Opinion: Government does not want house prices to fall

There is widespread agreement that rents and house prices are too high relative to incomes, leading to affordability issues. There is also a strong consensus on the remedy: representatives of the stockbroking, banking, property and not-for-profit industries concur that the solution is to build more homes. Given such aligned messaging, the “ramp-up supply” mantra has understandably gained traction with the electorate. In turn, this has focused the minds of politicians and Government officials, and all the key players are committed to building more homes.

Public support for increased housing supply stems from a belief that this will drive down housing costs; all-else-equal, producing more of something should cause the price to fall. Unfortunately, this is where Irish housing policy runs into difficulty.

Politicians know that 70 per cent of Irish households own their own homes, and they fear alienating these voters with policies which would erode housing wealth

Wishing to be re-elected, the Government desperately wants to deliver more homes. But this presents a conflict, because it is equally fearful of doing something that would cause house prices to fall. There are four reasons for this. First, politicians know that 70 per cent of Irish households own their own homes, and they fear alienating these voters with policies which would erode housing wealth. Second, through painful experience, the Government has learned that falling house prices can quickly get out of control. Once prices start sliding, all that is needed for a self-fulfilling deflationary spiral is the expectation that this will continue. A third, and related, concern is the banking system. Banks typically lend to first-time-buyers at loan-to-value ratios of up to 90 per cent. This provides limited leeway for price slippage before the outstanding mortgage balances exceed the value of the assets that are securing them. Finally, house price deflation conflicts with the objective of delivering more homes. Development happens when dwellings can be sold for more than the cost of delivery. Costs are currently rising due to supply-chain constraints and increased materials costs. This narrows margins, creating a headwind for development, and falling prices would narrow these margins further.

Pragmatic approach

Successive governments have taken a pragmatic approach to resolving this dilemma, by channelling increased public funding into schemes which subsidise occupiers. Interventions like Help-to-Buy, the Rebuilding Ireland Home Loan, the Housing Assistance Payment (HAP) and Social Leasing tick multiple boxes for politicians. First, they help people to secure accommodation that would otherwise be unaffordable. Second, because these schemes increase the amount that people can pay rather than reducing the housing costs that they face, they carry no deflation risk. On the contrary, by giving households – or State-sponsored agencies acting on their behalf – more money to procure housing solutions, they actually support prices, incentivising development.

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Aside from this inflationary impact, the elephant in the room is the sheer scale of State involvement on the demand side of the housing market. A total of 12,304 new homes were purchased last year. State bodies accounted for 2,873 of these. A further 6,202 buyers of new homes claimed Help-to-Buy subsidies of up to €30,000. And 7,292 additional HAP tenancies were created, through which private landlords receive rents directly from the State. Meanwhile, 1,400 homes were leased in the private market for social housing.

Large as it already is, the combined scale of these interventions will grow further. This is not because of demographic pressure but rather the lack of it. Population growth has nearly halved from 64,500 per annum in 2018 to 34,000 in 2021. Assuming a marginal household size of two, no more than 17,000 additional households were formed. This compares with 21,000 new dwelling completions in the same period – plus 600 ghost estate units occupied for the first time, 2,500 recommissioned vacant dwellings and 2,400 student beds.

Population growth

It may surprise people, but residential construction is now outstripping household formation. And this gap is destined to widen from both sides. All three demographic components continue to deduct from population growth. Births have been waning since 2010 due to fewer women being in the childbearing age group. This trend will last until at least 2025. Deaths have been rising since 2006, and will continue to do so as our population ages. Meanwhile net migration, which follows a cyclical pattern, passed its peak in April 2018 and was falling even before Covid-19. In contrast, 30,519 new homes were commenced in the 12 months to September, and residential output is clearly moving towards the Government’s 33,000 unit per annum target.

Population growth has nearly halved from 64,500 per annum in 2018 to 34,000 in 2021

To underpin values while meeting this target, the Government is further escalating its support for housing demand. Help-to-Buy was extended once again in October’s budget, while there was a pledge to further increase HAP tenancies. Meanwhile the long-debated shared equity scheme is still to go live. Some €20 billion of public funding has been committed to housing over the next five years and the Government is pointing to this as a symbol of its commitment. However, with such inherent contradictions, it remains to be seen whether the current policy approach can deliver better outcomes.

John McCartney is research director at BNP Paribas Real Estate and adjunct associate professor at UCD