Ireland’s housing crisis seems to predate history but, as recently as 2013, we actually had a surplus of properties. At that time rents and house prices were falling, vacancy rates were in double digits and there were over 1,200 ghost estates. The turnaround since then shows how quickly the balance can shift; Double-digit price growth and increasing rents suggest that today’s market has swung from being swamped to being acutely under-supplied.
To correct this imbalance everybody agrees we should build more homes. But the distance between current housing output and demand, combined with the time needed to ramp-up construction, means the market will remain under-supplied for some time to come. Therefore I believe we will see further house price and rent inflation over the next three years, albeit at a slowing rate as supply catches up and a base effect kicks-in.
After that, however, things get more difficult to call because both housing supply and demand are estimated with a wide margin of error. Looking firstly at supply, nobody knows exactly how many dwellings were built last year, never mind how many can be delivered over the next five. ESB connections, our traditional proxy of housing completions, indicate that 19,300 units were hooked-up in 2017. However this measure overstates construction because, in addition to new-builds, it picks-up things such as re-connections of long-term vacant properties.
At the opposite end of the scale Building Energy Ratings (BERs) have been advanced as an alternative proxy for housing output. Unfortunately this measure underestimates construction because self-builders don’t always get BERs. Last year 9,513 homes were issued with BER certificates and Goodbody Stockbrokers advises a further 1,000-1,500 units should be added for uncertified builds, suggesting total output of around 11,000 units. However the Construction Industry Federation robustly disputes this and says Goodbody is underestimating self-builds.
Considering data on new home sales, planning permissions for self-builds, and construction of build-to-rent units by institutions, I suspect that ‘true’ housing output was around 14,000 units last year. If I am right then the housing market, while still clearly under-supplied, is in a somewhat better position than people may think.
Moving to demand, most analysts (including myself) believe that, in the medium term, 30,000-35,000 dwellings are needed each year to cover population growth, changing household sizes, obsolescence and some ‘over-building’ to offset previous under-construction. However factors such as net migration are inherently tricky to forecast and a minority of industry commentators say demand is greater - up to 53,000 units per annum.
The housing market is certainly under-supplied - otherwise prices and rents would not be rising so rapidly. But this discussion highlights the difficulty in measuring under-supply. At one extreme the gap between output and the annual housing requirement could be 42,000 units (53,000 - 11,000). But I believe the deficit is about half of this (35,000 - 14,000 = 21,000 units).
One could argue that this point is moot - either way we urgently need to ramp-up construction. And this is true, for now. However as the OECD noted this week, house price increases tend to draw capital into housing construction, and all of the available indicators show that construction activity is trending sharply upwards. At the same time, however, key elements of housing demand have gone into reverse. Births are plummeting because many women born during the late 1970s baby boom have now finished having their own children. Meanwhile deaths are rising due to the increased number of older people. The favourable economic outlook, as set out in the latest OECD commentary on Ireland, may generate enough inward migration to compensate for these demographic headwinds. But this is unlikely and the Government and the ESRI are both forecasting an overall slowdown in population growth.
In this context it is interesting to consider how a 20,000 increase in ‘true’ housing output by 2021 would impact the market? By some estimates it would still leave us needing to increase production by 42 per cent. But by my calculations it would effectively eliminate the housing deficit and bring the market into equilibrium.
Unfortunately the question posed above is not hypothetical. Development lead-times mean that housing output in 2021 depends on policy choices and commercial decisions that are taken today. The environment for making such decisions is complicated by the many stakeholders feeding into this debate and by imperfect data which make their analyses more challenging and, indeed, more difficult to challenge. Positive news on the data front is that one key indicator that we have been lacking - a definitive measure of housing output - should shortly be available. CSO has recently assumed responsibility for producing this information and will publish its first figures on June 14th.
Dr. John McCartney is Director of Research at Savills.