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Cliff Taylor: Property crunch coming in the autumn

Serious rental squeeze in prospect as workers start to return to offices

The Government has a lot of plans for the autumn, with the first set-piece being the launch of its delayed Housing for All document that is intended to plot a way out of the housing crisis. The latest trends suggest a difficult backdrop to its launch.

Rents are accelerating again as the economy recovers. And new estimates question just how many homes we actually need to build to meet likely demand in the years ahead, particularly given the huge numbers of frustrated younger people living at home with their parents.

There are tens of thousands of these, reflecting years of under-building after the financial crash, during which only about 10,500 homes were completed each year, even as job creation picked up. Central Bank deputy governor Sharon Donnery has estimated that only one new home was built for every 12 new jobs created in the five years to 2019. A large chunk of the younger generation are stuck living at home. This is reflected in Irish household size being much greater than the European norms, about 2.6-2.7 people versus an EU average of 2.3.

In a report this week for the industry body Irish Institutional Property, economist Ronan Lyons crunches the numbers. He counts up the number of people in the 18- to 49-year-old age group living at home with their parents and earning below €75,000 a year. He reckons that 175,000 people – 8 per cent of the 18-49 age group – now fit into this category. Given that some would live together, this might mean 116,000 "suppressed" households. The Central Bank has previously come up with roughly similar numbers. These are the hidden victims of the housing crisis, unable to afford to set up home like previous generations.

There are members of what Lyons calls the “ forgotten middle” in the housing market. In this group he also counts those who are renting and who earn enough to not qualify for social housing, but too little to pay for the rent of a new-built apartment. He estimates there are 75,000 of these people in Dublin at the moment. In practical terms most are unlikely to be able to afford to buy or to rent a better place.

The key point of this is to underline the crunch problem in the market – the cost of building, particularly apartments, makes affordability a big problem. So even as the economy recovered after 2015, housing supply was slow to pick up. This has left a large middle group, who do not qualify for social housing but cannot afford current prices, effectively locked out.

By the numbers

This is a big social and political issue. And it also has a big impact on the number of houses we need to build to meet demand in the years ahead. The goalposts keep moving and making this more and more challenging.

If you just look at the number of new homes needed to meet the increase in the population – including making assumptions on migration – you get to the estimates which we are used to, in the mid 30,000s of new homes required each year. Lyons puts it at 34,000 per annum. However, if you make assumptions that household size here will continue to fall – in other words that some of those now stuck at home, and their potential successors in the years ahead will be able to buy – then the number of homes you require goes up. Lyons puts the annual requirement at 49,000. Central Bank researchers, when they plugged in similar assumptions on household size, came to 47,000 extra houses a year.

That is a heck of a lot of building, requiring a heck of a lot of money. And the old problem of how to make it affordable remains. Perhaps there are ways to drive down building costs and free the supply of land. But various forms of increased State subsidy are inevitable, whether by the provision of State land, cheaper financing, or supports to renters and buyers.

Behind these longer-term trends, shorter-term pressures are building. House prices are rising at 6.9 per cent per annum, according to the latest CSO figures, and daft.ie data shows rental costs rising at 5.6 per cent, with the main increases outside Dublin. The shortfall of rental property is striking, with just 2,455 homes available to rent on August 1st, the lowest on record and comparing to a long-term average of 9,300.

Selling for retirement

Add in student rentals and a likely pick-up in general rental demand as at least some officer workers return in the autumn and a real rental squeeze is in prospect. Additional supply is limited and newly built properties owned by funds will have more expensive rents. Elsewhere in the market there is a trickle away of smaller private landlords with estates agents Sherry FitzGerald saying this week that for every two private landlord property sales, there is just one purchase. Research by the Rental Tenancies Board has shown that bigger private landlords tend to hold mature portfolios and are more focused on selling for retirement income than expanding their portfolios to take account of a market opportunity.

So just like the house purchase market, the signs in the rental market are of more demand and limited supply. Senior property market sources warn that this looks like being one of the stories of the autumn. It will only serve to increase the pressure on the Government, as its new housing strategy is published. There are ways to better provide for social housing and those relying on State payments – and more State and local authority building has a role here. But solving the wider affordability problem in the market – and thus helping the reluctant renters who want to buy and those stuck at home with their family – requires nothing less than a revolution in housing supply.