The complex question of why there is a housing shortage

Despite the welcome uplift in home building, housing shortages persist around the country and particularly in Dublin. Furthermore, the latest Housing Market Monitor report for the first half of 2016, from the Banking and Payments Federation Ireland (BPFI), estimates an annual shortfall of 10,000 units in terms of housing output and the estimated requirement for new homes.

In his commentary accompanying the report, BPFI’s economist and head of accounting and tax, Ali Ugur, highlights the ongoing issue of housing shortages and estimates a large shortfall in homes despite a significant increase in both housing completions and commencements.

“Housing supply shortages seem to be continuing in Ireland, and particularly in Dublin, even though new construction has increased significantly in the past two years, albeit from a low level,” says Ugur.

“The latest data from the Department of Housing, Planning, Community and Local Government show that 6,642 housing units were completed in the first half of 2016, compared to 5,625 units during the same period in 2015, an 18 per cent increase. If the same levels of activity seen in the second half of 2015 continue for the second half of 2016, it is likely that there will be around 15,000 units completed in 2016, which is still well below the estimated requirement of 25,000.”

Vacancy rates

The BPFI report looked at vacancy rates across the country and suggests that this is something which might offer ways to alleviate the supply shortage. “The county with the highest vacancy rate was Leitrim (29.5 per cent), followed closely by Donegal (28.2 per cent ) and Kerry (24.2 per cent). The counties with the lowest vacancy rates were Kildare (6.3 per cent), Dublin (6.9 per cent) and Meath (7.5 per cent). Excluding holiday homes, according to Census 2016, there were 35,293 vacant dwellings in the Dublin region in 2016, with around 69 per cent of this vacant stock accounted for by Dublin City.

“In this context it is perhaps useful to examine in further detail the number of vacant homes, particularly in the Dublin region, with a view to identifying measures to help short-term supply challenges faced by the residential construction sector.”

The central question in all of this is why, in a market where there is strong demand and increasing prices, are more houses not being built. As usual in these cases, there is no simple answer or single factor which, if addressed, would fix the problem.

The first factor cited is the Central Bank’s rules on lending. These have had a dampening effect on prices but, despite the latest predictions by the ESRI, Savills director of research John McCartney believes this will only be a temporary effect.

“The mortgage rules were introduced in February 2015 when house price inflation in Dublin was running at 21.4 per cent: it had fallen to 2.6 per cent by December 2015 and is now back at around 4.5 per cent and rising,” says McCartney.

“Rules did have an impact. Fewer buyers can’t drive rapid house price inflation. I said at the time, and I’m sticking to my guns now, that in the long run it would only be a temporary effect. There are only two options if you can’t buy in Dublin, for example. You can move further out into the commuter belt and beyond. This displaced demand caused quite rapid house price inflation in those areas during 2015. The only other option is to stay renting and try to save enough for a deposit over time. That’s what has happened.”

Influx of investors

That is driving up demand for rental properties which in turn is driving up house prices. “In the short term, there is a limited number of rental properties and that’s leading to higher rents,” says McCartney. “That drives up the yield. Investors get wind of that, they see that there is money to be made in renting so you get an influx of investors. That drives up prices again.”

Karl Deeter of Irish Mortgage Brokers believes this is part of a global trend. “The mega-trend is that we are now living in a low-yield world,” he says. “Central banks are being forced to play both sides of the same table. Low interest rates cause asset prices to rise and the Central Bank is curtailing credit to prevent asset price rises. But there is an upward pressure on house prices despite this and it has been compounded by the earlier economic collapse which has led to supply disruption. These are trends that are bigger than any of us.”

While the Central Bank rules are undoubtedly playing a part in the problem, Deeter sees supply as equally, if not more, important and one factor here is planning laws. “Ireland has a particular problem when it comes to third-party property rights,” he argues. “Planning applications for housing developments are being turned down in areas where there are housing shortages. It costs just €250 to delay a €250 million development. There has to be some balance here. If you care enough about the development you should be able to raise a significant contribution towards the cost of delaying it.”

Knock-on effect

Sherry FitzGerald’s Marian Finnegan also points to the supply issue. “If you have a recovering economy and a shortage of supply with a growing population this will drive prices and rents upwards,” she says. “We definitely need more product available. If one part of the market is not working then nothing is working. We are selling product; we just don’t have enough product.”

Savills head of new homes David Browne also says the supply issue needs to be tackled. “It’s a dysfunctional market and it’s different to anything this country has seen before,” he says. “Institutional investors are buying and holding properties but there is no supply at the lower end of the market. Development is there but there is no volume. Developers are building 30 homes at a time not hundreds. What needs to happen is that the gap between what people can afford to pay and what a builder can build at profitably needs to be bridged.”

There is talk of measures being introduced in the budget to improve what people can pay. These include supports in the form of tax credits and the slight relaxation in the Central Bank lending rules for first-time buyers proposed by BPFI and others. On the other hand, there are calls for measures to make building land available at lower prices to developers and to make the planning process easier to navigate.

No single measure will provide the solution but until at least some of them are applied there appears to be no end in sight to the housing shortage.

THE INVESTMENT PROPERTY ATTRACTION

Buy-to-let properties have become very attractive investments both for institutional investors and individuals seeking a decent return for their cash. At a time when the banks are actually charging customers to put large sums on deposit, and where bond yields are at all-time lows and in negative territory in some cases, the allure of residential investment property is hard to resist, according to Savills head of research John McCartney.

“Even in average areas of Dublin, the gross yield from a residential investment property is around 5.5 per cent to 6 per cent,” he points out. “The costs of compliance associated with being the landlord of a residential investment property are estimated at about 25 per cent of rental income. If you deduct this from gross yield you end up with a net yield of 4 per cent. That’s a no-brainer in today’s market and that’s even before capital appreciation.

“If you combine the net yield of 4 per cent with capital appreciation of 4.5 per cent you end up with a total yield of more than 8 per cent. There is absolutely nothing to compete with that in the market. You can’t escape the logic – money doesn’t ignore rates.”

These returns on investment are reflected by market activity. Savills has carried out some research into this area and looked particularly at block sales, where multiple units in a development had been sold in a single day to the same buyer. This would clearly indicate institutional investor activity.

“The results were quite staggering,” says McCartney. “We estimate that 21 per cent of the Dublin market has been accounted for by these bulk buyers since the beginning of 2012 – that’s 11,590 out of 55,392 properties.

“The market has been ripe for investors to come into. The central point is that investors are there to make money and they will keep investing until the market reaches the point that prices drive the yields down.”