Market View

Buyers will drink to good facilities, including pubs, says Marc Coleman.

The latest seemingly dire news from the property front comes from Allied Irish Bank's (AIB) latest housing market bulletin.

According to the AIB, housing completions peaked last November with the cumulative 12-month total of houses built reaching 90,000. In the first two months of this year 12,840 units were built.

Although up 0.3 per cent on the same period of last year, the figure for housing commencements was down 2.3 per cent while registrations - which precede commencements - were down a whopping 28 per cent. Based on these numbers my guess is that around 70,000 units should be built this year.

Bad news, surely? Well not necessarily. As the central bank has said on many occasions, an annual house build of around 50,000 represents a sustainable steady state. What few commentators realise is that what seems to be signs that the property market is collapsing are, in fact, signs that the market is functioning really well.

All markets work on the basis of supply and demand. When demand for anything rises, either its price rises or supply goes up or a mix of both. If price increases are significant, more players enter the market. For goods that are quickly created the process is smooth and instantaneous: suppliers can quickly react to changes in demand, either by upping production and or prices when it strengthens or doing the reverse when it weakens.

The housing market operates in the same way, only more slowly because of the time delays in housing production: unlike ice cream sellers on a beach, the total supply of housing at present is harder for a building firm to assess. For this reason, supply can exceed demand before building firms can react by cutting supply.

To a certain extent this is what has happened here: builders now realise that their collective actions were meeting demand as of the middle of last year. But by cutting back supply, they are also moving forward the day when demand will once again outstrip supply, driving prices back up.

The number of empty houses reported in the last quarterly economic commentary of the Economic and Social Research Institute (ESRI) - around 110,000 - suggests this day is a few years away.

But even if it is, things are not as bad as that figure suggests: this is because housing is a heterogeneous beast. The vast bulk of dwellings, reasonably serviced by transport infrastructure and amenities, are immune from any significant negative price trends.

What is generating most concern at the moment is rather a minority segment of the market, a segment where overbuilding could have more serious consequences for prices. For dwellings in more remote regions with less infrastructure, the impact of oversupply on prices may be more significant. Fortunately, there are several things that the next government can do about this. The most obvious measure is the reform of you-know-what which I can't mention (because of my promise last week).

The National Development Plan is also going to help matters. As well as cushioning any decline in construction employment, it will (hopefully) take many housing estates and apartment blocks out of their present Siberian status.

Oh, there is one other important contribution that politicians can make to supporting house prices in newly created areas: drop the cowardly and self-serving objections to liberalising the pub laws. As well as cutting down on drink driving, such pubs will give thousands of new house buyers somewhere to eat and socialise within walking distance.

The significance of this is not to be trivialised: I have bought two properties in my life; an apartment which I sold last year and the house I bought this year to prepare for the impending end of my bachelor status.

While by no means determining a preference for where I wanted to live, the fact that in both instances there were decent pubs with nice punters and good food was a not insignificant factor in my willingness to buy. By giving what are now soulless dormitory estates some semblance of a social scene, the issuance of more pub licenses will, if you'll pardon the pun, boost liquidity in the housing market.

Marc Coleman is Economics Editor of The Irish Times - mcoleman@irish-times.ie