John FitzGerald: The bigger the population, the greater the housing need

NESC report shows how much hard thinking needs to be done on housing policy

 

Ireland is unusual in Europe in having a rapidly growing population. This has very important implications for the operation of the housing market, which policy needs to take into account.

In Ireland, the number of new households being formed every year by young people is double the number of homes becoming vacant as their grandparents’ generation dies. This is in contrast with Germany and some other EU countries where the number of annual housing vacancies through deaths almost matches the demand for housing from young people setting up home for the first time. In Germany, there is limited pressure to build more housing as the existing stock is almost adequate for the needs of the population.

How housing markets work in different countries is very much affected by the demographics. In Germany, a regime that involves fairly stable rents can work, as there is limited growth in household numbers. However, that model is unlikely to be workable in a market such as Ireland, where there is major pressure on existing housing and a serious need to build new accommodation.

In Ireland over the next decade we probably need to build around 25,000 more dwellings a year. As new housing supply is currently falling well short of that, there is continuing upward pressure on rents and prices. This is creating difficulties for renters and would-be buyers, particularly those on limited incomes. The long-term solution to a shortfall in supply is to build more homes, and where people want them – in our major cities.

Until homebuilding resumes on a bigger scale, for the next year or two there will effectively be a fixed supply of housing. The only way a rising population can be accommodated is if there is higher occupancy of the fixed supply – for example, more people sharing with others or living with their parents. Whoever pays most for any housing becoming available will have first call on it, whether that is individuals trying to buy or rent a home, or the State trying to house people who are homeless. So the pressure of demand on a virtually fixed supply will push up rents.

While the immediate problem is a shortage of supply, a recent National Economic and Social Council (NESC) report* suggests that, in the longer term, we need a larger and more diverse rental sector. NESC also proposes an integration of the existing government social housing programme with the housing assistance payment scheme. Both of these suggestions seem sensible.

The NESC report then goes on to consider how the regulatory framework might be developed to provide reasonable conditions for both tenants and landlords. However, changes in tenure would do little to improve the situation where there is a serious supply shortage, and there is a risk it might make it worse.

Stable rents

Presumably these proposals, if accepted, would be phased in gradually. There is an argument that any changes in regulation should only apply to new tenancies after a certain date because of the destabilising effect on existing rental contracts.

Unlike in Germany, the demand-side pressures on the Irish rental housing market make it very difficult to engage in consumer-friendly rent regulation at the present time.

The expected returns from investing in rental housing would be adversely affected by any measures to regulate the scale of future rent increases or to grant longer-term security of tenure. This could lead to an exit of landlords, particularly institutional investors, from the rental market. If the resulting stock is sold mainly to owner-occupiers, the effect could be a significant fall in the supply of housing to rent. The remaining landlords might also expect to charge higher initial rents, to compensate them for the restricted capacity to raise rents for the future. So well-intentioned measures to control price could in fact result in an adverse shift of the supply curve for rental property, perversely adding to price pressures.

It must be asked whether now is the time to make a move like this, which could actually raise rather than lower rents.

The NESC proposal to give tenure for life would have to allow some get-out clause to cover people who have been posted abroad by employers and who would normally let out their homes while they were away. Otherwise, they would face either having to sell their homes on moving abroad, or leaving them vacant for the duration of their absence, reducing further the supply of rental housing.

The development of a sizeable not-for-profit housing sector, building on the foundations laid by housing associations, might be another route to enhance security for tenants. It would be useful if the NESC did some further work on how this model might be implemented in a financially sustainable manner.

While the NESC report makes some sensible proposals on integrating State housing supports, it nowhere identifies the cost involved. The report suggests a combination of subsidies, tax expenditures, subsidised land, the housing assistance payment scheme and capital expenditure. Under straitened financial circumstances, it is difficult to entertain ideas that have not been costed.

There is room for new thinking on how the State could get better value from its existing expenditure on housing support. The NESC report has contributed to the debate, but in some ways it raises more questions than it answers.

* See NESC report at http://files.nesc.ie/ nesc_reports/en/141_Irelands_Rental_Sector_MainReport.pdf

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