Monday 23 September 2019

Conor Skehan: '2019 will witness the emergence of dreaded second housing crisis'

Dysfunctional rental markets and Brexit will create complications in residential property developments and politics, writes Conor Skehan

The Irish building sector is responding to the stimuli of policy by building with the startling efficiency and speed for which they are rightly famous. Stock image
The Irish building sector is responding to the stimuli of policy by building with the startling efficiency and speed for which they are rightly famous. Stock image

Next year will see the clearest emergence of a new urban politics. This will be driven by significant changes in our residential property market. The changes, while not new, will seem dramatic because they will quickly and directly affect many people.

The driver of this change will come from a source that will surprise many, namely a large and rapidly growing over-supply of housing.

This will happen because a few different events will all begin to become increasingly clear as 2019 progresses.

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Housing supply will begin to exceed predictions of demand. This will happen because three things will begin during 2019. First, there will be more and more secondhand houses for sale as prices recover and people emerge from negative equity - many people are unaware that secondhand houses make up [by far] the largest part of supply. Secondly, the Irish building sector is responding to the stimuli of policy and the lure of profit by building with the startling efficiency and speed for which they are rightly famous.

Demand, however, is about more than just quantity, it is also about price - demand withers as price increases. Readers will recall warnings in these pages that unaffordable supply is worse than shortage of supply. Affordability will be limited by excessive price expectations by developers as well as credit restrictions caused by Central Bank prudence.

This combination of the quantity of newly available secondhand homes, newly-built stock and the limits of affordability will cause a significant slowdown in sales and loss of profitability in the later part of 2019, quickly turning a victory into a new crisis.

At the same time as these forces create challenges for traditional developers and for nervous financiers, three other factors will create further complications. Dysfunctional rental markets, congestion and Brexit.

This unexpected turn of events will set in train a series of forces that will begin to change the landscape of both residential property developments and politics in Ireland.

In the short term, the doldrums or fall in housing prices will attract buy-to-let investors back into the market - this is always a 'red-flag' moment in the housing cycle because housing investment breaks the applicability of the classical supply and demand model, distorting markets - as readers will have previously read in these pages.

As this happens, investors are likely to be slightly ahead of developers by realising that the largest, most certain and most suitable vehicle for investment and sustainable profit is the build-to-let sector.

Some post-crash residential developers in Germany and Spain learned the hard way that housing appetites all over Europe are quickly moving to rental and that traditional houses built in the wrong location can be a recipe for slow or no sales.

Significantly, increasing congestion in large urban centres will mean that areas with poor public transport will quickly be seen as the 'wrong location'.

The post-Brexit economy is likely to concentrate more and more jobs into larger urban centres - especially in east Leinster which will be the 'right location'.

These developments will start to generate pressure from a number of quite different sectors. How the Government responds to these will determine the likely agenda and complexion of Irish politics for the foreseeable future.

In the short-term, there will be pressure from the traditional building sector for props to help a market that they will describe as 'threatened' or 'of national interest'. This will consist of demands for fiscal supports for borrowers [mortgage relief], builders [VAT and tax relief] and land owners [planning rules] - this misguided process has already begun.

As unaffordability, lack of convenient rental and rising rents all increase, there will be pressure for Government intervention in rents [both subsidies and controls] as well as subsidies for both accommodation and public transport users. These, too, have also already begun.

These are classical 'treat the symptom and not the cause' reflexes that are quickly seen to be initially ineffective and latterly pro-cyclical i.e. [they make things worse]. In time, it will become increasingly obvious that a new approach is required that addresses the causes - but these are slow, technical and certainly not popular [witness the early objections to Busconnects in Dublin].

This is where politics come in. Since 2014, Dr Lorcan Sirr, my colleague in the Technological University Dublin [formerly DIT], has been drawing attention to an international trend in urban politics. Once the majority of the population are 'renters or riders' - who live in rented accommodation or who depend on public transport, then these people can be quickly mobilised as a potent political force.

Politics in Ireland has traditionally been a noisily rural affair concerning a numerical minority of the population who are disproportionately dependent on State transfers.

The vast majority of the population are urban, tax paying and content to silently live and let live - because, on a day-to-day basis, they depend so little on the Government.

This all changes when a lack of effective regulation, planning and expenditure on critical urban rental, transportation and utility measures begins to impinge upon the source of the national well-being and wealth.

2019 will witness the emergence of a second housing crisis - one of over-supply of unaffordable houses in places that are congested and poorly served by public transport. Demands to resolve these issues will come from hitherto quiet, but highly motivated individuals who will begin to make very different demands on Government than the present shrill cries of entitlement and expectation.

To complicate matters, these forces and challenges will occur in very different ways in very different places. Future governments will be forced to give much more attention to what matters to large urban populations.

In these new circumstances ,clumsy politics will be very vulnerable to the 'news-as-entertainment' puppet show of urban versus rural adversity.

Tensions between these powerful forces of self-serving property beneficiaries, versus far-sighted servants of the common good, will drive change in politics.

Whether it will be new political parties or new politics by existing parties will depend on how the next 12 months is handled.

  • Conor Skehan is a Senior Lecturer in the Technological University Dublin

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