Some of our most challenging social and economic problems arise from the success of the economy. For example, if the recovery from the 2008 financial crisis had been much slower, there would have been fewer jobs to attract back emigrants, or skilled employees from round the world.
The huge rise in employment since 2013, and the related rise in the population – up 8 per cent between 2016 and 2022 – has filled the government’s tax coffers and raised living standards for all. However, it has put severe pressure on the housing market.
We have yet to find a solution that will deliver the major increase in housing stock needed for a successful economy.
Almost a decade ago, the Economic and Social Research Institute (ESRI) highlighted a need, at the time, to build 30,000 houses a year. We have averaged just two-thirds of that over the intervening period.
However, the ESRI also pointed to a funding gap. Unlike the madness of the 2000s, households are now constrained to borrow in a prudential fashion, limiting how many people could become homeowners. That has meant a substantial financial gap – one that, if 30,000 houses were to be built, could only be met by Government investment or by private investment in rental property.
Last March’s ESRI Quarterly Economic Commentary returned to the theme. Now, with the continuing success of the economy, there is a need to build at least 50,000 houses a year but it’s likely that those who can afford to buy their own home will account for just a little more than half of these.
The Government has also to fund a major increase in water and transport infrastructure to allow the expansion of the housing stock.
Thus, without a massive increase in taxation, a prudent government can only finance, directly or indirectly, a minority of the required new builds.
As a result, the private rental sector will be essential to fund a large chunk of the required new homes. Without willing institutional investors, we will have no prospect of solving the housing crisis. As noted yesterday by the Central Bank governor, this is not happening.
The introduction of rent controls a decade ago has made it increasingly difficult to attract commercial investment. Potential returns on investment in Ireland have been lowered by rent caps, by uncertainty around planning, by building costs, and by politicised rent controls.
Those who could fund the extra homes can choose to invest in other countries instead.
The experience worldwide with rent controls is that they are good for existing tenants but that, over time, the supply of new apartments dries up as they cannot be financed, given the impact of rent controls on investor returns. The impact is exacerbated when population, and thus demand, is growing strongly.
More than a century ago, as a wartime measure, Ireland introduced rent controls on unfurnished accommodation. My wife grew up in a rent-controlled house that her parents had moved into in 1941. However, over time, new supply of unfurnished rental accommodation vanished, and only furnished tenancies – outside the rent control system – became available.
Particularly as inflation took off in the 1970s, real rents in the controlled sector plummeted. This rent control was found unconstitutional in 1981.
The latest proposals from the Government don’t deal effectively with the challenge of encouraging private investment in homes to rent. Without private capital, there will continue to be a funding gap relative to the need, and ambition, for new homes.
That means the housing crisis, caused by the gap between high demand and low supply, will continue.
If we want to build 50,000 or more homes a year, rent for new lets should be unrestricted. For those currently protected, it would be traumatic to revert immediately to market rents so that a continuation of some restrictions on rents for existing protected tenants is warranted.
Initially, if rent controls were ended for new builds, there would be little effect on protected tenants. However, rents on new builds could rise more rapidly than consumer prices. What would put a lid on ever-increasing rents would be the resulting supply response.
If investors were convinced that by building lots of apartments they would get their money back, supply would, over time, increase to meet the needs of the economy, choking off any surge in rents.
From the 1930s to the 1950s, in much more difficult economic circumstances, Ireland built tens of thousands of social homes, and ended the tenement scourge. Today’s housing challenges are different, but we should have the know-how and the imagination to tackle this most urgent of social problems.
