New supply is welcome – but mix matters too
While well-flagged, the evidence of further relief in the sales segment of Ireland’s housing market is still to be welcomed. Sellers may, of course, be less happy than most at something approaching normality. However, for the rest of the country, and for policymakers in particular, the belated but by now strong supply response will be taken as a good news story.
The figures in this latest Daft.ie Sales Report are telling. Over 8,200 properties were listed for sale in May 2019, the highest monthly total in over a decade. Indeed, the last time that many properties were put on the market at the same time was April 2008. At that stage, market conditions were hugely different: 8,700 homes were put up on the market, but just 5,600 came off. Supply may have been strong but demand was weak – and, as most of us know, prices fell as a result.
A new addition to this quarter’s sales report is a focus on sales of new homes. Indeed, it is something of a curiosity that Ireland’s longest running report on the sales market has never really had a new-homes segment to analyse. Supply collapsed shortly after the Daft.ie Sales Report started in 2006 and is only now recovering to anything like the level the country needs.
The new infographic shows that 16% more new homes were sold in 2018 than in 2017 – 10,300 last year compared to 8,900 in the previous year. Despite the increase in the number of homes for sale, prices held up. In fact, the median price rose from €300,000 to €330,000 between 2017 and 2018. So, as supply has improved, demand has been there, ready and waiting. A contrast between Dublin and Munster is, I think, instructive. In Dublin, nearly 4,600 new homes sold in 2018 – up from 3,900 in 2017. This boost to new supply is obvious when looking at availability on Daft. Over the last 12 months, there have been an average of 5,000 homes on the city’s for-sale market at any one point. This is up from just 3,200 in the period July 2016-June 2017.
Unsurprisingly, this huge change has had an impact on prices. Prices in the capital are now just 1.2% higher than a year previously. On the face of it, this may seem similar to mid-2016, when inflation was just over 1%. But then, the market was adjusting to the introduction of the Central Bank rules. Those rules removed the nascent bubble from the equation, but could do nothing to address the underlying lack of supply. That’s why, by mid-2017, annual inflation in Dublin was back above 10%. This time, however, the slowdown in inflation is all down to extra supply.
In Munster, the picture is very different. Prices in the province – outside the cities – are 11% higher now than a year previously. And unlike in the capital, availability has hardly improved at all. Over the past 12 months, there have been an average of 7,500 homes for sale in Munster. This is below, rather than well above, the level of availability seen two years ago (8,100). And moving a step further back, the stagnant availability merely reflects weak construction activity. In Kerry, Clare and Tipperary, there were just 369 new homes sold in 2018 – down slightly on the 377 sold in 2017.
Weak construction activity itself reflects the single most pressing issue in the Irish housing market. This is the very high level of construction costs when compared to average household incomes. In a country where the average household income is close to €50,000, it should not cost more than €150,000 to build a home. However, it is very challenging to build a home for anything less than €250,000. This viability gap means that, only where average prices are already well above €250,000 will developers be able to meet demand.
So, is this a good news story then? The new supply is certainly to be welcomed. And the longer it continues, the more likely it is to bring prices down to levels more reflective of incomes in this country. However, as mentioned above, costs are still a huge issue – especially when thinking about anything other than the three-bed semi-d.
The vast majority of new homes built in Ireland over the last couple of years – when supply has improved – have been either estate houses or one-offs. The problem is: the country doesn’t need any more of these types of homes. Under no reasonable projection of demographics will the country ever have more than 1.5 million families. And yet, Ireland already more than this in its housing stock and is building lots more.
This mismatch between the type of supply and the type of demand should dominate housing policy over the next five years, much as the mismatch between the scale of supply and demand should have dominated it over the last five. To get a sense of what lies in store, it is worth checking the snapshot in this latest Daft.ie Sales Report.
All told, there are 270 market segments covered in the snapshot. 54 of those are three-bedroom homes – which have been the focus of almost all construction – and more than three quarters of those market segments show prices lower now than a year ago. Indeed, in the Greater Dublin Area, prices of three-bed homes are falling almost everywhere – in 27 of the 29 segments covered in the report. In the rest of the markets around the country, prices are – more or less – still rising. In just 12% of the other 226 market segments are prices falling.
Ireland really needs to learn how to build the full life-cycle of housing. This includes student accommodation and co-living, which – despite all the fuss – remain markets starved of supply. But it also includes medium-to-high rise city centre living and downsizer apartments in suburban areas. And it also includes independent living and assisted living that will take the pressure not only off our housing system but also our health system.
The country has restarted building the only type of home it has ever really known how to build: the three-bed house. We don’t need any more of those, though. So housing policy needs a new focus – to reflect the diversity of ways we live today.