Increasing Supply Won’t Solve Housing Crisis

The government is banking on the idea that augmenting the supply of homes annually will reduce the cost of new homes. They envisage that an enhanced supply will alleviate the struggles of prospective homeowners with aspirations to begin a life in a house they can afford. Nevertheless, is an amplified supply of new homes going to assist individuals like teachers and law enforcement officers residing in places like Thurles or Leixlip in achieving homeownership?

In 2019, the Bank of England determined that the soaring prices of homes had little to do with the relative scantiness of housing at the national level since 2000. It was discovered that levels of interest rates were responsible for nearly all the increases in home prices since then. The similar conclusion was drawn by the Irish Central Bank in 2022, indicating that we can’t dismiss the UK findings just because our circumstances differ.

So, if the prices of homes aren’t greatly influenced by supply, what’s the main driver? The answer can be found in the Bank of England’s findings. According to their researchers, a 1% rise in lending rates corresponded with a 3% decline in home prices and the reverse is also true. The government, to motivate further development, utilises taxpayer-funded schemes that stoke demand, such as Help-to-Buy. But the truth is that the state is wary of a fall in home prices stalling supply.

Another significant influencer of house prices is population growth. UK researchers have established that a 1% increase in household natural growth since 1990 correlates with a 2% hike in house prices. This 1-to-2% ratio is also applicable to immigration. Immigrants, who typically require housing upon arrival due to the absence of family to live with, contribute to housing demand. Between April 2022 and April 2023, almost 100,000 individuals joined our population through immigration and natural growth.

The third variable to consider in this equation is salaries. A 1% increase in wages will typically trigger a 2% increase in property prices. This can be better understood against the backdrop of a 10.25% public sector pay increase (spanning two and a half years), with the private sector predicted to follow a similar trajectory. Consequently, in the ever-intensifying spiral of housing policy turmoil, a wage surge amplifies property value, which then bolsters wage demands, eventually boosting house values due to boosted purchasing power.

Further complicating matters is the very supply of housing. Theoretically, a 1% surge in the supply (equating to around 20,000 houses) should see property prices drop by 2%. Yet, since 2017, we’ve constructed an impressive 156,695 new homes. Given this, if supply were the solution, house prices should have lowered by roughly eight per cent – a far cry from reality. Instead, we’re contending with unprecedentedly high property prices harking back to the Celtic Tiger era. Any positive influence that increased supply might have had is swiftly negated by opposing influences like interest rates.

Worth noting, too, is that the majority of new homes never make it to the estate agent’s desk. Over the past six years, we’ve witnessed a drastic reduction – nearly half – in the number of new homes being listed for sale. In fact, last year, only about a quarter of new homes were put on the market for sale – the remainder being social housing, scattered single dwellings, and rental flats. As a consequence, prospective homeowners are hard-pressed to even find a new house to view, let alone buy.

Despite a surge in overall supply, home-ownership rates have dropped below the European average to just 66% as the availability of new homes for purchase dwindles. Three decades ago, this figure stood at 81% of households owning their homes. This phenomenal decrease in homeownership has gone by without much outcry or recognition from the government.

A myopic, market-centric, and lax political approach has placed younger generations at a fiscal disadvantage by pushing for private housing over homeownership. Specifically, real estate makes up approximately 75% of our wealth: the average net worth of homeowners is over €300,000, compared to renters whose wealth hovers around €5,000. Without owning a house, wealth generation becomes incredibly challenging.

In the previous year, within the city of Dublin, apartments made up 94% of the totality of new homes, with a staggering 98% of these being let out for rent. The number of new houses purchased by first-time buyers staggered at 75. In stark contrast, the Cork city’s new housing landscape saw a mere 3.5% being sold, with first-time homeowners adding a scanty 17 new houses to their names. In the year 2017, housing estates, or as the Central Statistics Office (CSO) names them, new scheme houses, saw over 80% being sold in the market, however, this dramatically decreased to 52% by the previous year. There’s no denying that individual house buyers have been overlooked and left behind by consecutive governments.

Admittedly, each new housing format contributes to larger housing dynamics. One could argue that even if the influx of new apartments only impacted the high-rent market, eventually, the effect would trickle down to those earning average salaries. Nevertheless, this speculation assumes a ready pool of individuals capable or interested in taking on these steep rents, many of whom may well have reached retirement age by the time Thurles sees any favourable knock-on effects.

The discourse surrounding housing policy and supply has lacked creativity, circling around topics like further planning deregulation, diminishing standards, feasibility, grants, the prospect of smaller homes and pleas for more funding. Analysis of the present policies’ impact is minimal. With 68% of Irish youth aged between 25 and 29 still living with their parents compared to a mere 5.7% in Finland, discussions need to turn towards this. Moreover, we need to examine how an excessive focus on urban hyper-density housing and unsuitable family residences has led to unsustainable commuter distance under a Green Minister for Transport’s policies.

Believing that the private sector, in a show of benevolence, will suddenly elevate housing production levels for sale, thereby decreasing house prices, is a delusional approach by the Government. Instead, the Government, through its power to influence planning policies, could guide the construction of different types of housing and maintain value-for-money to ensure affordability. In 2023, the State found the average comprehensive cost for directly building apartments and houses, including land prices, was €309,000, and only €219,000 in Tipperary. This price range could be comfortably covered by many teachers in Thurles. Therefore, it begs the question, why isn’t the Government doing more of this, reinvesting the funds, offering more affordable housing and expanding the qualifications for eligibility?
Dr Lorcan Sirr, a housing lecturer at TU Dublin and Visiting Professor at the University of Galway, poses this pertinent question.

Written by Ireland.la Staff

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