Wednesday 29 January 2020

House price bubble is not a property bubble - yet

Objections to building on underdeveloped land that is already zoned and serviced is putting the economy at risk, says Colm McCarthy

A TALE OF TWO WORLDS: Old Castle House, in Dungar, Roscrea, Co Tipperary, has an
asking price of €395,000 and comes with six bedrooms, three bathrooms and 4.9 acres.
A TALE OF TWO WORLDS: Old Castle House, in Dungar, Roscrea, Co Tipperary, has an asking price of €395,000 and comes with six bedrooms, three bathrooms and 4.9 acres.
Colm McCarthy

Colm McCarthy

Reports released last week confirm something which looks like a house price bubble. It is not, or not yet, a bubble driven by excessive growth in bank credit like the last time round. But nor is it a nationwide crisis in housing affordability.

House prices and rents have risen across the country but accommodation is still affordable for most people in most parts of Ireland. The problem is concentrated in the Dublin region and a few other hotspots around the country, including Cork and Galway cities and some coastal areas with pricey holiday homes.

In most other areas, accommodation is still affordable even for people on incomes below average.

The easiest way to illustrate the point is to compare prices in the outer suburbs of Dublin, for a three-bedroomed semi, with prices in a rural county. I have chosen the midland county of Tipperary and the postal district of Dublin 16, which includes Ballinteer, Churchtown, Rathfarnham, Ballyboden, Dundrum, Sandyford, Knocklyon and Templeogue. Currently available-for-sale numbers are as follows, according to the property website.

Look at the house prices and supply figures below. You get the picture.

In Tipperary, there is an embarrassment of choice at affordable prices. If your fairy godmother gave you €300,000 to buy a starter home in Tipperary, you would struggle to find one that costs that much and might feel honour-bound to return the money. In Dublin 16, there is little on offer below €400,000 and you would have to ask for more.

The Dublin 16 area is ­pleasant but not particularly posh, nor is it close to the city centre. This is not Ballsbridge or Ranelagh.

As with all outer suburbs of Dublin, there is oodles of undeveloped open space, and vigorous residents' associations determined to keep it that way. The residents are supported in their resistance to residential development by their stalwart local TDs and councillors, who join in objections to planning permission even on sites already zoned and with services, such as roads, water and public transport already in place.

Dublin is a low-density city not particularly because there is no high-rise, but because there is, in the vast rolling prairies that surround it, no low-rise either.

In addition to materials and labour, residential construction needs four ingredients. These are land, zoning, services and planning permission.

No 10 Braemor Grove in Churchtown, Dublin is a 90sqm house with three bedrooms and one
bathroom, going for €550,000.
No 10 Braemor Grove in Churchtown, Dublin is a 90sqm house with three bedrooms and one bathroom, going for €550,000.

There is, within easy commuting distance of Dublin city centre, enough vacant land to construct another large city. But much of it, although effectively derelict and of little agricultural or amenity value, is not zoned; if zoned, not serviced by the local authority; if both zoned and serviced, denied planning permission on any pretext available.

According to builders, the cost in materials and labour for starter homes should be no more than about €110 or €120 per square foot. Allowing for design and finance costs they reckon that new homes of decent size can be delivered in the outer Dublin suburbs at all-in prices in the range of €150,000 to €200,000.

Since this is the cost price of new supply at the margin, any excess over this price level can only be accounted for by land-use regulation, taxes and development levies.

The main culprit is land-use regulation. Not enough land is zoned, not enough zoned land is serviced and land both zoned and serviced is routinely denied planning permission. The high cost of houses, and consequently rents, in the Dublin area is a political outcome which persists only because it is the revealed preference of politicians, all of whom insist that they believe in affordable housing.

There should be no alarm in Tipperary about the recent escalation in prices. They are probably below replacement cost in many parts of Ireland and there is no affordability problem. A couple on ordinary incomes are not priced out of the market. In Dublin, and also in a few other areas, it is impossible, on current policies, to offer any reassurance to young people that their incomes will rise to levels which would support a mortgage at current price levels.

The Central Bank will call a halt, on prudential grounds, if banks continue indefinitely to lend rising multiples of construction cost for homes in low-density suburbs. Their 'value' derives from policy failures which might eventually be reversed. The greatest risk to the collateral value of mortgages on the books of the Irish banks is a successful policy to make housing affordable.

In its Fiscal Assessment Report released last week, the Government's Fiscal Council, a statutory body charged with offering public tutorials on budgetary prudence, had this to say: "The lack of a supply response to the excess demand in the property market has seen an escalation in the prices of both residential and commercial property. This has negative implications for competitiveness, with the likelihood of compensating upward pressure on wages.

"While a stronger supply response is needed to keep prices and rents down, overheating in the economy would be more likely to occur if there were substantial increases in construction activity, as other sectors continue to grow strongly."

What they are driving at is the risk, in the fifth straight year of economic recovery, that the economy is beginning to run out of underemployed factors of production, notably labour. Employers are beginning to report shortages in many areas and the unemployment rate is edging down to historically low levels.

A very rapid build-up in housebuilding in these circumstances would risk a rerun of the last fiasco, when the competitiveness of the broader economy was undermined by the sheer manic pace of the construction bubble.

It is correct to point out, as did NUI Galway economist Alan Ahearne on television last week, that this recent expansion in construction activity here has not (yet) been fuelled by ultra-loose bank credit. But too rapid an expansion carries overheating risks, however it is financed.

The political class appears to regard the Irish economy as possessing, in all circumstances, sufficient underemployed resources to withstand any level of expansion in the availability of finance.

The hunt is already under way for clever manoeuvres to somehow borrow extra money off the balance sheet, the better to evade the stern gaze of the European Union enforcers of fiscal rules.

But an economy is constrained by real as well as financial resources, and overheating is a mistake with or without EU oversight. The virtue of the latter derives from the enforcement of behaviour to which common sense should lead unaided.

In his policy document issued during the Fine Gael leadership contest, Taoiseach-elect Leo Varadkar hinted that he might scrap the Government's first-time buyer subsidy scheme, introduced as a part of the housing policy reforms, if a review found that it has been pushing up prices.

There is no need for a ­review: any measure which ­expands demand while leaving the supply curve untouched can have only one outcome.

The money saved by cancelling the review could make a small contribution to the budgets of local authorities short of money for servicing zoned lands.

Sunday Independent

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