State must double investment to solve housing crisis, ESRI says

A major public investment in housing financed through additional borrowing is needed to address the State’s housing crisis, the Economic and Social Research Institute (ESRI) has said.

In a new report, the think tank warns the State will experience another decade of housing shortages resulting in further upward pressure on prices and rents unless the Government steps in to address the current undersupply of residential homes.

It said the gap between “actual supply levels” and demand had worsened because of the restrictions on construction necessitated by the pandemic.

To address the shortfall, the Government needed to double the existing level of capital investment on housing to €4 billion, which the ESRI said would deliver an additional 18,000 housing units a year.

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The Government could finance such an investment by running an annual budget deficit of €4-€7 billion “on an ongoing basis”, which equates to about 1.5 per cent of gross domestic product (GDP).

Given the expected strong post-Covid-19 performance of the Irish economy and the likely continued low cost of sovereign debt, the report argues that running a budget deficit of this size would be sustainable.

Economic shocks

It also claimed this level of borrowing would still enable the State to have a fiscal buffer in place to meet either anticipated or unanticipated shocks to the economy.

The ESRI said more activity in the housing sector may lead to an increase in inflationary pressures and would almost certainly involve an expanded mandate for State agencies such as the recently initiated Land Development Authority (LDA) "to identify suitable sites and co-ordinate on a nationwide basis the delivery of the units".

It also cautioned that capacity constraints in the domestic labour market would have to be carefully considered. One potential risk concerning any sizeable increase in State investment in housing is the potential for “crowding out”, it noted. “However, one could argue in the present case, given the relatively low level of supply in the private sector, increased State involvement in the supply side of the market could ‘crowd in’ as opposed to ‘crowd out’ residential investment,” it said.

The State is expected to build about 15,000 new housing units this year, down from 20,000 last year, and well below the current level of demand, which the ESRI estimates to be about 35,000.

‘Supply-side issues’

“While there are many pressing demands for additional State capital investment, without significant investment in residential construction, we risk experiencing another decade of inadequate housing supply and resulting upward pressure on residential prices and rents,” the report’s author Kieran McQuinn said.

He said the housing situation had become critical and to avoid further rises in prices and rents “we really have to make a serious dent in the supply-side issue”.

“And the only way to do that at this juncture is to increase Government investment,” he said.

The report comes as more details of changes to local property tax were announced by Minister for Finance Paschal Donohoe on Wednesday. The new LPT rates – which Mr Donohoe has insisted are affordable – will be based on the value of homes next November. New valuations will take place every four years.

People who buy a new home between 2022 and November 2025 will pay a rate of LPT that will be calculated based on a retrospective valuation of what they would have been worth had the property existed in November 2021.

Meanwhile, Tánaiste Leo Varadkar told a private meeting of Fine Gael TDs and Senators on Wednesday night that he was in favour of local authorities having the power to vary the LPT rates up or down by more than the current 15 per cent limit.

It is understood the measure could be included in the reform of the LPT system as the Bill is being drafted though it would be subject to Coalition agreement.