How Ireland’s property crisis is affecting the real economy

In 1980, housing accounted for just 7 per cent of household expenditure in the Republic. By 2016, this had increased to 20 per cent, equating to an estimated €52 billion annually, figures from the Central Statistics Office (CSO) show.

The escalating cost of housing has been a central feature of western economies in recent decades. The problems experienced in Dublin – chronic undersupply, young people priced out of the market, increased rates of homelessness – are remarkably similar to those seen in London, Sydney and San Francisco, for example.

Whether they are a direct result of housing’s transformation from a basic factor of production to house workers into a highly speculative investment asset, deeply enmeshed in the global financial system, is debatable. Either way, residential property is increasingly now subject to financial speculation and disconnected from its primary social function.

Ireland has the dubious distinction of having the most volatile property market in the world

Critics say public policy here and elsewhere has facilitated this creeping “commoditisation” by providing tax breaks for developers and less onerous mortgage arrangements. The role these policies played in the spectacular boom and bust cycles of recent years is difficult to quantify but undeniable.

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Ireland has the dubious distinction of having the most volatile property market in the world. A recent study by the Economic and Social Research Institute (ESRI) indicates that prices here rose by a colossal 431 per cent between 1995 and 2007, before dropping by 50 per cent in the five-year period between 2007 and 2013. Nowhere else was the swing more extreme.

And since the low point of the crash we’ve once again been subject to a prolonged period of surging prices and spiralling rents. Prices nationally have risen by 50 per cent since the trough of 2013, while rents are up over 80 per cent since 2010.

In Dublin the incline has been even sharper. Typical rents in the capital are now almost €500 a month higher than at the peak of the boom a decade ago. But what is the impact of this sort of volatility on the real economy?

Disposable income

For economist Jim Power, the escalating cost of rental and owner-occupier housing means more and more disposable income gets diverted into housing and away from "more meaningful stuff in the economy like goods and services".

Power's argument isn't a far cry from that of French economist Thomas Piketty, who highlights how so much of contemporary wealth is bound up in unproductive property assets rather than labour.

“Nobody really benefits from rising house prices and rents other than landlords and people who own property,” he says. “If the money was being diverted into goods and services, or [into] investing in entrepreneurship, this would be more productive.”

Power says rapidly escalating house prices and rents also restricts mobility. “Living in Dublin is becoming totally unattainable for people of average or moderate income. It’s good for people to be able to move around geographically, job-wise and get more experience. As a social good, labour mobility is good.”

Equally, he says talented people tend to move to the most productive locations and that tends to benefit the wider economy and add to prosperity.

But what happens when that channel is blocked?

“I come from a perspective that migration is a good. It’s been very beneficial for the Irish economy. Housing costs definitely damage mobility.”

Foreign workers

But how does he square the fact that Ireland’s economy – even with its prohibitive housing costs – is once again enticing foreign workers in significant numbers. Central Statistics Office figures show new inward migration rose to 34,000 in the year to April, the highest level recorded since 2008, with two-thirds of people coming here classified as foreign nationals.

Power admits that Ireland’s economy is booming at the moment, and the rapid acceleration in employment does make it an attractive place to seek work. However, he insists there is strong anecdotal evidence that a certain cohort of workers seeking to relocate from the UK ahead of Brexit have been put off coming to Dublin not only by the high cost of housing but by its lack of availability.

In San Francisco, a city that is similarly overwhelmed by housing issues, Google and Facebook have started building apartment blocks to house their staff.

Another issue linked to rapid housing inflation is competitiveness. Ibec’s chief executive Danny McCoy warned recently that Ireland was burning through its cost base quicker now than during the boom, noting that excessive wage demands, often linked to property prices and soaring rents, were threatening to unravel the State’s hard-won recovery.

A report by the National Competitiveness Council suggested the delivery of an adequate housing infrastructure was "critical" to support competitiveness in the medium term.

Thriving

Still, from the outside, Ireland looks to be thriving. Spectacular growth numbers – the economy grew by 7.2 per cent last year – have made it the fastest growing economy in the EU for the past four years. How are we managing to produce this type of economic performance in the midst of a such severe housing crisis?

Power says the headline growth metrics are driven by multinationals and have little bearing on the real economy. The private speculative housing model, he says, creates all sort of social difficulties that never show up in the standard suite of economic measurements.

He says the reality on the ground is that people who want to work in Dublin are commuting three or four hours every day; students are commuting long distances on buses and failing to capture what college life has to offer. “Escalating housing costs undermines the quality of life.”

Power believes institutional investor-led development rather than part-time landlords is preferential. “They’re more prepared to accept modest returns, while guaranteeing renters long-term leases and security,” he says.

His point chimes with a recent AIB report, which suggested institutional investors, despite the negative headlines about vulture funds, bring more stability to the market.

The ideal situation for economists is where house prices are growing roughly in line with the real economy – typically in the region of 2-3 per cent – something that seems to completely elude us here.

Social engineering

Dublin architect and property expert Mel Reynolds believes the constant erosion of affordability is tantamount to a social engineering of sorts, with the cities filleted of young working families and communities broken down by income groups.

“Some people call it social vandalism, others call it gentrification. If your definition of affordability is two people working full-time, that means that you have got to have two salaries to buy a house; you also probably have two cars on the road and kids in childcare.”

“That leads to bigger loads in terms of infrastructure, more cars on the road, more emissions, and ultimately sustainability issues.”

“It’s no longer about the right of women to work, it’s becoming the case that women can’t not work.”

Reynolds says ramping up housing supply has never once in our recent history improved affordability. Even at the high water mark of construction in 2006, when a record 92,000 homes were built, property prices rose by 14 per cent. The Government's plan to crank up housing supply to a target level of 30,000 units a year will deliver a greater choice of what Reynolds describes as "executive homes".

By this he means homes in the €400,000-€500,000 bracket, ideal for professionals fleeing London in the wake of Brexit but too costly for those on average incomes and outside any reasonable definition of “affordable housing”.

Reynolds points to the Nama-funded Cualanore development by Cosgrave in Dún Laoghaire, one of the most high-profile schemes in the area, as a bellwether. He says typical two-bed apartments are selling for in excess of €450,000. Even the homes in the Part V social element of the nearby Cherrywood scheme being developed by Hines are being offered to the local authority at a “discounted” price of €354,000 per two-bed unit.

Inflation

Director of research at Savills Ireland, John McCartney, says rapid house-price inflation contributes to cycles in the construction sector that are hard to break.

“There is this potential for very rapid inflation to stew or suck in capital, leading to huge surges of supply followed by an overshoot, followed by a complete halt to development and then a period of catch-up,” he says.“Once that starts it can be hard to stop it.”

Ultimately, the concern is that this is unsustainable, and that labour will vote with its feet, creating shortages that could hinder future economic growth.

“If we think of housing as a factor of production, in other words companies need places for their workers to live otherwise they can’t do their business, then it’s an issue,” he says.

But why hasn’t the current crisis been an impediment to foreign direct investment?

“I think, on some level, it’s unhelpful but, in practical terms, the multinationals that locate here pay well above average wages,” Mr McCartney says. “So the likelihood is they’re going to be able to find staff and those staff are going to be able to house themselves.

“Is that the same as saying that foreign multinationals are immune from the housing issue? No,” McCartney says, noting they probably have to pay a bit more than they would like so staff can cover the costs of housing here.

There are reports that developers are now approaching multinationals with offers to build housing for their staff. US property firm Kennedy Wilson recently offered the anchor tenant of one of its developments first option on the adjoining apartments.

Consumer spending

While McCartney agrees that having so much household expenditure funnelled into housing is not ideal, he makes the counter point that house price inflation does also lead to the so-called “wealth effect”, whereby consumers feel wealthier and proceed to spend more, providing a boost to consumer spending.

However, on the other side of the equation having so many people in need of rent support has become a major draw on the exchequer. The Government will spend in excess of €3 billion on rent subsidies over the next five years, according to official projections. This represents a 25 per cent pick-up on the previous five-year period, and reflects the Government’s increasing preference for using the private rental sector to accommodate lower-income families rather than social housing.

Ireland’s property problems, like those in other countries, are multi-layered and complex, and it’s not obvious that any of the current trends will be halted or that there is a willingness in Government to get at the root causes.