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What a healthy housing system looks like

The figures in this latest Sales Report are unlikely to surprise many who have an interest in the housing market. Comparing prices in the first three months of 2018 with those in the final three months of 2017, they rose in 53 of the 54 markets covered in the report, with only Monaghan recording a slight fall. Compared with prices a year ago, only Donegal has seen a fall.

It is, in other words, a market that continues to see almost across-the-board strong increases in prices. Looking at the national average, the annual rate of inflation was 7.3% in the first quarter of the year. The optimist will point out that this is the slowest rate of inflation in almost two years.

Guest post by Ronan Lyons.

However, in a healthy housing system, housing prices increase at the same rate as prices in the rest of the economy, no faster. According to the official measure of the price level, general prices in the Irish economy are no higher now, in early 2018, than they were five years ago. This is a remarkable achievement in recovering the lost cost competitiveness of the Celtic Tiger years. It is all the more remarkable considering that one of the single largest components of the CPI is private rents – so in truth, leaving the housing market aside, consumer prices in Ireland have fallen over the past five years.

In the same time, though, the purchase price of housing has risen by one half, on average. In Dublin the increase is slightly above 60%, outside urban areas, the increase is closer to 40%. But overall, this is a collection of geographical markets more defined by their similarities than their differences.

The reason that prices are rising is not complicated: the growth in demand far exceeds the growth in supply. The fundamental barometer of a healthy housing system is that, where new demand occurs, new supply follows quickly. This should be true for the housing system as a whole – i.e. both market and social housing segments. But a closer look at the figures reveals just how dysfunctional Ireland’s housing system is.

Turning to demand, first, Ireland’s population is rising by over 50,000 people a year. About two-thirds of that increase – between 30,000 and 35,000 – is down to a natural increase in the population. The remainder – a far more volatile number in Ireland but 20,000 in 2017 and on average that amount over the last two decades – is net migration.

Of course, it’s a little more complicated than births exceeding deaths. A population increase of 50,000 does not mean the country needs 50,000 new homes a year. At a very basic level, not every individual – and certainly not new-borns – has a household by themselves.

So, in order to understand housing demand, we need to look at household formation. But the picture here reinforces the stats above. There are about 330,000 women in Ireland aged between 25 and 34, compared to about 110,000 aged 75-84. This gap of between 20,000 and 25,000 per year gives a good measure of the underlying demand for new housing in Ireland each year.

But in addition to the increasing population, there are two further elements that need to be factored in. The first is obsolescence: even in countries with a declining population, new homes need to be built to replace stock that falls out of use. Even if every home lasts on average 200 years, that’s still 0.5% of the housing stock – or in Ireland’s case, 10,000 homes.

And lastly, there is household size. While at first glance, this appears to have been static in recent years, or indeed even increasing between the 2011 and 2016 Censuses, this is merely because household formation is what economists call endogenous. Simply put, if you can’t find a dwelling, you cannot form a household. Looking at the bigger picture, including long-run trends in Ireland and elsewhere, it is clear that the bulk of new households formed will be 1 or 2 persons.

This has implications for both how many new dwellings are needed and what type. If Ireland adds 2 million people in the coming decades, but they are in households of 4 persons on average, this is an additional 500,000 dwellings. But if – as is overwhelmingly likely – they are closer to 2 persons on average, Ireland needs twice as many new homes to cover the same increase in population.

And not only that, Ireland is urbanising. Dublin and the other major cities are likely to account for 80% of the country’s population by mid-century. This is not some anomaly, with Dublin far too big – indeed, if anything, Ireland is anomalous in not having this process happen already.

Ireland is in the middle of a century-long process of moving from rural households of roughly 4 persons to an urban society of 2 persons per household. This has huge implications for what we build and how. Supply will be needed in and around the cities – and predominantly in apartment form.

What is clear is that this is not happening. Planning permission was granted for a little over 5,000 apartments, nationwide, in 2017, and for 20,000 dwellings in total – less than half the likely demand. It is often said that the mantra in the housing market is “location, location, location”. For housing policy in Ireland, it needs to be “supply, supply, supply”.


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