A “sharp drop” in housing completions is likely next year and in 2024, leading to a contraction in supply, while the State’s housing targets significantly underestimate our needs and ought to be “urgently reviewed”, according to a new report.
AIB’s latest property report, which deals with supply and demand in the sector, says an area of “immediate concern” on the supply side is the “lack of viability” of apartment development.
It notes that apartments accounted for more than 94 per cent of all units granted planning permission in Dublin in 2021. However, a large proportion of apartment planning permissions in the capital “have not been converted into commencement or completions”.
“Practically the only type of residential development that will get planning permission in the four local authority areas in Dublin is apartments,” it says. “Unfortunately, the viability challenge has increased over the past year due to the significant cost inflation.”
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Estimates from various sources indicate that the average development cost for the construction of a two-bedroom apartment in a medium-sized development was in the region of €450,000 to €500,000 prior to 2022.
These development costs have increased by about 15 per cent over the intervening 12 months. This would indicate that the development cost of a two-bedroom apartment in a medium-sized development has increased to in the region of €520,000 to €575,000.
Furthermore, the report suggests viability is “likely to deteriorate further” over the coming year if, “as seems likely”, apartment/private rental sector yields increase.
The report says this could result in the capital value of an apartment falling below the cost of development, and, worse still, the “near cessation” of new apartment commencements.
“In a rising yield environment, it is evident that the viability of apartment development is going to be even more challenged and will likely result in a sharp drop in apartment commencements and completions over the coming 12 to 24 months,” it adds.
This could occur up to the point “where new housing supply numbers could actually contract next year and in 2024 from this year’s level”, the report says.
A solution it puts forward is the adoption of “compact growth design standards” to achieve densities of 35 to 50 units per hectare, something that “has the potential to unlock a significant amount of supply in the Irish market with a near immediate effect”.
Up to now, the “only realistic buyers” of apartment developments were institutional buyers. However, private institutional buyers are “likely to be considerably less active for the foreseeable future”.
Therefore, the reliance on the public sector as a buyer “will have to increase” if there is to be any reasonable supply of new apartment developments over the next few years.
Separately, the report says a “recalibration” of the planning system is required, particularly in relation to the demographic assumptions underpinning public policy, as well as our estimated housing requirements.
Those assumptions are leading to a “significant underestimation of housing requirements in Ireland, particularly in the Greater Dublin Area and surrounding counties”, the report argues.
It describes the issue of residential land being de-zoned in the greater Dublin area and surrounding counties as “perplexing”, and says “overly conservative” demographic assumptions lie at the heart of this problem.
It points out that Fingal is estimated to need a total of just 18,560 new units between 2022 and 2040. “This level of estimated demand belies the fact that Fingal has been one of the fastest-growing local authority areas over the past two decades,” it says.
It adds: “We believe that the demographic assumptions underpinning the National Planning Framework and the housing need and demand assessments need to be urgently reviewed and updated.”
