Ireland: Better Housing and Improving Affordability and Supply
Introduction:
Housing affordability pressures are predominantly due to the high cost of development land. Construction costs in Ireland are currently about the EU average and do not explain our high and rapidly rising house prices. However, we see significant cost pressures emerging in the industry and are concerned about the trajectory of construction costs. Land and development costs account for 55% of house prices and both are high in international terms.
Attraction and retention of talent is now the single biggest challenge facing Irish businesses. It is concerning business leaders in most regions and sectors of the economy and is particularly acute in our main cities. Inadequate supply of affordable and quality housing is one of the main factors impacting talent availability. Ireland’s housing problems have now clearly moved beyond being the social issue of our time and have also become a major risk to our future economic prosperity.
Changing demographics and the housing market:
The 30 year demand for homes:
We look at the demographic change facing the housing market based on Census data and population projections. The population projection is based on the CSO projection M1F2 which we see as the most likely demographic scenario2. The growth rates in this projection have been applied to the population from Census 2016. On this basis, the population will likely exceed 5 million by 2021, 6.2 million by 2041 and 6.5 million by 20463. This suggests that the population could be higher than forecast for the National Planning Framework (NPF), which is based on the population increasing to 5.7 million by 2040.
A changing housing and tenure mix:
Census 2016 provides data on the number of households classified by the number of persons per household. Compared with other EU countries Ireland has a higher proportion of larger sized households and a lower proportion of smaller households. For example, 52% of the Irish population live in households of two persons or less. In contrast, the proportion for Germany and Denmark, respectively, is close to 76%. A move in the household distribution toward the EU average by 2046 would also result in substantial change. In this scenario, the number of one-person households would increase by 495,000, with two-person households increasing by over 383,000. There would also be an increase in three-person households, up by 158,000.
Affordability and viability of homebuilding:
The challenge of affordability:
Housing affordability will continue to be a major challenge in Ireland over the coming years. Housing increasingly is an issue faced by employers in the recruitment and retention of staff. It is recognized that our cities and many towns now face a severe shortage of accommodation and as a result, both prices and rents have risen sharply. The impact of these housing costs is not equally distributed across the population. It is particularly damaging to younger people, with 66% of household heads in the private rented sector aged under 40 years and facing rising rents.
The viability of homebuilding and current levels of supply:
While the affordability of accommodation is a challenge the viability of building new homes is also an issue in the market at present, particularly given the interplay between high land prices and the macro-prudential constraints. Analysis by the Department of Housing, for example, has shown that the viability of an apartment building in an urban location for sale or build-to-rent, and a housing scheme in a suburban location to be particularly challenging.
The role of social housing provision:
Social housing as it stands:
Rebuilding Ireland: an Action Plan for Housing and Homelessness is a start in delivering a social housing sector which was decimated by the more general capital expenditure cutbacks during the crisis. Of the 50,000 units to be delivered under the Plan around 25,000 will be direct new build financed by the State. Of this, at least 35% is expected to be delivered by approved housing bodies (AHBs) with the remaining 65% to be delivered through new build local authority housing.
There must be a balance between regulations and affordability:
Some planning and building regulations can have unintended consequences in terms of reducing affordability of homes. Such regulations are regressive as they directly impact the affordability of all new homes, regardless of location, size or price. The costs of regulation aren’t limited to meeting compliance obligations as design standards add to the final cost of a new house or apartment.
Conclusion:
Fiscal policy changes are needed to support housing supply and affordability:
Ireland has a long history of ‘quick fix’ housing tax policy measures which have in many cases added to market instability. The future tax and fiscal policy for the sector should be underpinned by stability and certainty and involve the introduction of a site value tax to replace the existing commercial rates and the vacant sites levy; reform of development contributions; and a permanent reduction in VAT for large scale build-to-rent developments in order to provide a level playing field with competing commercial developments.