How have we let housing, a basic social commodity, become one of the most divisive issues on the planet? There is perhaps no one answer to this, but there are several partial explanations.
Somewhere along the line, housing became a highly financialised asset, a vehicle for wealth and investment rather than a social good. According to data from Real Capital Analytics, institutional investment in Europe’s residential market hit a record level in 2020, accounting for nearly 30 per cent of total acquisition activity, up from just 10 per cent in 2015. Foreign funds bought a quarter of all the new homes built in this State last year, most were apartments destined for the high-yield rental market.
Another piece of the pie centres on interest rates. We’ve had four decades of low rates, most of us have known little else. Several studies, including a seminal work by the Bank of England, suggest cheaper and cheaper credit combined with more aggressive lending practices have encouraged people to borrow more and spurred this upward cycle in prices. From an investor’s perspective, low interest rates increase the value of future income flows.
Social housing
Governments here and elsewhere have also stopped building social housing to the same extent as they did in the past, while selling off significant chunks of the existing stock to private tenants. This, combined with the switch to offering rent supports instead of actual homes, has fuelled price and supply pressures, particularly in rental markets. The Irish Government spent close to €900 million on rent subsidies last year, including €542 million on its main subsidy scheme, the housing assistance payment (HAP). Spending on HAP has increased by more than 80 per cent since 2018.
These issues aren't unique to Ireland; the UK government is spending even more on rent subsidies. The chronic misalignment between supply and demand is, however, particularly acute here, quantifiably worse than in other countries. We effectively stopped building public and private homes in the wake of the 2008 crash – as if the housing need had somehow been neutralised by the financial crisis – only to find 10 years later that we didn't have the stock to house a growing population.
According to property website Daft, there were just 712 properties available to rent in Dublin at the start of February this year. In an affluent city of 1.4 million people, that must go down as one of the most astonishing stats.
When the pandemic finally subsides, housing will again become the defining issue, a demarcation line between young and old, between parents and children, between those who own appreciating assets and those who feel the game is rigged against them.
House prices
A fresh set of data from the Central Statistics Office last week suggests annual house price inflation is now running at 14.4 per cent, a level not seen since mid 2015, while the average price of a home in Dublin is now over €500,000. Sitting out the current price surge can mean having to paying upwards of €50,000 more for a home in a year's time, while jumping in requires a household income, in the case of first-time buyers in Dublin, of €130,000 plus. These are prohibitive metrics for young people.
Even the most progressive and stable of real-estate markets – Germany – seems to have become infected with these issues. Inflation in Germany's "big seven" cities – Berlin, Hamburg, Düsseldorf, Cologne, Munich, Frankfurt and Stuttgart – averaged 123.7 per cent between 2009 and 2019, according to Deutsche Bank, eclipsing the price appreciation seen in New York and London over the same period. Berlin used to be the place to go to in Europe for cheap accommodation. Now citizens there are up in arms about rising rents and the build-to-rent schemes of foreign funds.
Germany's housing crisis may explain why the august, traditionally macro-focused European Central Bank (ECB) is now talking about house prices.
ECB executive board member and German economist Isabel Schnabel told the Financial Times last week that Frankfurt had to consider the "unprecedented" rise in house prices when assessing inflation across the euro zone and deciding how quickly to tighten monetary policy.
Schnabel’s “hawkish” comments come ahead of next month’s rate meeting, when the ECB will decide how best to tackle rampant price growth across the bloc. “If this [rise in the costs of home ownership] were included, it would have a substantial effect on measured inflation, in particular on core inflation, where the weight of owner-occupied housing is larger. It has to be part of our general considerations,” she said.
The Central Bank is forecasting that about 25,000 new housing units will be built this year, followed by 30,000 and 35,000 units in 2023 and 2024 respectively. That 35,000 figure is roughly the estimated level of demand in the market, although some say it is higher. The Government is banking on traditional supply and demand laws resolving the affordability issue.
But that’s a questionable assumption, not least because of the Government’s increasingly large footprint in the market via the purchase of turnkey properties and the additional spend on rent supports, both of which underscore the current pricing metrics. The cost of construction is also accelerating at twice the rate than before the pandemic, placing further upward pressure on prices.
What’s increasingly clear is that if there’s no one reason for our housing woes, there is also no one simple solution.
