The financial crash of 2008 has cast a long shadow over Ireland’s housing market. It has taken many years of economic recovery for housing output to return to its current level of about 33,000 a year.
The economy’s major success since 2013 is actually contributing to the current scarcity of housing. Ireland’s adult population has grown by one-eighth since then, compared to a 2 per cent increase across the EU. Providing homes for such a big increase in population is a major challenge, on a scale the rest of the EU doesn’t face.
Meanwhile, some of the legacy effects of the bust are still impacting on financing both of homebuilding and of house purchase.
Prior to the financial crash, Ireland’s building sector had been quite flexible, with many small builders rapidly ramping up their output to meet rising demand. On completing one house, a builder was usually able to borrow from the banks to begin another four or five, thus rapidly scaling up output.
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Finance is not the only constraint on expanding housing supply. The shortage of skilled building workers is another big problem
However, as the banks discovered, this unsecured lending to builders was risky. When the bust happened and builders could not pay the banks, the banks themselves hit the rocks.
Today, as a result of this experience, the financial landscape for builders is completely changed. There is very limited access to bank funding to support a builder expanding activity – they have to put up a lot of the capital themselves, rather than relying heavily on borrowing. As a result, we are dependent on a small number of larger well-capitalised builders to do much of the heavy lifting. For smaller builders, it is less capital-intensive, and so more attractive, to move into refurbishments and retrofitting houses rather than to undertake new builds. This could be good for climate change, but it is a problem in tackling a housing shortage.
State-led projects, where the State funds the site and commissions someone to build on it, reduce the amount construction firms must raise. However, builders will still need access to capital to take on large contracts. It also requires more capital to develop today’s apartment blocks than yesterday’s houses built four or six at a time. So, despite the welcome injection of State capital, the system is less nimble than two decades ago.
Of course finance is not the only constraint on expanding housing supply. The shortage of skilled building workers is another big problem. The planning system is a huge obstacle, with major delays raising costs. The sheer complexity of the new Planning Bill is worrying. Until the legislation is fully tested and bedded down, it could add to problems.
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Even when we manage to raise housing output to between 40,000 and 50,000 units a year, potential homeowners may find it hard to buy them. The banks are awash with our money, representing huge savings built up over the pandemic years, so they have plentiful funds to lend. However, learning from the financial crash, they can only make loans if households have a substantial deposit and an income to service repayments. This could prove a significant limitation to the goal of expanding home ownership. Although the aggregate household sector has very significant savings built up since the pandemic, much of these funds belong to people who already own their homes.
The State is already spending a lot on new social housing. However, given the State also needs to invest in other vital infrastructure, it cannot take on financing the housing needs of those who already have good incomes.
Learning from the financial crash, banks can only make loans if households have a substantial deposit and an income to service repayments
Some of the slack is being picked up by the bank of mum and dad. Nevertheless, there is a significant funding gap which means many would-be homeowners will remain renting. In addition, for a highly mobile young population who are emigrating, returning or coming to Ireland for the first time, house purchase is not a suitable short-term option. We need a healthy supply of homes to rent, as well as of homes to buy.
But the current regulatory regime militates against increasing the supply of new rented accommodation. While it sounded like a good idea to limit the rise in rents for existing tenants, the effect is to drive out those who would invest in new supply. The result is that, while existing tenants are protected, those who seek housing face an extreme shortage of accommodation, with exceptional rents.
It is vital to protect tenants from arbitrary behaviour by landlords and provide security of tenure. However, the current system of rent regulation is stifling the expansion of rental supply – which is what will ultimately bring down rents.
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