Invest in more social housing to avoid Covid-related supply shock, says ESRI

The State should increase its investment in social and affordable housing now to offset a future supply crunch caused by Covid-19, according to the Economic and Social Research Institute (ESRI).

A new paper from ESRI researchers has concluded that the long-term effect of Covid-19 on the housing market is likely to be a reduction in supply of homes in coming years caused by a dip in investment now, as builders find it harder to secure development finance from banks whose profits are down.

In the short term, the ESRI predicts, as State pandemic income supports are unwound, demand will decrease in the housing market. But in the long term, a supply crunch could exacerbate the “imbalance” between supply and demand that already existed in the housing market, once the economic uncertainty of the pandemic ends and housebuyers come back on the market.

The researchers, Kieran McQuinn and Conor O’Toole, highlight that the savings rate – the proportion of income put away by the public – is likely to rise to close to 20 per cent this year from 10.5 per cent last year, as the public remains cautious in the midst of the economic uncertainty.

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They suggest in their paper, Assessing the Impacts of Covid-19 on the Irish Property Market, that, once the pandemic ends, these elevated savings “could be directed towards the housing market” and potentially cause “a surge in demand”.

Undersupply

“As demand picks up, the level of supply will not be there to meet it, amplifying the existing undersupply,” the ESRI researchers conclude. They suggest the full effects of Covid-19 may not be become apparent in the housing market for another year or more.

Latest estimates from the lobby group for banks, the Banking and Payments Federation of Ireland, suggest that housing completions in 2020 will fall by 3,000 from last year’s total to 18,000. Previous ESRI estimates have suggested completions could fall as low as 15,000 or 16,000 this year.

The number of new houses needed to meet demand in the long term in the Irish market is believed to be up to 35,000.

The ESRI researchers say the imbalances in the housing market, both for purchases and in the rental sector, may also be exacerbated because of affordability problems among the cohort of workers currently employed in the sectors most affected by anti virus restrictions. Hospitality, tourism and retail, which have a higher proportion of lower-paid workers, are the segments of the economy that have been hit hardest by Government curbs to stop the spread of coronavirus.

Imbalance

“One of the most appropriate policy responses is for an increase in State provision of social and affordable housing. An increase in the supply of such housing at this point would help to reduce the extent to which the [later] imbalance would be exacerbated by the present crisis,” the report concludes.

“At a more speculative level, the potential increase in the number of people who can and will work from home in the future may have significant implications for the housing market and the general economy over the longer term,” they say.

The researchers suggest this means that most of the existing pre-pandemic long-term predictions of future housing requirements may have to be recalculated.