Housing supply to fall further behind demand as rising costs hit investment, Goodbody warns

Housing supply is set to fall further behind demand as rising interest rates and higher construction costs choke off investment, Goodbody Stockbrokers has warned.

In its latest housing supply tracker, the brokerage highlights a fall-off in commencements, particularly for apartment blocks, a trend that has accelerated in recent months. It noted that there were 2,211 housing units commenced in September, down 31 per cent year on year. For the quarter as a whole, commencements were down 22 per cent on the same period last year, and down 11 per cent on the same period in 2019 “prior to any Covid-related volatility”.

“While completions may continue to trend upwards in the short-term, this suggests that supply will fall well short of the 40,000-plus per annum mark that is required to meet demand in the coming years,” it said.

Goodbody said one of the main drivers of the weakening trend was the fall-off in apartment commencements. Apartment commencements fell by 29 per cent in the third quarter, albeit they were still 7 per cent higher than the same period in 2019.

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“However, this disguises a significant decline in both August and September, possibly reflecting the recent weaker environment for PRS [Private Rented Sector] due to rising costs and yields,” Goodbody analyst Dermot O’Leary said.

Much of the pickup in residential construction has centred around Dublin where foreign funds have invested heavily in PRS apartment schemes. Rising constructions costs combined with higher interest rates are threatening this investment.

As central banks raise interest rates to tame inflation, experts predict a rapid cool down in property markets and, potentially, a painful correction in some of the more overpriced markets.

On Thursday the Central Statistics Office will publish its latest housing supply numbers, which are expected to show a continuing pickup in output. A late surge in activity in the final three months of last year saw overall home completions reach 20,000, on a par with the previous year. The total for this year is expected to be significantly higher, up to 28,000 units, according to one forecast.

Nonetheless housing supply is forecast to remain below estimates of long-run demand – 35,000-40,000 units a year.

In its report Goodbody noted that all regions experienced an annual fall in housing starts in the third quarter.

“Relative to 2019, starts in Dublin were flat, but the weakness in the apartment sector is a concern here due to the dominance of this type in the capital,” Mr O’Leary said. “The fall in housing scheme commencements in Dublin’s commuter counties is a concern given the role this region was playing in the expansion of housing output.”

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Mr O’Leary also highlighted the impact of planning guidelines on supply. “As noted previously, density and spatial requirements under the National Planning Framework may be playing a role here, creating supply-side blockages to the achievement of housing output targets for the industry overall. Scale, and thus the ability to navigate these issues, is at a premium in Ireland, with the two PLCs (Cairn and Glenveagh) widening the gap in completions between them and the rest of the industry.”