Tuesday 22 August 2017

Cluster economy will demand city homes

The US network of federal highways has allowed cities to grow, but in doing so it has depopulated the urban cores. This is in part due to the nature of highways in that country, which do not stop at ring-roads but penetrate to the heart of cities, such as this one in Los Angeles
The US network of federal highways has allowed cities to grow, but in doing so it has depopulated the urban cores. This is in part due to the nature of highways in that country, which do not stop at ring-roads but penetrate to the heart of cities, such as this one in Los Angeles

Ronan Lyons

Fifteen years ago, the Irish Government published a National Spatial Strategy. Complete with gateways and hubs, it was supposed to be a cornerstone of Ireland's development over the coming two decades - and indeed, if successful, well beyond that.

However, within a few months, it had been trumped, as the same Government announced its own plans to "decentralise" its Government. (As the OECD has noted, the so-called decentralisation was no such thing: no powers were to be returned to local authorities. What happened instead was the fragmentation of central government.)

Particularly once government finances took a turn for the worse in 2008, ambitious plans for future decades had to take a back seat. Indeed, the fraction of Government spending devoted to 'voted capital', ie, infrastructure, is lower now than at any point since 1980. Even in the grim, fiscally austere mid-1980s, the country was investing more in its future.

The recent and dramatic improvement in economic conditions in this country, however, has finally convinced the Government to have another look at planning for growth. The aim for the new National Planning Framework is to coordinate government policies that relate to national and regional development. This will include housing but also water, transport, communications, energy, health and education.

Those crafting the new policy would do well to heed the lessons from other countries. I'd like to highlight three: relating to transport, to utilities and public services, and to housing.

Infrastructure - in particular transport infrastructure - has been shown to have long-lasting effects on the spread of people and jobs. To give one extreme example, the US network of federal highways has allowed cities to grow, but in doing so it has depopulated the urban cores. This is in part due to the nature of highways in that country, which do not stop at ring-roads but penetrate to the heart of cities.

A second key lesson for Irish policymakers is making the link between where people live and the infrastructural services they consume. In practical terms, what do every 1,000 new residents translate into, in terms of hospital beds, school places and utility networks?

Ireland is constrained here on two fronts. The first is the lack of a meaningful property tax - its rate of 0.18pc is less than one-fifth the standard rate in other countries, depriving local authorities of the revenues to invest. And the second, political poison it turns out, is the lack of a water charge. This has turned some parts of the country into 'one in, one out' in terms of planning permissions, as the water infrastructure simply can't cope.

The final point relates to housing. Economists, particularly those who focus on water, are very exercised by one number, what they term 'the elasticity of housing supply'. In everyday language, this is how supply responds to new demand. If a region needs 10,000 new homes - due to job creation or demographics or some other factor - how many of those 10,000 new homes are built and how fast?

Given supply of new housing takes time, how the price of housing is changing across regions gives a good picture of the underlying demand for housing. And the figures from the latest Daft.ie Report (see main news section), out soon, are telling, if not surprising.

House price increases are back with a bang in Dublin, the area around it and in the other major cities. In Dublin and the four other major cities, prices have risen by roughly 55pc from their lowest point nearly five years ago.

Dublin's commuter counties, and other counties well connected to the capital by transport infrastructure - see my first point above - have also seen increases of 50pc or more. But in those parts of Munster, Connacht and Ulster outside the cities, prices have increased by less than one third. And, unlike the urban centres, house price inflation in those parts of the country appears to be easing off, not hotting up.

What this means is that Irish people are similar as their counterparts in other high-income countries. They like to cluster and that means cities will drive future growth. I can understand the temptation for the National Planning Framework to become another Spatial Strategy, with cherry-picked market towns around the country somehow going to act as a counter balance to Dublin, Cork and the other major cities.

But the truth is that a country rises and falls together. What is good for Dublin or Cork is also good for the market towns and rural Ireland. It is clear from the housing market that there is substantial unmet demand for new homes in and close to Ireland's biggest cities. As a country, we need to make sure supply can meet this demand.

Ronan Lyons is assistant professor of economics at Trinity College and author of the Daft.ie Reports

Sunday Independent

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