Do we really need 30,000 new homes a year?
ESRI’s estimate of structural demand is based on household formation rates
At the height of the boom in 2006, the State built 90,000 new homes, nearly twice the level of demand, which was retrospectively estimated at 50,000. Photograph: Clodagh Kilcoyne/Reuters
We’re told the magic number is 30,000. That is the level of new house builds needed to satisfy demand and halt the spiral of rising prices.
Currently, we’re building about 16,000, well short of this target, hence prices are continuing to increase, at 7 per cent nationally and 5.5 per cent in Dublin.
But how reliable is this estimate of demand? Is there really 30,000 potential home buyers entering the market each year?
The Economic and Social Research Institute (ESRI) calculates structural demand in the market via population forecasts and household formation rates, a formula used internationally.
One of the main reasons why the level is so high in Ireland relates to changing family structures. In other words, more people are staying single longer and more people are getting divorced. This necessitates more homes.
The problem in trying to draw out a greater level of supply via various policy instruments is that you can overshoot.
At the height of the boom in 2006, the State built 90,000 new homes, nearly twice the level of demand, which was retrospectively estimated at 50,000.
This was market failure fanned by ill-advised interventions on the supply side in the form of tax breaks for developers and on the demand side via help-to-buy schemes and mortgage interest reliefs.
We’re still tinkering with the market now by restricting lending and with a new help-to-buy scheme.
Whatever about the mortgage lending curbs, many experts believe the Government’s scheme smacks too much of a boom time measure.
The ESRI would prefer the Government to fast-track a site tax, planned for 2019, to force developers hoarding land to get building, which it claims would buttress supply without fanning prices.
In any case, we probably shouldn’t be focusing on the level of new builds but on the overall housing stock. Lorcan Sirr of DIT calculates that while 12,666 new homes were completed last year the housing stock, as measured by the Central Statistics Office, only increased by 6,282.
The anomaly reflects the number of existing homes becoming derelict or being taken over for reconstruction. This means the supply of new homes may be significantly less than the headline number of new builds, which suggests the 30,000 may, in fact, be an underestimate.