Election proposals may make the housing crisis worse

It is no surprise that housing is figuring prominently in election manifestos. High house prices and exceptionally high rents, especially in cities, along with major homelessness, make housing a top priority for many voters.

However, some of the solutions being proposed across the political parties are likely, at best, to have no beneficial impact. And some of them may make things worse.

While there is a pretty widespread acceptance that a shortage of supply relative to need is at the root of these problems, many of the measures now proposed are likely to add to demand pressures, and may drive house prices up further, or exacerbate the situation in the rental sector.

A fundamental issue driving shortages is the rising population, especially among those setting up their own households. Our population has grown by 1.2 million people in the last 20 years, and by 800,000 in the last decade. This is the result of the baby boom a generation ago, alongside an influx of skilled workers from abroad and the return of Irish emigrants as the economy flourishes.

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The number of young households seeking accommodation is double the number of vacancies created as older people die or move into long-term care. So at least half the demand must be met from new build.

In Germany, by contrast, most young adults can be housed in the apartments being vacated by their grandparents' generation. However, even there, Berlin is experiencing a housing shortage with the influx of people from all over Germany to high-skilled jobs in the capital.

Rent caps

When housing is scarce, prices go up and, in response, new rent controls have been introduced by Berlin's city government. In Ireland, we have already enacted a 4 per cent limit on rent increases in rent pressure zones, and some parties are calling for further rent restrictions.

However, research across many countries by the left-leaning German Institute for Economic Research shows that rent controls significantly reduce the supply of rental accommodation. Faced with restricted rents, many landlords choose to sell, so stock leaves the rental sector.

Those who benefit from rent controls are tenants who already have a home, and people who could afford to buy. Those who lose out are people looking for a home to rent in a shrinking market, including the homeless.

Election campaigns encourage the production of simple, populist answers to complex policy questions

The German research findings are valid for Ireland. Here, controls already in place have exacerbated the fall in supply of rental accommodation, pushing rents even higher. Prospective new tenants would fare even worse if further rent regulation were to follow after the election. Fianna Fáil and Fine Gael are opposed to such measures.

However, the two biggest parties both propose to channel additional funds to first-time buyers. With supply still very sticky, that will drive up prices. To put it simply, if you give an extra €10,000 to all those new buyers, they can each afford to pay €10,000 more than otherwise, and the sale price goes up by €10,000. Only sellers and owners of building land will be better off.

Social housing

Housing supply needs to increase to address underlying shortages. Here all parties are planning to substantially increase social housing, which could make a real difference if it actually results in new builds. But there is limited detail in policy platforms on how to pay for this expansion, and none at all on how to tackle Nimbyism or other opposition.

There is a general consensus across proposals from the main parties that tax on vacant sites should increase to free up the supply of urban land for housing. That could help to deliver well-located and affordable new supply.

Addressing other obstacles to expanding supply may be more technical and less eye-catching for the electorate. An example that’s recently been acted on is reducing the requirement for parking spaces in apartment blocks. While this should give more efficient land use and lower the costs associated with underground parking, its significance is more likely to be appreciated by economists than by typical voters.

Hopefully, whatever government is elected will spend some time looking at the messy details of how to increase housing supply. While some regulations ensure our new housing stock is socially and environmentally sustainable, others may be adding to building costs, with little social gain.

Election campaigns encourage the production of simple, populist answers to complex policy questions. Hopefully more nuanced policies, with the emphasis on supply, will emerge as a new government gets down to work, and proposals that inflate prices by putting money into buyers’ pockets will be quietly shelved.