The Irish Housing System: Halfway There – Living On A Prayer?

Dr. Ronan Lyons


The Irish Housing System: Halfway There – Living On A Prayer?

Dr Ronan Lyons is Associate Professor in Economics at Trinity College Dublin and Director of Trinity Research in Social Sciences, as well as the author of the Reports.


As we reach the midway point in 2022, we are – believe it or not – one quarter of the way through the 2020s. All those five-year strategic plans for the period 2020-2025 are, in other words, due their mid-term review. With that milestone in mind, it makes sense to have a look at the Irish housing system at the halfway point in a pivotal five-year phase in its development.


It hardly needs saying that, for the Irish housing system as for everything else in Irish society, the defining event in the two-and-a-half years so far of the decade has been the Covid-19 pandemic. Indeed, as we move from the emergency phase of Covid-19, marked by lockdowns, restrictions and facemasks, into ‘living with Covid’, it seems an appropriate time to examine the patient that is the Irish housing system and how it reacted to Covid.


The outbreak of Covid-19 seemed, at first pass, like a classic recipe for falling housing prices. Here was an extraordinary economic shock, one that catapulted Ireland’s unemployment rate to above 30% in mid-2020. The country seemed destined for a recession and, with high unemployment and falling incomes, surely housing prices would follow.


Instead, however – in Ireland as in other high-income countries – the opposite happened. If anything, the pandemic turbocharged demand even as it decimated supply. On the supply side, it is true that building sites closed down, affecting the number of new homes that were completed both in 2020 and again in 2021. But just as important was the seizing up of the second-hand market. If you cannot go to see a property without going sale agreed, as was the case at one point during restrictions, who would put their own home up on the market?


The total number of homes listed for sale on fell from a peak of nearly 70,000 in the year to September 2019 to just 45,700 in the year to February 2021 – a fall of more than one third. Almost all of this fall is due to the second-hand market, not new homes.


At the same time, governments around the world – including Ireland – supported incomes to an extent never before seen. In Ireland, at least, the effect of this was to support the rental segment, rather than the sales segment. For would-be home-buyers, what was more important was that they were by and large working from home, on the same salaries, but without almost all the usual outlets for expenditure: childcare, holidays and nights out were all not available for much of the first year of the pandemic. Household deposits have grown by almost one quarter, from €104 billion to €127 billion, since the start. At the same time, total mortgage debt owed by Irish households fell from €76bn to just below €70bn. By that albeit somewhat crude measure of leverage, Irish households’ mortgage debt fell from 73 cent in every euro of savings to just 55 cent.


Unsurprisingly, this significantly stronger financial position of households meant very strong demand for housing – again something true in other high-income countries over the past two years. And with a fall-off in supply, inflation in housing prices surged. It may be tough for some readers to recall but – believe it or not – the Irish housing market had found something close to balance in the last years of the 2010s, after a painful few years of readjusting to supply shortages. In the two years to December 2019, prices around the country increased by just 4%.


In contrast, prices between mid-2020 and mid-2022 increased by 24%. And even that figure hides important differences by region. Because, of course, Covid-19 has reshaped where and how we work. Many office-based jobs have been, over the past two years, largely done from home. New patterns of work, where workers share space with their colleagues once or twice a fortnight – or in some cases less often – have changed the parameters of housing searches. In particular, some home-buyers have been able to choose based on what an economist might call consumption amenities (what you do in your free time) rather than production ones (where you work).


This is quite obvious when you compare inflation by region over the last couple of years. To take an example, average prices in Dublin 6 – one of the country’s most expensive markets – were 10% higher in mid-2022 than two years earlier. That level of increase is not far off what had happened in the postcode between late 2017 and late 2019 (an increase of 8%). In contrast, in Donegal, prices rose by 38% in the two years to June – a complete about-turn from the effectively stable prices during 2018 and 2019. Brexit woes had meant that prices in the country rose by just 1% in those two years combined.


In part, this marked a reversal of fortunes. Dublin, its surrounding areas and the other cities had seen the biggest increases in prices during the second half of the 2010s. But now, the cumulative increases from the low points look quite similar across the country: for example, 95% in Dublin and an average of 90% in Munster, Connacht & Ulster outside the cities.


This, then, is the story of the last 2.5 years. But what does the next 2.5 years hold? Nobody could have predicted, at the start of 2020, that a pandemic would determine the fate of Irish housing over the next couple of years. Similarly, who knows what surprises lie in store in what is turning out to be a tumultuous decade? That said, as things stand, it seems that Russia’s invasion of Ukraine will undermine Irish policymakers’ attempts to alleviate the on-going mismatch between supply and demand in the Irish housing system.


On the one hand, it looks as though the war will add to demand pressures, as tens of thousands of Ukrainians make Ireland their new home. But again while too early to be certain, it seems that the demand impact may be smaller than some had thought. Four months into the conflict, Ireland has admitted almost 40,000 Ukrainians – well below the 100,000-200,000 range that had become accepted wisdom in early March. And some of those who came here have already gone home, while the flow of new refugees is likely to be small, as the conflict – at least as things look now – appears to have concentrated in the far east of Ukraine.


Instead, the impact of the conflict appears like it will be greater on supply. This is because the conflict has significantly disrupted supply chains already weakened by Covid-19. With strong demand and now even weaker supply, the global economy is facing a level of inflation it hasn’t experienced for decades. And the housing sector is far from immune from that.


Construction costs are the number one issue facing the Irish housing system – and have been for close to a decade now – albeit quickly followed by a planning/legal system that is simply not fit for purpose. The country needs at least 50,000 new homes a year to match underlying need across all segments – owner-occupied, market rental and social rental – but it is struggling to even build half that. The reason it is struggling is because of a lack of viability. Including land, it costs over €500,000 and probably closer to €600,000 to build a two-bedroom apartment in Irish cities currently – a cost that is far too high relative to the country’s income distribution.


Recently, I was inclined to some optimism about supply. Notwithstanding the disruption of Covid-19, the owner-occupier segment had reached some balance between homes being built and households able to get their mortgage application ‘over the line’ while changes in planning codes meant that a substantial pipeline of new rental homes existed, albeit concentrated in the Dublin area.


Unfortunately, that optimism has waned over the last year. Firstly, the pipeline of new rental homes has come under increasing threat from a variety of legal challenges. Ireland must learn from its peers here. Our EU friends are able to marry the competing interests of different stakeholders with a far more decisive system. And secondly, the increase in construction costs – common to most countries – will affect Ireland more than most. We were already amongst the most expensive locations in the world to build new homes, so an increase of 10% will hit viability here more than elsewhere. And, as revealed by the Census figures last month, Ireland is in a phase of accelerating population growth, which translates into housing demand – even as our peers face slowdowns or even population declines.


The housing challenge as we enter the second quarter of the decade is, therefore, a steep one. The pipeline of approximately 50,000 rental homes in Dublin and Cork is desperately needed but under threat. If it comes to pass, such an addition to rental housing in this country will ease things considerably. The question, then, is not about the need, but rather about the capacity to deliver.


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