Monday 23 April 2018

Measuring the health of the housing sector

Ronan Lyons

When we think of how the housing market is doing, we often rush straight into looking at prices - how fast prices are rising or falling, how that differs between Dublin and elsewhere, and how prices compare to either 2007 or else to the bottom of the market.

But there is actually no such thing as a healthy level of house price inflation. The finding from international studies is that the typical rate of inflation in housing matches the rate of inflation in the broader economy. This was true in Ireland up until the mid-1990s - if you compare house prices in the mid-1970s with 20 years later, once you adjusted for changes in the general price level, they had barely moved.

So perhaps there is only so much we can read into prices and price trends. In fact, prices are only one part of the picture when it comes to measuring the health of the housing sector. As any economist will tell you, there are four elements in the market: prices, quantities, supply and demand. The point I would like to make is that we can learn quite a lot from looking at quantities.

This has become much simpler to do since the establishment of the Property Price Register. This tracks the volume of transactions by time and location. A typical way of converting this into a ready-to-use metric is to see what fraction of properties change hands in a given year. If 10pc of homes swap hands in a 12-month period, this means that the typical house changes hands every 10 years.

And looking at the US, something like once every 10-15 years is probably not far off the mark, in terms of a healthy housing market. When the market is dead, of course, this will drift out. And this is what happened in Ireland - acutely - after the market crashed in 2007/2008.

Figures from the Property Price Register and the 2011 Census indicate that by mid-2011, the typical property in Ireland was changing hands only once every 90 years (see graph above). In Connacht-Ulster, the figure was more than once every 125 years. Negative equity, fear of future property price falls, and a frozen mortgage market all combined to cut off entry into the housing market for first-time buyers and the ability to move to more suitable accommodation for trader-uppers and trader-downers.

Since then, though, things have improved considerably. By late 2015, the typical property nationally was changing hands once every 33 years, although there was still quite a gap between Dublin (every 28 years) and Connacht-Ulster (every 45 years).

But even still, these figures probably remain too much on the high side. In the year to September 2015, there were 50,000 housing market transactions for a country of probably 1.75m households. And in that same 12-month period, there were roughly 30,000 new families started. This leaves very few transactions for those trading up or trading down.

Thus, it is perhaps something of an irony - as well as a legacy of the boom-bust history of the sector in this country over the last 20 years - that sectors involving issuing mortgages, building housing and selling homes will be growth industries in Ireland over the coming few years.

To those who view these sectors as partly responsible for the crash, this may come as a bitter pill to swallow. However, one point that should be made is that these are industries which saw falls of 90pc in activity in the five years after 2007 - compared to perhaps 15pc in the rest of the economy. This is not about getting lending, building or moving back to 2007 levels; it's about getting these activities up from the unhealthily low levels seen in 2011 and 2012.

More importantly, though, mortgages, construction and transactions are key ingredients in a healthy economy, one that allows people to move to the type and location that suits their family best. At first blush, one might think that properties changing hands every 45 years - as it the case in Connacht and Ulster currently - is fine. People buy homes and they stay in them.

In next week's column, I will try to explain why having people stuck in one home for the bulk of their adult lives has widespread negative consequences in everything from transport infrastructure to planning for retirement.

Ronan Lyons is assistant professor of economics at Trinity College Dublin and author of the Reports

Sunday Independent

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