Monday 22 April 2019

Housing costs damaging our competitiveness again

Workers are now seeking to recover their higher housing costs through higher wages. Photo: Angel Nieto
Workers are now seeking to recover their higher housing costs through higher wages. Photo: Angel Nieto

Dan White

Soaring house prices and record rents risk undermining Ireland's international competitiveness as higher mortgage payments and rents feed through into the general price level.

Last week, the National Competitiveness Council published its annual Competitiveness Challenge report. In the report the NCC warned that: "The shortage and cost of residential property is damaging competitiveness. It impacts upon our attractiveness for mobile investment and talent. High rents affect decisions around labour mobility and entering employment."

Ireland's housing market has recovered strongly since its March 2013 trough. Average house prices across the country have risen by 70pc over the past four-and-a-half years, while Dublin house prices are up by 77pc over the same period.

The rise in rents has been equally spectacular, with property website estimating that average rents have risen by 72pc since October 2011 while average Dublin rents are up by between 67pc and 85pc over the same period. reckons that average Dublin rents are now 23pc above their pre-crash peak while average rents nationwide are running about 17pc above pre-crash levels.

However, despite escalating house prices and rents, inflation and earnings have remained subdued with the consumer price index recording a barely-discernible 0.6pc increase in the 12 months to October 2017. It was a similar story with earnings, with the CSO recording an increase of just 0.6pc in the year to the fourth quarter of 2016.

This was despite a fall in the unemployment rate from a peak of 15.9pc in early 2012 to just 7.2pc by the end of 2016. The failure of either the inflation rate to respond to rapidly-rising accommodation costs or of average earnings to react to rapidly falling unemployment is truly remarkable.

It also flies in the face of conventional economic orthodoxy.

Have we in Ireland succeeded in rewriting the rules of economics? Or are we merely experiencing a time-lag before the full effect of the housing crisis and the fall in unemployment rate is felt?

Almost certainly the latter.

The ESRI, the Government's favourite economic think tank, published the winter edition of its Quarterly Economic Commentary last week.

It pointed out that having failed to respond to falling unemployment for many years, average earnings are finally beginning to make up for lost time.

"As the labour market approaches full employment levels, wage growth has intensified, rising four times faster in the period between Q2 2016 and Q2 2017 compared to the same period in the previous year," said the ESRI.

While average annual earnings growth, which hit 2.2pc in the second quarter, eased back to 1.7pc in the third quarter, there is little doubt but that the subdued wage growth of recent years is rapidly disappearing in the rear-view mirror.

With the ESRI forecasting an average unemployment rate of just 5.4pc in 2018, full employment to all intents and purposes, the upward pressure in earnings is set to intensify.

The only surprise about this is that anyone should be surprised.

The average rent nationwide is now just under €1,200 per month while rents in Dublin average from €1,478 in north Co Dublin to €1,955 in South Co Dublin.

This compares to average public sector earnings of €3,850 per month and average private sector earnings of €2,828 per month.

What this means is that the average nationwide rent is the equivalent of 42pc of average private sector earnings while someone on average public sector earnings would have to part with between 38pc and 51pc of her earnings to rent in Dublin. And this is for gross, ie pre-tax earnings. When taxes are deducted accommodation costs consume an even higher proportion of net earnings.

One doesn't need a Nobel Prize in economics to see where this is heading.

With the labour market tightening - although the participation rate, basically the proportion of people of working age actually in the labour force, remains about 3pc below pre-crash levels - wages will rise.

With more and more of their incomes going towards keeping a roof over their heads, workers are seeking to recover the higher housing costs through higher wages.

As the supply of workers begins to dry up employers are having to increase wages in order to attract new workers and retain existing staff. They in turn will seek to recoup higher wages through price increases.

We have been here before.

As the Celtic Tiger roared during the noughties, Ireland slipped from 11th place in the World Economic Forum's Global Competitiveness rankings in 2001 to 22nd place by 2007.

In recent years the downward trend in our international competitiveness was reversed with Ireland rising in the rankings from 28th place in 2014 to 23rd by 2017.

But is history now about to repeat itself? As higher house prices and rents feed through into the general price level, Ireland will become an increasingly expensive and uncompetitive location from which to do business.

Ryanair's massive climbdown

Things will never be the same at Ryanair after last Friday's dramatic climbdown on trade union recognition. The airline's last-minute decision to recognise the pilots' trade union marks a key milestone in Ryanair's evolution from scrappy outsider to dominant incumbent.

As climbdowns go, this was as big as Texas. Last Tuesday Ryanair issued a statement headlined: "Ryanair to face down threatened IALPA strike".

With the airline's pilots threatening a one-day strike for next Wednesday: "Ryanair will deal with any such disruptions if, or when they arise", promised the statement.

Within three days Ryanair had executed an astonishing U-turn.

Last Friday it issued another statement, headlined: "Ryanair agrees to recognise pilot unions to avoid widespread customer disruptions over the Christmas period".

For generations of Irish emigrants the big worry always was that their Christmas travel plans would be ruined by a strike at either Aer Lingus or Aer Rianta (now Dublin Airport Authority).

The rise of Ryanair apparently changed all that as the aggressive newcomer put manners on the incumbents.

Now the shoe is very much on the other foot. With Aer Lingus having become part of IAG, Ryanair has become Ireland's 'national airline' by default. And guess what - it's starting to behave just like the old Aer Lingus with strikes threatened at times designed to cause maximum inconvenience to passengers.

The threatened strike came in the wake of last September's rostering fiasco, when Ryanair was forced to cancel more than 20,000 flights and pay out €25m in compensation to passengers after completely miscalculating the availability of pilots to fly its autumn schedule.

Ryanair's head of operations, Michael Hickey, departed after the affair. It also exposed a vulnerability in Ryanair that hadn't previously been visible.

The pilots, with whom Ryanair has never enjoyed the best of relations, were quick to seize the opportunity created by this vulnerability.

Ryanair pilots based in Ireland, Italy and Portugal threatened strike action while their German colleagues were also limbering up for a spell on the picket lines.

Confronted by the appalling vista of tens of thousands of its passengers having their travel plans ruined for the second time in less than four months, Ryanair blinked first and agreed to recognise the pilots' union.

Now that it has yielded to the pilots it is surely only a matter of time before Ryanair is also forced to recognise unions representing ground crew and cabin staff.

Sunday Indo Business

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