Thursday 20 September 2018

Housing crisis could yet sink our economic recovery

With new building at lower levels than believed, soaring prices and rents are eroding our economic competitiveness

The views of Central Bank Governor Philip Lane on the housing crisis, have been undermined by fresh evidence based on more accurate statistics from the CSO which revealed a 5,000 shortfall in the number of homes built last year
The views of Central Bank Governor Philip Lane on the housing crisis, have been undermined by fresh evidence based on more accurate statistics from the CSO which revealed a 5,000 shortfall in the number of homes built last year
Dan White

Dan White

Central Bank governor Philip Lane is confident that house prices, which rose by another 13pc in the year to April, will "cool off". Speaking to Bloomberg TV, Lane said "it is important to put it in context. We have an economy that is growing quite quickly, so employment is growing strongly, wages are picking up. So when we talk about house prices, there are some strong fundamentals there. It's also the case that we are far below peak prices but, of course, any central bank is going to keep a close eye on the housing market.

"We have put in place credit measures, so there's a limit to the loan-to-value ratio and loan-to-income ratio for mortgages. We are putting risk management parameters in place.

"If there were any downturn in the future this cushions - there's buffers there in terms of down payments - in terms of limits on the amount of debt. So what we have now is a strong market, but we think over time - as housing supply increases - some of this will cool off."

All very true, but the timing of Lane's remarks, coming less than a week after the CSO completely rejigged the official housing statistics, was somewhat unfortunate. The CSO now estimates that only just over 14,400 new houses and apartments were built last year. This compares with 19,300 new ESB connections, which had been the proxy for the level of new housebuilding up to now.

On closer examination, it transpires that many of these 'new' ESB connections were no such thing - with about 2,750 being reconnections, 1,100 being previously completed houses in so-called "ghost estates" and a further 965 being non-dwelling connections. "It is now accepted that this dataset [new ESB connections] overestimated housing output, as it included connections which do not relate to new dwellings," says CSO senior statistician Kieran Culhane.

But just how much new housing output has been exaggerated can be seen when one compares the previous housing statistics, which relied on new ESB connections, and the CSO's new figures over the past seven years.

Central Bank Governor Philip Lane. Photo: Stephen Collins/Collins Photos
Central Bank Governor Philip Lane. Photo: Stephen Collins/Collins Photos

The CSO now estimates that a total of just 53,500 new houses and apartments were built between the beginning of 2011 and the end of 2017. This compares to the figure of 85,200 derived from new ESB connections, a gap of almost 32,000.

This gap between what had previously been the official figures and the actual level of new housebuilding came as no surprise to Goodbody Stockbrokers' chief economist, Dermot O'Leary, who has long argued that they were overstating the true level of activity. He had been using another proxy, registrations of BER energy efficiency certificates, in an effort to get to the bottom of the matter.

In 2017, approximately 9,500 BER certificates were registered for new houses. Add 1,500 self-builds which weren't registered for BER purposes, and one gets a figure of approximately 11,000. O'Leary now believes that the new CSO statistics get the level of housebuilding about right.

"The CSO has done an excellent job. This is as good as we are going to get, but it is a gross number. When one factors in factors such as obsolescence it is not a net addition to the existing housing stock. The net increase is still very small."

While the latest CSO numbers make it clear that there has been very little housebuilding for the past decade, it isn't all bad news. After bottoming out at just 4,600 in 2013, the number of new builds has been gradually rising since then with O'Leary forecasting a 30pc increase to 19,000 this year.

Unfortunately, that's only about half of the level required to meet the growth in the population and changing household sizes. O'Leary reckons annual housing output of about 35,000 is needed to meet this underlying demand. That doesn't include the backlog that has accumulated due to the very low levels of construction activity over the past decade. O'Leary reckons that clearing this backlog will require building a further 60,000-70,000 new houses and apartments.

Other building-watchers believe that the housing market can be brought into balance at slightly lower levels of activity, with the Construction Industry Federation putting the backlog at about 50,000 units and the balance between supply and demand at 30,000 a year.

However, the most recent population estimates from the CSO, which project a population of up to 6.69 million by 2051, mean that the actual demand for housing is far more likely to exceed, rather than fall short of, current estimates.

The National Planning Framework is targeting 550,000 new houses and apartments by 2040. That works out at an average of about 24,000 a year, or a 70pc increase on the 2017 figure.

This continuing gap between supply and demand is driving prices ever higher, with average house prices jumping by a further 13pc in the 12 months to April. While average house prices are still some way off their pre-crash peak, rents, which rose by a further 11.5pc in the year to the end of March, are now almost 25pc above their Celtic Tiger peak.

There are growing signs that this rapid rise in house prices and residential rents is eroding our international competitiveness. Having fallen to a low of 24th place in 2011, Ireland had risen steadily in the IMD's global competitiveness rankings to sixth place by 2017. However, when the 2018 figures were published last month, Ireland had slipped back to 12th place.

Speaking at the launch of its most recent Costs of Doing Business in Ireland report last month, National Competitiveness Council chairman Professor Peter Clinch said: "Housing costs impact upon our attractiveness for mobile investment and talent - where is the skilled labour required by Irish firms going to live? High rents affect decisions around labour mobility and entering employment and drive wage increases as employees seek ways of paying for rent increases. This inevitably reduces competitiveness."

So what can be done to bring housing supply into demand and clear the backlog before our international competitiveness is eroded even further?

As well as completely revising its housebuilding statistics for the past seven years, the CSO also calculates that, despite very poor weather in March, the number of house and apartments completed in the first quarter of 2018 rose by 27pc to over 3,500. Given that the first quarter is traditionally the quietest period for housebuilders, this makes forecasts of 19,000 or more completions for the full year look very achievable.

Leading indicators are also pointing to an increase in activity. Planning permission was granted for over 8,400 housing units in the first quarter of 2018, an 81pc increase over the same period last year. There was also a 15pc increase to 6,300 in the number of new homes commenced in the first four months of 2018.

While the number of new homes being registered with the CIF's HomeBond structural insurance scheme was broadly unchanged at just under 3,800 for the first five months of the year, this seems to have been at least partially due to competitor Global Home Warranties grabbing market share, with 1,040 properties being registered with GHW in the first five months of 2018 as against just over 2,500 for the whole of 2017. HomeBond and GHW registrations reflect contractor activity.

So far the recovery in housebuilding activity seems to have been largely confined to the greater Dublin area with 3,500, or 55pc, of the units upon which work commenced in the first four months of the year.

As housing supply has lagged demand, much of the resulting political attention has focused on the lack of affordable homes for first-time buyers. The centrepiece of the 2017 budget unveiled in October 2016 was the help-to-buy scheme, which gave first-time buyers of new homes a tax credit of up to €20,000. Although it was widely criticised at the time, there are some indications that the scheme is having an effect. Jeanette Mair, the CIF's economic and policy research executive, points to the number of housing completions in Dublin 13 (800), Dublin 15 (689), Dublin 18 (384) and Dublin 24 (366) in 2017 as evidence that more units within the price range of first-tine buyers are now being built. "Outside of Dublin there are pockets in urban centres where it is becoming viable [to build for first-time buyers]," she says.

However, to do so it is important to first put in place the necessary services and infrastructure such as roads and water mains first, she stresses. Even then builders are finding it difficult to finance projects as lenders insist that projects are developed on a phased basis, with next stage funding only released after the previous one has been completed.

At current growth rates, new housing output of 25,000-26,000 units is on the cards for 2019 and getting on for 30,000 in 2020. An increase in housebuilding to these more 'normal' levels would largely close the gap between supply and demand. Even if, in Lane's words, house prices cool off at this stage, there will be many people for whom home ownership will be an unaffordable dream.

Goodbody's O'Leary believes that balancing supply and demand in the housing market will require the involvement of both institutional investors and the public sector. With housing shortages most concentrated in the apartment space, he thinks that encouraging institutions to build more apartments for rent is the most effective way of dealing with the problem.

That still leaves those who can't afford elevated Irish house prices and rents. Solving this problem may involve going back to the future. Way back in the late 1970s, when Ireland was a much poorer country than it is now, local authorities were building 7,000-8,000 houses a year, about a third of total housing output at the time. "It is difficult to see how we can reach that level of output without the involvement of the public sector. This could involve public-private schemes and other off-balance sheet mechanisms," he says.

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