There’s a fundamental misconception at the heart of the debate about property in this country, one that conflates housing need with housing demand and therefore presumes the answer to the problem lies with supply.
There’s undoubtedly a huge need for housing – that’s indisputable, on demographics alone – but that’s not the same as saying there is a huge market of potential buyers waiting in the wings.
Most of the apartments being built in Dublin have no buyers, or at least very few. The price points are too prohibitive. According to the Society of Chartered Surveyors Ireland, the cost of delivering two-bed apartments in the capital range from €493,000-€581,000 in medium-rise developments to €514,000-€619,000 in high-rise developments. Hence most are built to rent.
In many cases, even the rents are too high and the schemes are only half let. Take a walk around the city’s docklands on a Saturday or Sunday morning – where much of the recent development has taken place – it’s a ghost town.
So in the middle of a housing crisis – defined by a chronic shortage of affordable options – the market is supplying high-end, luxury units that don’t sell and, in many instances, can’t be let. The same thing has happened in London. Housing need and housing demand are two entirely different things.
You can draw a parallel with the electric car market. Many motorists want to go green but most still can’t afford the basic EV (electrical vehicle) models, so the market remains small.
The homebuyers' market here might appear cut-throat and treacherous – pictures of young couples queuing outside starter-home estates paint a picture – but it's actually quite small. The latest property price figures from Central Statistics Office show there were just 524 new dwelling transactions in June, down from more than 1,000 in December. That's because so many are priced out and forced to rent.
Property industry body Irish Institutional Property (IIP) weighed into the debate last week, suggesting the State needed to build roughly 50,000 homes a year until 2051 to resolve the crisis, which is significantly above the Government’s 35,000 target.
It rightly pinpoints that the main drivers of housing demand are population growth; inward migration; household size and obsolescence. With a population of 6.5 million forecast by 2050, arranged into households of 2.1 persons on average, and where 0.6 per cent of the existing building stock becomes obsolete each year, the report estimates that the State needs about 49,000 new units per year between 2016 and 2051. Of these, roughly 20,000 are likely to be needed in the greater Dublin area, it says.
The supply mantra
The supply mantra – the notion that increasing supply is the answer to the problem – is now enshrined as a article of faith with Government, industry and much of the public. Government promises bigger and bigger levels of housing output even though it’s not within its gift to do so, while industry says it is being blocked from building more by rising costs and/or increased red tape, legal or otherwise. Both agree, however, on the need to significantly increase supply.
But if we start building at the scale proposed, what will happen? The IIP report claims that the break-even cost for developers of a two-bedroom apartment in the Republic is now close to €450,000, “something that only the top sixth of the income distribution could sustainably afford”.
For this metric to change, one of two things needs to happen. Either the cost of construction needs to come down as we build more and the industry exploits economies of scale or the cost of new homes needs to come down as we supply more, leading to either a better financial equation for developers or a better financial equation for buyers.
History unfortunately tells us that neither of these things will happen. Ramping up housing supply has never once in our recent history improved affordability. Even at the high-water mark of construction in 2006, when a record 92,000 homes were built, property prices rose by 14 per cent. Back then the cost of construction was also soaring despite the fact we had an extra 100,000 construction workers in the country.
And even if the price of new homes comes down and the affordability dial moves in a favourable direction, it’s likely that developers will rein in production as the cost of delivery – for reasons to do with land, regulations and other variables – is now firmly baked into the system. Therefore when prices start to fall, the risk for developers will become that bit greater and the tendancy to pause that bit stronger. When the house prices fell off a cliff after the 2008, the industry didn’t build for almost a decade. This is the main reason why we’re in such a jam now.
The traditional developer and the traditional buy-to-let landlord are finding life in the post-crash world financially difficult. That’s why they’re increasingly being replaced or funded by institutional investors, which work to a different financial equation, backed as they are by a wall of cheap money. They can afford to sit on half-empty apartment blocks.
A building boom – as many seem to want – will not resolve the central issue at the heart of Ireland’s housing problem: affordability.