Dublin house price rises are not a bubble but are cause for concern
Published 03/08/2014 | 02:30
It is fashionable at the moment to argue that there is a bubble in the Dublin housing market. And at first glance it is easy to see why. House prices in some parts of Dublin are up almost 40pc in just two years, leaving a small group of delighted purchasers and a much larger group of would-be first-time buyers feeling that they blinked and missed the boat.
However, the term "bubble" means something in particular. This matters because dealing with a bubble is different from dealing with other reasons prices may rise rapidly.
A bubble is when the price of an asset such as housing departs from the fundamental value. Charles Kindleberger has written a book on bubbles throughout history and there is one common thread across all of them.
You cannot have a bubble unless there is loose credit to fuel unrealistic expectations. This has been true from the earliest bubbles of the modern era, such as the famous South Sea Bubble of 300 years ago, and it remains true today.
Looking at the loan-to-value offered to first-time buyers today, and just as importantly at what they expect to happen to house prices over the medium term, it is hard to argue we are in the midst of another credit-fuelled bubble of exuberant expectations.
First-time buyers struggle to get a mortgage with anything less than a 10pc deposit (and rightly so, for reasons of financial stability). But when surveyed, they revealed they expected annual house price increases over the next five years of the order of about 3pc a year, which looks far from excessive.
The reason why what is going on now is different to what was happening 10 years ago - when it most certainly was a bubble - is the rental market.
Ten years ago, when house prices throughout the country were rising rapidly, rents were falling, as tens of thousands of new homes were being built. Now, rents are rising just as rapidly as house prices.
So if it is not a bubble, what is going on? House prices in Ireland are determined by five key factors. The first two are about the fundamentals of demand - household incomes (which are flat at best), and demographics (which move slowly).
The other three are the supply of housing, the availability of credit and what economists call user cost (which is interest rates less expectations). Credit and user cost are the drivers of bubbles, but as discussed above, neither is at the heart of recent increases.
Certainly, the normalisation of expectations - where people went from expecting falling house prices to stable or rising ones - has played a role in flushing out demand.
But the underlying reason for house price rises is more obvious. The population of Dublin is growing by roughly 17,000 people a year, which translates into roughly 7,500 units a year. But over the entire three years from January 2011 to December 2013, just 4,000 new dwellings were built in the capital, about one sixth of what Dublin needed.
This chronic lack of housing is at the root of most of the housing difficulties we see currently, from homelessness to rising rents, from the student accommodation crisis to dramatic turnaround in house prices.
And there is no over night fix in terms of vacant housing in Dublin. In mid-2013, there were 23 unfinished developments in the capital with a total of 6,370 dwellings - not far off one year's worth of supply.
However, more than half of these units are already occupied, while most of the remainder are not even started. Just 617 units stood vacant in Dublin last year, barely one month's supply.
In a sense, you could view all this as good news. House price rises due to a bubble are notoriously difficult to stop in a way that doesn't damage your economy, as the UK is discovering currently.
House price rises due to a lack of supply have an obvious fix - build more homes. This generates employment and also boosts competitiveness, by driving down the cost of accommodation.
Perhaps this sounds too optimistic. After all, wasn't building too much part of the problem?
Actually, in Dublin, there was very little over-building. Where Ireland went wrong was in its planning system, which encouraged sprawl in a world economy that thrives on density. More units were built in Connacht and Ulster during the bubble than in Dublin, even though Dublin has twice the population.
What the decade to 2007 tells us is that planners should be very wary of directing where buildings and people should go.
We are our own best judges of where we want to live. If building is not happening now, when both prices and rents in Dublin are near their limit relative to incomes, then something has gone horribly wrong with our planning and regulatory system. Those unconvinced that regulation is at the heart of the problem would do well to consider this: the development which won the Urban Land Institute's prestigious global award for housing last year is illegal under Irish building regulations.
We currently have a Junior Minister for Housing, who in reality has only the homelessness aspect of that portfolio, with the rest of the policy tools relating to housing divided out between the Departments of Finance, Taoiseach and Justice, as well as the Central Bank.
What we need is someone who is responsible for the housing ecosystem.
Such a minister could set the target of reducing the cost of building a family home by 33pc by the next election and achieve it.
Sadly, there is no political appetite for this - so even medium-term respite for Dublin's dysfunctional housing market is likely to be underwhelming.
Ronan Lyons is assistant professor of Economics at Trinity College, Dublin, and is author of the Daft.ie report
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