Over 20 years Ireland has experienced both flavours of housing crisis – bust and boom – neither of which has delivered palatable outcomes. This situation has united some unlikely bedfellows. Opposition politicians of all creeds have made housing their main point of attack. Meanwhile, private sector economists have rowed in to emphasise the intractability of our housing problems.
It would be wrong to say these commentators are spinning the crisis, but, equally, it is plain to see how they might benefit from the perception that Ireland is facing a quasi-permanent shortage of residential property.
For Opposition politicians, an obdurate housing crisis provides the opportunity to sell hope.
For commercial economists, the perception that supply will forever lag demand creates inflationary expectations which make it easier for their principals to raise funding, get Government support for development-friendly policies, and mobilise indecisive buyers.
Nonetheless, the under-supply mantra is beginning to jar with pricing signals from the market.
House-price inflation in Dublin peaked at 13 per cent last April, but has been on a slippery slope ever since, and now stands at just 0.6 per cent. The stock explanation is that between early 2015 and mid-2018, house prices rose much faster than earnings. Consequently, the Central Bank’s loan-to-income limit has become increasingly restrictive, choking off inflation.
This seems plausible in Dublin. House prices in the capital are 48 per cent above the national average, while wages are only 24 per cent higher, suggesting a need for bigger loans relative to income.
However, Ireland is divided into eight statistical regions, and price inflation is slowing is seven of them. In many of these regions the Central Bank’s limits are not binding. For example, in the midlands the typical house costs €169,000, but a couple on average earnings could borrow over €250,000 before hitting their limit. Yet despite this price inflation in the midlands has almost halved in a year.
Problematic
Rental growth is now also beginning to ease. Residential Tenancy Board data show that rent inflation remains problematic in Dublin, rising 8.5 per cent in the year to March. However, this is an improvement on the 9.9 per cent recorded last September. Moreover, growth in the more timely Daft.ie and CSO rental indices has been steadily slowing since last autumn. How can this be due to mortgage rules?
The disappearance of inflationary pressure is generalised – across locations and tenure types. This, and the fact that 49.2 per cent of residential transactions in the last 12 months were undertaken without a mortgage, suggests that something other than credit is impacting the market. I believe this factor is supply.
In the past data ambiguities gave people impunity to say anything about housing supply that suited their agenda. However, the CSO shut down this avenue of misinformation last summer, and we now know the facts: completions rose 31 per cent in 2015, a further 37 per cent in 2016, 45 per cent in 2017, and 25 per cent last year.
After 20 years of unbroken dysfunctionality it could just be that the Irish housing market is starting to straighten up
Based on commencement notices that have already been served, this will continue in the short-run, and I expect over 22,500 completions this year.
Some commentators argue that output is rising from a low base. However, the “lowness” of the base can only be established relative to market demand. And this is where we move from fact to opinion.
In recent years I have seen estimates of the annual home-building requirement ranging from around 20,000 to over 50,000 units. Based on recent pricing evidence, it seems those who were towards the lower end of this range have been the most correct. In a nutshell, it looks like house price index (HPI) and rent inflation are slowing simply because supply is catching up with demand.
Output growth
Looking ahead, high rents will continue to put pressure on tenants in the private rental sector. But further output growth in the short run should start to bring inflation more into line with earnings growth. Longer-term, if completions were to continue rising, as in recent years, the biggest concern would actually be about over-supply.
Thankfully, however, the construction industry already seems to have recognised that it is now approaching the right size to deliver our medium-term housing requirements. Construction was the second fastest growing sector of employment this time last year, but no additional jobs have been created in the last nine months. Planning permissions were surging a year ago, but have now contracted in two successive quarters. And land sales have also tempered from last year’s frantic pace.
After 20 years of unbroken dysfunctionality it could just be that the Irish housing market is starting to straighten up and fly right.
Dr John McCartney is director of research at Savills