Thursday 19 September 2019

Ronan Lyons: 'The great divide is getting bigger'

In the first half of 2018, there were on average fewer than 1,400 properties available to rent at any one time in Dublin.
In the first half of 2018, there were on average fewer than 1,400 properties available to rent at any one time in Dublin.

Ronan Lyons

As the year has progressed, the story of the property market has evolved. This time last year, the easiest way to summarise the Irish housing market - across sale and rental segments, in Dublin and elsewhere - was as a market where chronic shortages were pushing up prices across the board.

With 2019 drawing near, though, the story is evolving. It remains far from a healthy market - but the uniform description of the market no longer seems to apply. In particular, the sales market is starting to show some signs of normality.

Given it's so long since we had anything resembling normality, perhaps it is no harm to set out what that might look like. In a healthy housing system, new housing supply comes on stream to meet new demand. That should hold true for all types and tenures of housing: owner-occupied, market rental and social housing.

It is also a point that needs to hold in times of growth, not times of decline. Suppose housing demand goes down - for example, due to unemployment or emigration.

Then, because the existing stock of housing is fixed, all society needs to do is sit tight, build less and wait for things to come back into balance while enjoying cheaper housing.

There is no such opportunity in times of growth. Every year of under-provision of new housing means that it becomes more and more expensive relative to everything else in the economy. Over the past five years, there has been effectively no increase in general prices - but rents have almost doubled in Dublin while the increase in sale prices has been almost as large.

The parallel paths of sale and rental markets, though, appear to be at an end. Annual inflation in the sales market was below 6pc in the middle of the year, down from 12pc a year previously and below the inflation figures for 2014, 2015 and 2016 to boot.

Meanwhile, in the rental segment, rental inflation if anything is getting worse. As of mid-year, rental inflation nationwide stood at 12.4pc, up slightly from 11.8pc in 2017 and also above figures for 2013-2016, which range from 6pc to 11pc.

The answer to why sale and rental segments are diverging lies in supply. Whereas the volume of sale listings has improved significantly over the past 18 months, no such improvement has occurred in the rental market.

In the first half of 2018, there were on average fewer than 1,400 properties available to rent at any one time in Dublin. That's a hundred fewer than in the same period in 2017 and one-fifth of the level of availability seen in 2009. My estimate is that Dublin needs at least 5,000 properties put up to rent every month and it is currently well below half that.

For the sale segment, however, steadily increasing numbers of properties are available to buy. In mid-2018, there were almost 5,000 properties for sale in Dublin - up almost 50pc in just 12 months. The improvement in availability in Dublin is starting to spread, with increased stock on the market in Leinster (outside Dublin) and most recently in the other major cities.

These differences in availability reflect differences in construction. More than 7,200 estate houses were completed in the Greater Dublin Area, Cork and Galway in the year to mid-2018. This is 2,500 more than were completed in the preceding year, or over 200 extra new houses each month.

In a market that is currently processing perhaps 4,500 transactions every month, an extra 200 estate houses - while hardly game-changing - is certainly not insignificant. Contrast this with the construction of new apartments, where just 2,000 were completed in the same period, up less than 700.

An extra 50 rental properties per month - and even then that is assuming that apartments are being built for rent, not sale - is simply far too small to make even a small dent in the supply-demand imbalance in Ireland's rental sector currently.

We can see somewhat into the future by looking at planning permissions. Based on what's happened over the past few years, planning permissions for estate houses typically take six quarters to convert into homes that are completed. For apartments, the lag appears to be longer - more like 10 quarters - but also weaker, especially as apartments are an ''all or nothing'' completion. (No apartment is ready until they all are.)

Those lags mean that we can look at planning permissions registered this year and have some reasonable expectation of completions in 2019 and even into 2020 for apartments. We are likely to see more than 13,000 estate houses completed next year - up from 10,000 this year. That increase will further cool off the sales market, by bringing into balance supply and demand.

However, the picture remains bleak for the rental segment. We are likely to see just 4,200 apartments built next year. While that's an increase on 3,000 this year, it is important to note that many new apartment complexes are aimed at downsizers in affluent areas.

While all supply is welcome - tempting wealthy empty-nesters out of larger dwellings will free them up for families - the signals from the housing market are that the split between a steadily improving sales segment and a rental segment bereft of supply will persist over coming years.

  • Ronan Lyons is assistant professor of economics at Trinity College Dublin, and author of the Daft.ie reports.

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