Philip O'Sullivan: 'Unfortunately, there is no magic bullet for housing supply'

The colourful language used to describe the residential market is, of course, no consolation to those negatively affected by the wide jaws between supply and demand. How did we get here? During the crisis years, no serious news report was complete without footage of the ghost estates that littered the countryside. In the 2011 Census, the CSO estimated that there were 230,056 vacant houses and apartments (12pc of the housing stock) across Ireland. This was about double the 'normal' vacancy rate, with some housing units inevitably becoming temporarily vacant for reasons such as probate.

Why was this 'glut' of, say, 110,000 housing units insufficient to satiate the country's need for accommodation? For starters, it equated to only about three years of a demand for housing that is driven by factors such as the natural increase in population (births minus deaths), migration, obsolescence, the trend towards smaller household sizes and economic conditions. Secondly, the oversupply was not well matched with the population distribution. Some 29pc of the vacant units were located in Connacht-Ulster (home to 18pc of the population), while 19pc of the vacant units were in Dublin (home to 28pc of the population).

Estimates of annual new household formation range between 30,000 and 50,000 units. The last year that Ireland built at least 30,000 housing units was 2008. Housing output troughed at just 4,560 dwellings in 2013. Since then it has quadrupled (to 18,072 units in 2018), but that is still around 40pc to 60pc adrift of the flow of new demand. Thus we have a large, and growing, stock of unmet housing need.

The mismatch between supply and demand has had a predictable effect on capital values and rents. The CSO's Residential Property Price Index has increased by 81pc since the 2013 trough. Nationally, rents have soared 71pc from the depths of the recession to an all-time high, 27pc above the Celtic Tiger peak.

Policymakers have brought in a number of measures to try to stem the upward moves. The Government capped annual rental inflation for existing buy-to-let properties in designated rent pressure zones at 4pc. This has helped to moderate the annual rate of growth from 9.7pc at the time of the introduction of the rent caps in December 2016 to 5.6pc currently. Within that, rent inflation in rural Ireland is running ahead of many urban centres, reflecting the distortions produced by the caps.

In 2015, the Central Bank of Ireland introduced macro-prudential measures, placing loan-to-income and loan-to-value ceilings over the majority of new mortgage lending. These rules have a particularly sharp effect in Dublin, where asking prices are 47pc higher than the national average, while disposable incomes stand 18pc above the mean for the State. It is not a surprise, therefore, that annual Dublin price inflation has slowed to 1.4pc, while prices in the rest of Ireland shows an increase of 7.5pc in the latest CSO data. We also suspect that the Central Bank rules are 'exporting' inflation away from some urban areas into their commuter belts.

The latest Daft.ie data show that annual Dublin asking price inflation is running at 4pc, while the capital's commuter belt is seeing increases of between 4pc and 7pc. Similarly, Co Limerick (+13pc) is seeing faster growth in asking prices than Limerick city (+11pc).

So long as there is a wide gap between demand and supply, our contention is that the path of least resistance for both rents and house prices will remain to the upside.

How do you close that gap? We have seen so many prescriptions put forward by commentators that it sometimes feels like we are at a medical convention.

One popular view at this time is that so-called cuckoo funds are locking would-be buyers out of the housing market by snapping up new apartment blocks. Context matters and we note that these funds only own around 0.5pc of the entire housing stock. Moreover, these funds are actively funding the delivery of new units into a rental market that is starved of supply, helping to address the shortages of accommodation.

Irish builders were left chronically under-capitalised by the crash of a decade ago and high street banks are still reluctant to lend. Central Bank data shows that the stock of domestic bank credit for residential development and investment has fallen 91pc since 2010. Labour is another constraint, with fewer people working in construction today than at the end of 2000.

We cannot conjure up an army of builders overnight. But we are doing ourselves no favours by neglecting to tackle skills shortages. Construction Industry Federation research shows that only 29pc of firms are training apprentices.

Additional development finance innovations, further planning reform and targeted fiscal measures will also likely be required if we are to provide enough housing for our people.

Until (or unless) these happen, it is hard to envisage a catalyst for a halt to the upward march in prices and rents.

Philip O'Sullivan is Chief Economist with Investec Ireland