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What a difference a year makes

Ronan Lyons, Economist

4th Jan 2016

Ronan Lyons, Daft's in-house economist, commenting on the latest Daft research on the Irish property market.

The latest figures in this Daft Report confirm that the housing market has levelled off in Dublin, while it is still recovering in most other parts of the country. Inflation in Dublin has fallen from nearly 25% in mid-2014 to less than 3% by the end of 2015, while elsewhere in the country, inflation has risen from 2% to 13% in the same period.

Where does this leave the housing market? A year ago, despite a plethora of Government announcements and policy statements, it was hard to argue that Ireland had a coherent housing strategy. Not least when prices and rents had risen by up to 40% in three years in the capital and housing shortages were emerging everywhere.

Inflation

The housing shortages persist: just 25,000 homes were on the market on December 1st this year, the lowest for this time of year since 2006. Nonetheless, the outlook for the housing market looks much healthier now than it did in 2014. Perhaps most importantly, the mortgage rules mean that whatever else happens, house prices cannot engage in the destructive upward spiral that took place in the decade to 2006.

But more recently other aspects of housing policy have been examined and are starting to change. With an election only months away, it is useful to step back and see the bigger picture on housing policy. There are four main areas where government intervention is needed in the housing market. The first relates to the supply of mortgage credit. As discussed above, this is largely in place now.

The second relates to the supply of private housing: here the government needs to limit construction costs relative to our incomes in the same way mortgage credit is now linked to the real economy.

As 2015 draws to a close, we are beginning to see an understanding on the part of Government that its actions largely determine build costs. The National Competitiveness Council, for example, has recently committed to benchmark the cost of building homes in Dublin and other Irish cities, compared to our peers. This will provide the evidence base for closing the gap between construction costs and the real economy.

In the absence of official figures, it is estimated that a two-bedroom apartment costs roughly €280,000 (excluding land costs), roughly twice the level consistent with the incomes of households that would live in two-bedroom apartments. Thus, requirements regarding basement car parks, lifts, orientation and yes, minimum sizes, are to be welcomed. Remember these are minimums, not targets, and local authorities still have the final say on any particular project.

The third area for government action – supply of public housing – follows directly on from the second. Once you have decided what the minimum cost is for building a home, anyone earning less than this needs a subsidy to give them access to housing. Otherwise, they are being denied their human right to housing. Unfortunately, this is an area where very little change has taken place.

Most and Least Expensive Areas in Ireland

Ultimately, the plethora of current forms of intervention, from rent supplement and HAP to putting families up in hotels, needs to be replaced by a single unified housing-related income top-up. This would then render almost irrelevant the discussion of who is providing the housing – the state or the private sector – and thus prevent the ghettoization of lower-income households.

The final area for government policy relates to land use. In many ways, this is the one area where emergency measures are not required. Land use has been dysfunctional in Ireland for decades, so what's another few years? Sorting out lend rules and the supply of homes, including for low-income households, is enough for the next Government.

But to ensure that decade after decade, land is used well and thus housing is readily available and affordable, a land tax is required. Ireland missed a trick when introducing its Local Property Tax. Many afterwards believed that a land value tax would never happen in Ireland. However, a growing coalition supports the idea. It started with Dublin City Council, who have proposed a vacant site levy.

Housing Stock on the Market

This will be problematic unless applied to all commercial, industrial and development land, though, and more recently both the National Competitiveness Council and the Economic & Social Research Institute have called for a broader land value tax. Ideally, this would replace all development levies, commercial rates and perhaps stamp duties.

The figures contained in this report show that acute supply shortages persist, with the Central Bank rules protecting house prices in Dublin. While lots of tough reforms still need to be made, at least there are encouraging signs that policymakers understand not only the nature of the problem but also of the solution.

Map of Ireland