We’re about to enter a period of falling house prices and rents, combined with a pick-up in supply, the biggest in over a decade. That means more homes at more affordable prices. In other words, the housing market we’ve always wanted. The only problem is, we’ve had to crash the economy to get it. Just like in 2008, the affordability dial is shifting back towards the consumer but only in the context of a wider economic collapse. A pyrrhic victory if ever there was one.
Left to its own devices the property market here doesn’t produce affordable homes, not for people on lower and middle incomes anyway – we need economic earthquakes for that. And already analysts are warning that a softening of prices due to the pandemic will dampen supply up the line, as it did after 2008.
The latest rental report by Daft.ie, published last week, shows rents fell by 2.1 per cent on average last month compared to March, the biggest one-month decline in over 11 years.
The market is either too hot for buyers or too cold for developers: the Goldilocks effect
The report also noted that the number of homes available to rent, as of May 1st, was 40 per cent higher than a year ago, the result of landlords withdrawing their rentals from short-term listing sites such as Airbnb and offering them on Daft.ie instead.
But this potential sweet spot of falling prices and rising supply was quickly characterised as problematic by Daft's chief economist Ronan Lyons, who warned of a potential hit to supply in the longer term.
“Given that the pandemic is unlikely to change any of the long-term fundamentals driving underlying housing need, there is a danger that while its immediate impact might be to lower rents, its longer term effect could be to worsen the shortage,” he said.
So the market is either too hot for buyers or too cold for developers: the Goldilocks effect.
Two things have been driving housing demand here: population growth and income growth. Covid-19 has the potential to knock back both of these.
Population growth, the excess of births over deaths, a feature of Irish demographics for decades, has begun to slow naturally. But net inward migration, which was 33,700 in the 12 months to April 2019, has kept it relatively strong. Inward migration, however, is likely to be halted by restrictions around travel and poorer economic conditions generally, resulting in weaker housing demand overall.
An even bigger dampener is likely to flow from the collapse in employment. While most of the 1.2 million workers on temporary lay off or in receipt of Government supports will return to work, as many as 300,000 could permanently lose their jobs. That's according to Minister for Finance Paschal Donohoe, who told TDs at a briefing for parties involved in government formation talks last week that the country is facing into an economic crisis which is more comparable to the 1980s recession than the financial crash. This will automatically lead to a decline in aggregate income and a decline in housing demand.
The supply of new homes, which had been ramping up for several years, may have been halted by the pandemic but many of the schemes are in the final stages of development and will emerge on the market regardless of demand conditions.
The Dublin Housing Supply Construction Taskforce, the body set up by the four Dublin authorities to monitor what is in the pipeline, said that as of last September there were 8,610 units under construction, the biggest pick-up in a decade. While 3,518 of those have already come on stream, another 5,092 are near completion and will come onto the market in the coming months. The pick-up doesn’t take account of planning permissions or commencement notices, less stable measures of future supply. Daft’s report suggests there are over 35,000 new rental homes nationally in the pipeline.
The combined impact of weaker demand and increased supply will be falling prices. As a result, analysts across the board are predicting a decline in house prices of around 10 per cent this year. KBC Bank Ireland said last week that its base case assumption was for a 12 per cent squeeze on prices in 2020, 20 per cent in the event of a second wave of infections or a more protracted exit from lockdown.
This might not seem like much to would-be buyers, but it has the potential to undermine the viability of certain developments and choke off some of the inward investment that is funding the big apartment schemes here. Part of the reason why there is this constant mismatch between supply and demand is because there is a significant lag between the developer assembling the funds to build and bringing a house to market.
Covid-19 marks an end to an eight-year long upswing in employment and house prices, but not an end to our housing saga
Supply coming on stream now is a response to a price signal from two or three years ago. That makes development risky. The risk is amplified when it comes to big apartment schemes, which are costlier to build and can’t be phased as easily as traditional housing estates, with early phases effectively paying for later ones.
Risk is the most common reason developers use to justify their high profit margins. The private speculative model we rely on for development here also incentivises landowners to hold onto land and drip feed it into the market to maximise returns, bidding up prices for buyers and amplifying the cycle. That's why we have the most volatile property market in the world.
When demand reached fever pitch after the crash in 2013, 2014, and 2015, landowners didn’t flood the market with development, they hoarded land, knowing bigger gains could be made from holding on. The Government’s vacant site levy was a response to that. But this equation works in reverse too, falling house prices and rents translates back into falling land prices and collapsing margins for developers. Either way, Covid-19 marks an end to an eight-year long upswing in employment and house prices, but not an end to our housing saga, just a new phase.