As if the Government wasn’t already under enough pressure regarding Ireland’s housing crisis, events next week are likely to up the ante. Estate agents and the main residential property listings websites Daft and MyHome will publish their reports for the second quarter.
By all accounts the heat in the housing market has ratcheted up, with homebuyers and vendors raising prices even more aggressively given the exceptional lack of property for sale.
There are currently just 12,700 homes for sale on MyHome, down 30pc on last year and close to an historic low.
This is equivalent to just 0.6pc of the Irish housing stock of two million homes. Although estate agents have managed to bring new listings back to pre-pandemic levels, there has been no period of ‘catch-up’ following the enormous disruption last summer.
With so few houses available to buy, the pace of house price increases has accelerated.
Residential property price inflation rose to 4.5pc in April. However, it now looks likely a high single-digit gain in prices is likely in 2021, or perhaps even double-digit inflation, bringing back unwelcome memories of the Celtic Tiger era.
The renewed impetus in Irish house prices mainly reflects the disruption from the Covid-19 pandemic.
Perhaps, doubly frustrating for the Government and Minister for Housing Darragh O’Brien is that Covid-19 has interrupted the fledgling signs that housing supply was beginning to pick-up before the pandemic.
The latest data shows 45,000 units were granted planning permission in 2020. Furthermore, the Irish House Builders Association (IHBA) estimates applications for 69,000 units are currently making their way through the fast-track, Strategic Housing Development (SHD) planning process.
These are very substantial numbers. Similarly, the Dublin Housing Supply Co-ordination Task force indicates that 10,000 apartments are now under construction in the capital.
However, there is a danger the Irish public’s penchant for nimbyism can delay progress. According to the IHBA, judicial reviews have now quashed plans for 7,500 units with a further 6,500 awaiting their review.
Their prospects look bleak. One study has found judicial reviews have quashed development plans in 92pc of cases since 2018. The IHBA argues that a referral to the European Court of Justice on SHDs could take 18 months to resolve, exposing the pipeline of development.
This is a lamentable state of affairs. Thankfully it was reported this week the Government plans to speed-up planning processes and make it more difficult to mount legal challenges that delay development of homes for first-time-buyers.
Last week at Davy we published an in-depth report on the Irish housing market. One stark statistic was our estimate that ‘latent’ housing demand now exceeds 100,000 households. This is an estimate of the pent-up demand that has built up over time, those who would have bought a home but have been frustrated by high prices and weak housing supply.
It also means next year’s census will paint a lurid picture of frustration among the electorate – greater numbers of working adults still living at home with their parents or cramming into shared accommodation with unrelated people. Add to that the population is still growing, providing a minimum of 30,000 units of demand each year, on top of pent-up demand.
These figures get to the crux of Ireland’s volatile housing cycle. During the Celtic Tiger era too many houses were built, often in the wrong places, followed by too few over the past decade.
Over the next three years our estimates imply 200,000 units of demand. If homebuilding actually picked-up to the 60,000 units per annum to satiate this demand it would raise concerns the sector was overheating.
The question is does Ireland really have the patience to build a sustainable housing sector? The volatile housing cycle in Ireland has been largely driven by political pressures, the public is now demanding immediate action and risking knee-jerk policy responses from politicians. Many proposals could well bring forth a short-term cyclical housing supply response but leave difficult structural problems unanswered.
Too often Irish politicians have suggested State involvement in the housing market can be a panacea to our problems. Great faith is now being placed in the ability of Approved Housing Bodies (AHB) to ramp-up capacity from a very low base. Budget 2021 put in place €2bn of funds to target the delivery of 9,500 social housing units in 2021, up from 5,000 delivered in 2020.
However, it cannot be repeated enough that there is no State homebuilder.
All social houses will be delivered by private sector firms. Sensible voices within the AHB sector itself acknowledge that ‘turnkey’ units built by private developers in mixed tenure developments will be essential for social housing delivery.
There is little evidence AHBs or local authorities can secure greater value for money, Hardly surprising since they rely on private sector firms to build. It will be interesting to see the costs per unit achieved as the new ‘cost-rental’ model is rolled out.
This point was reinforced by data recently released by Dublin City Council’s Brendan Kenny, showing exceptionally high build costs for 481 direct build social housing units in Dublin – €429,000 per unit on average, even with land costs excluded.
Kenny drew attention to worrying features of Dublin City Council’s procurement practices which make it difficult to secure value for money.
Rather than entertain a false debate on private or public housing provision, the crux of the issue is why Ireland’s build costs seem so high?
Recent Society of Chartered Surveyors Ireland (SCSI) reports have highlighted the particular problems around viability on apartments, again costs well in excess of €400,000 per unit in most areas of Dublin. It is far from clear how these costs can be reduced.
Our report this week highlighted Turner and Townsend data which indicates build costs on medium standard houses and apartments in 2018 in Dublin were 40pc higher than the European average, albeit reasonably close to the UK.
Interestingly, the same survey indicated neither labour costs nor raw materials prices in Ireland stood out significantly and hence cannot explain high total build costs.
There is a range of alternative explanations. First, the lack of scale and investment in the Irish construction sector.
Cairn and Glenveigh, the two listed homebuilders, no doubt enjoy lower costs because they can offer contractors a stream of work and bid-down prices.
However, developers also face substantial charges from Irish Water, infrastructural costs and levies from local authorities – that ultimately drive up prices for homebuyers.
It is not clear the State is shouldering an appropriate burden of development costs, that should be paid out of general taxation, rather than be passed on to homebuyers.
What can the Government do?
First, these upfront costs and building standards that exceed EU norms should be reconsidered. Globally, productivity and innovation in construction has been poor with build costs rising over time.
So Ireland shares many problems with other EU countries. However, there may still be a role for the State to encourage bulk procurement, standardisation and adoption of modern building standards such as volumetric manufacturing.
Rising build costs are becoming an increasing concern in the aftermath of the pandemic – raw material prices rising rapidly due to disruption to global supply chains. The construction sector has also drawn attention to emerging labour and skills shortages.
Affordable housing will not be achieved if construction wages continue to rise. Raising housing output above 30,000 units per annum may require action to attract foreign workers, perhaps from outside the EU.
Hence, rather than pretending ‘public’ delivery of social or affordable housing is the answer, the focus should be on viability, costs and measures to improve the capacity of Irish construction to deliver housing.
Conall Mac Coille is chief economist at Davy