The opportunity in downsizers

Guest post written by Ronan Lyons.

There are two well-established facts that summarize the Irish housing market in its current state. Firstly, there is a shortage of accommodation. This is particularly true in Dublin – roughly speaking, for every ten new homes needed in the period 2011-2016, only one was built. This was a time of net emigration so, as the country returns to net immigration, the demand will only grow.

The second fact is that it is prohibitively expensive to build apartments in almost all segments of the market. The focus on apartments is not arbitrary – Ireland has Europe’s largest average household size currently. In the 2011 Census, there were 2.7 people in the typical household.

But household size is converging steadily with the rest of the continent, having fallen from over 4 in the early 1970s and over 3 in 2002. As Ireland’s average household size continues to converge to the European average, this will create significant amounts of new housing demand.

The logic behind this is simple, although often forgotten. Suppose Ireland had a fixed population (rather than a growing one) – for round numbers, take 5 million. If the typical household size is 4, the country needs 1.25 million homes (5 million divided by 4). If, however, the typical household size is 2.5, the country needs 2 million homes – 60% more!

A rise in the fraction of one- and two-person households is creating huge demand for a significant number of new dwellings. Let’s take more precise numbers for Ireland’s case currently, which has a population of roughly 4.8m. Relative to a 2.7 average household size, if the same population had an average household size of 2.5, this would mean the country needs 142,000 extra dwellings.

When the numbers are that big, it can be easy to be almost blasé about them. But let’s stop and think about that: 142,000 extra homes is the equivalent of 11 years of what was built in 2015! And if Ireland converges to the EU average (2.3), this would require an additional 300,000 dwellings.

An April 2014 report by Future Analytics for the Housing Agency confirms that these demographic trends have implications for the type of housing stock needed in Ireland and specifically in Dublin. Their findings – for the period 2014-2018 – indicated that three quarters of the new households added in Dublin in that period had at most three persons, with the large majority comprising just one or two persons.

So one- and two-person households comprise the bulk of new households being formed in the capital. You might expect that, in response, accommodation suitable for one- and two-person households would be built.

But that would only happen if costs could be recouped. Those active in the space confirm that the break-even cost of building a two-bedroom apartment currently is roughly €325,000 – excluding any land costs. There are two ways of looking at how affordable this is.

The first is to convert it into a monthly rent – this is what a developer would do if they were thinking of building to rent. An upfront cost of €325,000 converts into a monthly breakeven rent of roughly €1,650. Site costs per apartment of up to €100,000 would add another €500 to that.

It is clear that, with the exception of Dublin 2 and 4 – and a small range of other areas, like the North Docks and some parts of South County Dublin – this is completely unaffordable. Average monthly rents for a two-bed in West Dublin, for example, are just €1,200, well below viability.

One solution might be to build-to-sell, rather than build-to-rent. An upfront cost of €325,000 converts, given current interest rates and deposit rules, into a monthly mortgage of €1,300. However, the first-time buyer market has by and large turned off buying apartments. Such “property ladder” homes, typically bought in the bubble for 2-3 years before being sold, leave the owner open to the risk of a fall.

This is not the case when it comes to downsizers, though. In many parts of the city, the bulk of those over the age of 55 own their homes – and own them mortgage-free. Not only that, this generation have benefitted from a one-off increase in property values. This has happened in Ireland as in other countries: once you strip out inflation, most high-income countries have seen a one-time increase in prices at some point since the 1970s.

This gives them equity – and equity that could be used to downsize and to provide for their future. The average four-bedroom home in South County Dublin is worth €800,000 currently. The average two-bedroom apartment in the same part of the city is worth less than half that.

But currently, there is almost nothing for them to choose form. According to Eurostat, just 14% of households in the region that includes Dublin and Cork live in apartments. This is very low compared to other European city-regions, with almost half of the housing stock in apartments in the equivalent EU region containing Liverpool, two thirds in Copenhagen and over three quarters in Lisbon.

There is, therefore, a clear mismatch. In 2011, 256,000 of Dublin’s 467,000 households, in other words over 55%, had just one or two persons in the household. However, only 170,000 dwellings in Dublin contain four or fewer principal rooms – a two-bedroom apartment would typically have three principal rooms.

What the city needs is the densification of the suburbs: good-quality apartments built close where older people live and thus close to where their networks and amenities are. But time and again local politicians – including Cabinet ministers – object to the development of new apartments in areas where the buyers would disproportionately be older people.

If local authorities want to be age-friendly, they need to take a much firmer stance on objections to the development of apartments, particularly in suburban locations. If there is no supply of homes for people to downsize into, demand for downsizing becomes almost irrelevant.