Construction sector moving in the right direction
By Ronan Lyons
This commentary for the Year in Review ≈®¸ will have a different tone to some of its immediate predecessors. Understandably, given the more than 50pc increase in sale prices countrywide in recent years, recent end-of-year commentaries have been gloomy in outlook. Last year’s review finished with a warning that without the right policy response, “there could be many more years of housing market angst ahead”.
Of course, 12 short months can hardly overturn a systematic failure of housing supply. The mismatch between strong demand and weak supply continues – as does the mismatch between what is being built and what is needed.
But within that last fact lie some positive developments for Ireland sales segment. Construction activity has improved over the last year. Over the course of 2018, the country is likely to see about 18,000 new homes built, up from less than 15,000 in 2017.
More supply should ease the problems in the housing market. But of course, not all homes are equal. If the country needs urban apartments and is getting mostly rural one-offs, then the extra supply will be of far less benefit than if urban apartments were built.
And that, at risk of simplification, is what is happening. Comparing the country’s housing stock with its people, the country does not need any more three- and four-bedroom family homes. What it needs instead is homes for one- and two-person households, especially in urban areas – i.e. apartments.
But the uplift in construction has been dominated by estate housing – three- and four-bedroom family homes. Three quarters of the growth in construction between mid-2017 and mid-2018 came from estate housing. Almost all of that is housing built for sale to owner-occupiers, rather than for the rental sector.
And this has had an impact on the trends in the sales market. Perhaps the most notable trend in the sales market right now is the extraordinary growth in availability of homes for sale, especially in Dublin (where construction is concentrated). Two years ago, at the end of 2016, there were fewer than 2,800 homes for sale in the Dublin market. Now, in December 2018, there are over 4,800.
This trend of greater availability has started to spread, too. In Leinster (outside Dublin), availability is up from 5,000 a year ago to 6,000 today. Elsewhere in the country, the picture is more about stabilisation after many years of dwindling stock. This is a world away from the rental sector, where availability continues to worsen.
Unsurprisingly, with greater supply, the bargaining power of buyers improves and price increases have slowed down. The annual rate of inflation in list prices for Dublin in 2018 was 2.9pc, down from 11.7pc a year ago. Outside of Dublin, as you might guess from stable rather than improving supply, inflation has levelled off rather than cooled: increases of 7.3pc in 2018 compared to 7.4pc in 2017.
Looking ahead to 2019 and indeed to 2020, what does the market have in store? 2018 was the year that sales and rental segments detached. For roughly five years, there had been a common trend of acute supply shortages that characterised both segments. That has given way in the sales market to one of steadily improving supply, relieving the upward pressure on prices.
And more is to come. Suppose, on average, it takes 18 months to go from planning permissions to occupied units on new housing estates. The 8,500 or so units planned in the year to mid-2017 became the new homes completed during 2018. Over 2019 and 2020, we are likely to see that number rise well above 10,000 new estate homes completed in a year.
The focus will switch, in the sales segment, from supply shortages to the capacity of the mortgage market to process the new homeowners.
Unfortunately, no such relief is coming down the tracks in the rental segment – or indeed the third main component of the housing system, social housing. In both of those segments, the system needs to increase at least by a factor of 10.
That won’t happen on its own and thus it is those two segments where policymakers need to focus now.