In February last year the Statista Agency of Hamburg, Germany, found that housing in Dublin was the second most expensive in the EU – after Paris. On March 15 this year, the Society of Chartered Surveyors estimated that house rebuilding costs here have increased by an average of 7.3 pc over the last 18 months. There have been concerns from the Central Bank and the Economic and Social Research Institute that schemes to tackle Ireland’s high house prices by assisting buyers will further increase prices. The case made here is that Ireland’s high house prices are caused by supply factors. If these are tackled, there will be substantial gains to those facing difficulties with high housing costs now, and to the overall competit iveness of the Irish economy.
The first cause of high house prices in Ireland is the low productivity of the construction industry. The Build report of 2019 found there has been minimal productivity growth in Irish construction from 2000 to 2016. Labour productivity in the Irish construction sector is ranked at 14 out of 19 Euro area countries and is 24pc below the average. By contrast, Irish productivity across all sectors is 34pc above average. That gives the other sectors a much better output and price performance than the construction sector. The Build report estimated that, had Irish construction costs kept pace with other domestically dominated sectors, its gross output would have been €3.1bn higher.
The rebuilding cost of a three-bedroom semi-detached house was estimated by the Society of Chartered Surveyors last month to range from €163,000 in Waterford to €218,000 in Dublin, with an unweighted average of €173,000 over seven regions. Had the €3.1bn of higher output been achieved in this housing segment, the gain would have been 17,919 extra houses.
The 7.3pc increase in housebuilding costs in the 18 months to last month equates to an annual rate of 4.9pc. In 2020, the Central Statistics Office (CSO) Wholesale Price Index for Building and Construction Materials increased by 0.4pc over 39 cost categories. The rate of increase in the rebuilding costs charged to house buyers was thus 12 times the rate of increase in the price of inputs purchased by the construction sector. The CSO data confirm the low productivity picture of an increase in output prices far in excess of the increase in the cost of inputs. In the last year alone, the difference between the prices of outputs would have added €7,800 to the price of a house now costing €173,000 to build. Given that Build estimates the productivity problem has been going on since 2000, the addition to house prices is considerable.
The cost of low productivity in construction can also be studied in relation to the Statista survey, which weighted equally a furnished two-room apartment, an unfurnished three-room flat, and the price of an apartment of typical size, location and amenities for the city. The Dublin rent was reported at $2,318 per month in 2018. In Paris, rent was 23pc more. There the good news for Dubliners ends. In Copenhagen rents were 19pc lower; Amsterdam, 26pc lower; Brussels, 34pc lower; Rome, 40pc lower; Frankfurt, 31pc lower; Berlin, 50pc lower; Lisbon, 47pc lower; Barcelona, 35pc lower and Warsaw, 64pc lower.
The signs from a year of lockdown indicate that internet improvements are likely to relocate many jobs away from high-rent cities. This might be to elsewhere in Ireland, or to the many lower-cost cities elsewhere in the EU common labour market.
The Irish State has a further role in lowering house costs. It must stop fuelling construction inflation through its public capital programme.
Edgar Morgenroth of DCU has written: “Contrary to popular belief, public capital investment in Ireland has been well above the EU average over the period 1970 to 2013.” Relieving sectors of competitive market pressures did nothing for the tariff-protected industries or a highly protected low-productivity, high-fare aviation sector. When the State runs a large welfare programme for the construction sector, house buyers lose. The construction sector works on large public projects with minimal budget constraint.
The National Children’s Hospital, still without a completion date or completion price, will probably divert the best part of €2bn of construction from house building. That would have provided funds to build more than 11,000 houses at €173,000 each. The Comptroller and Auditor General has documented cost overruns of 23pc on the motorway programme; 33pc on the Galway Art House Cinema; 23.8pc on 10 sample building projects in higher education; and an OPW building maintenance contract previously estimated to cost €3m a year but which actually cost €10m a year over the period 2015-2018. The Páirc Uí Chaoimh cost of €96m includes a cost overrun of €17.5m.
The Housing Minister’s decision not to fund the white-water rafting project in Dublin was a welcome departure from the Exchequer record of funding the edifice complex of Irish public agencies, especially where sports venues are concerned. The key concept is opportunity cost. Dud projects divert resources from house building.
The IMF warned Ireland in 2017 that there was an efficiency gap in public capital spending compared with advanced countries and 23pc compared with the rest of the world. Ireland’s non-binding reviews of capital projects were unique among the IMF’s 189 member states. They are a recipe for high-cost construction.
The construction industry in Ireland has to be upgraded from its role as a low productivity supplier to a bloated public capital programme towards building houses that we can afford. Prices must be related to the CSO input price index for building material inputs. Each spending minister should shed 20pc to 25pc of prestige capital spending from his or her department in order to build houses.
We have not had an efficient house construction sector for decades. Time to start.