step in addressing these problems is to better measure rent inflation, by reflecting not only “between lease” rent inflation in the headline stats but also “within lease” inflation. We should not be surprised if this dramatically changes our picture of what has been happening renters since 2011.


A version of this article appeared in the Sunday Independent Property Section on February 12th, 2017.

Would you rather be fat or tall? Time for Dublin to grow up

The figures from this latest Rental Report make grim reading not only for tenants but for policymakers also. The annual rate of rental inflation – at 13.5% in the final quarter of 2016 – was the highest in the history of the Report, which extends back to 2002. The rate of inflation in rents is high across the country, with only Connacht seeing inflation of less than 10% currently, of all the major regions. (Its rate of inflation is 8.9%.)

Indeed, in 45 of the 54 sub-markets analysed, there is double-digit inflation in rents currently. In Dublin, rents are now rising by almost 15% a year, the highest since the middle of 2014. It means that rents in the capital are now up almost 65% from their lowest point in 2010 and are a full 14% higher than their previous peak at the start of 2008. In the four other cities, inflation has eased back somewhat in recent months but remains between 10% and 13%.

Unsurprisingly, the issue is a severe imbalance between supply and demand. Fewer than 4,000 homes were available to rent across the country on February 1st. While this marks a 10% increase on the same figure a year previously, it is still well below the lowest point for availability during the Celtic Tiger. Then, stock on the market reached its lowest point in April 2007, when slightly fewer than 4,400 homes were available to rent nationwide.

The crucial difference between 2007 and 2017, however, is the size of the renting population. We won’t know for another couple of months how many households in Ireland rented at the time of the 2016 Census, but it is unlikely that the number then is less than the number in 2011. At the time of the 2011 Census, roughly 475,000 households lived in rented accommodation, just under 30% of the total. In 2006, there were just 145,000 households in the private rented sector, together with a further 155,000 in the social rented sector.

It is likely that much of the growth of roughly 150,000 extra renting households between 2006 and 2011 was the private rented sector, given the limited social housing available in recent years. Thus, the private rented sector doubled in just five years – and may have increased further since. And yet, instead of availability doubling, it has fallen, even compared to the worst days of the Celtic Tiger. And in Dublin, the problem is most acute.

Recently, the Government launched a consultation period for its National Planning Framework. This will be the successor to the National Spatial Strategy, which aimed to develop a system of gateway towns and hub towns around the country. Much of the media discussion around the launch focused on the idea of Dublin “eating up” the country and how policymakers should focus instead on ‘balanced regional development’.

While policy can help a city thrive, it is foolish to think that politicians have control over the economic forces at work in determining city size. Indeed, one of the most remarkable laws in economic geography is known as Zipf’s Law. It states that the biggest city in an economy is on average twice as big as the second biggest city, three times as big as the third biggest, and so on. This is true more or less all over the world, with – if anything – the world’s largest cities being too small, rather than too big.

Some respond to this with “Ireland is different”. In some ways, it is. Dublin is more than twice as big as Cork. But the same holds true for Vienna in Austria and Budapest in Hungary. What all these countries have in common is that their current borders do not match their past ones. The island of Ireland is a much more natural economic unit than the Republic and the North are individually. And sure enough, once Belfast and Derry are included, Zipf’s Law starts to look like a much better description of Irish cities.

What does this have to do with policy? It means that population is not a game of redistribution. Trying to redirect people from Dublin to other cities in Ireland merely stunts the growth of the country as a whole. If you want to stimulate growth in the fifth, fifteenth and fiftieth biggest cities in your country, you should encourage growth in your largest, not try to stop it.

This does not mean, of course, that sprawl should be ignored. There is absolutely no reason for Dublin to take up nearly as much space as it does. Greater Tokyo, with a population of over 27 million people, fits into 9,000 square kilometres. Greater Dublin, with a population of less than 2 million people, takes up almost 6,000 square kilometres.

Dublin can drive population growth across the country without “eating up” the countryside. For this, though, three things need to happen. Firstly, Dublin needs to be allowed to grow up. Height limits of between four and six storeys in one of Europe’s fastest growing cities merely translate into lost jobs and higher rents. After all, why be fat when you can be tall?

Secondly, homes need to be built on brownfield, as well as greenfield, sites. Looking around Dublin, it is littered with grossly underemployed land, in the form of army barracks, golf clubs and bus depots, built on the fringes of the city in the past but now in prime central locations. A land tax would help achieve this reuse of our scarce and valuable urban land.

But, even if these regulatory changes were brought in overnight, we still would not see the apartments being built that are needed to stem rental inflation. And the main reason for that is the extremely high cost of construction in Ireland, compared to other high-income countries. An audit has been promised – let’s hope it delivers.


A version of this appeared as the commentary to the 2016Q4 Rental Report, released on February 14th, 2017.