Monday 21 October 2019

Paul McNeive: 'State's fingerprints are all over the rental crisis'

The right moves

Paul McNeive
Paul McNeive

Paul McNeive

Architect Maoiliosa Reynolds has done the citizens (if not the State) a great service with his searing analyses of government housing policy and exposures of the lack of new home construction by local authorities. On social media this week, I came across a very interesting debate as to whether or not the level of supply of new homes affects the price of new homes. That debate had been sparked by an article originally written in 'The Village' by Reynolds, which posited that the assumption that increasing supply means that prices will reduce may be incorrect - which would undermine the theory behind State housing policy.

As a 'free market man' with an interest in economics, I'd find it hard to accept that increasing the supply of anything, whilst demand remains relatively constant, could do anything other than reduce price. However, Reynolds presented compelling evidence, based on CSO data, from 1975 to 2015. This shows that the numbers of new home completions, and average new home prices, track each other fairly closely, over those 40 years. This in turn suggests that the relationship of supply to cost is inelastic, that increasing supply does not reduce cost (value), and in fact, that the opposite may be happening, which is a dynamic normally associated with luxury goods.

There are strong views on the subject, but I suspect that there are other factors at play which are disrupting one of the fundamentals of economics, ie that price is a function of the levels of supply and demand. The biggest of these, I believe, is the availability of both credit and capital. For example, a clear case of where new home prices closely followed increasing supply numbers upwards, was during the Celtic Tiger era, from say 2005. The supply of new homes increased to 90,000 units per annum while new home prices continued to climb too - until both crashed together.

The biggest reason for this was the huge increase in the availability of credit from the banks. Population growth, employment growth and economic prosperity were all driving demand for new homes. But not only was there an organic need for shelter - new homes also became increasingly popular as a means of holding wealth as an investment. And the more prices went up, the more credit became available, and so on.

However, during the same period, rental costs, which are a purer measure of demand for housing, did not increase at anything like the same rate, because there was a better supply of units to rent.

Another factor is the availability of 'finance' as distinct from 'credit', and we are seeing that dynamic now, with the weight of money coming into Irish property from the overseas funds, for example. The funds are seeing strong rents and short supply in a good economy. This means that yields go down, and prices increase, which affects an owner-occupier market that is competing for units.

Other factors preventing the normal operation of the new-homes market are constraints in our land management structures, in that we do not get land zoned and into the market in time to react to demand. Thus, we don't get enough new homes built when they are needed and thus prices are artificially high. This phenomenon is seen strongly in cities with anti-development land policies, such as San Francisco, which combined with geographic boundaries there, contrive to keep prices artificially high and necessitate long-term commuting to the city centre.

At the root of the whole problem here is the State's failure to build enough social housing. To solve our housing and rental crisis, the Government has to boost housing supply, from the bottom of the market up, and not just encourage supply at the top and hope for a trickle-down effect. Prices for the few new-homes schemes available outside the private rented sector stopped increasing last year, and that's partly due to increased supply.

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