The Sunday Independent today gives a summary of a recent Deutsche Bank report on the level of housing oversupply in Ireland and how long it will potentially take to work off, suggesting that we need to bulldoze 200,000 houses. Last week the Sindo reported on a CIF statement that we are about to enter a housing shortage, this week Deutsche Bank think we have 43 years worth of oversupply. What a difference a week makes!
Interestingly, Deutsche Bank’s report uses present data relating to housing vacancy (from the Census) and population growth (from CSO). It is data that is frequently detailed on IAN (which we used to refute the CIF pronouncement last Sunday). Unfortunately, how DB interprets the data is totally misleading for a number of reasons as I’ll set out below. First it’s worth seeing what they said, taken from the Sindo (I’ve tried finding the original report online but with no joy).
“Deutsche Bank figures suggest that there are 289,451 empty houses in Ireland, including almost 60,000 vacant holiday homes. This represents a vacancy rate of 15 per cent. … Demand for housing is the key factor as to how long it will take for this oversupply to be reduced, and aside from demand for second homes the key driver should be population growth” Based on 2011 figures which showed population growth of just 13,000, and the average number of residents per house, the bank estimates that it could take until 2055 for the glut of houses to be worked through.
The report says that if current population trends are sustained, housing oversupply will take 43 years to clear (this excludes holiday homes from unoccupied houses in the calculations). If holiday dwellings are included in calculations, the oversupply will take 57 years to clear.
However, the 2011 population growth figures were well below the levels seen over the previous decade. But such is the scale of vacant property that even at pre-crisis, boom-year population growth levels it would take almost 10 years to clear the backlog. And this is before taking into account developments which may subsequently be completed, and houses which are still being built — 10,480 in total in 2011.
“Barring a sudden and sizeable recovery in Irish net migration, or a politically controversial policy of demolishing large volumes of excess housing stock, housing oversupply will remain a feature for many years, possibly decades, to come,” says Deutsche.
“This has ramifications for any bank with development loan exposure, and also for the mortgage market, where prices have continued to fall and oversupply makes any reverse of this trend unlikely in the near term.
“Over 200,000 houses would need to be demolished in order for the housing supply to fall to three years of current population growth.”
The first major problem with the analysis is that it conflates housing vacancy with oversupply. We would always expect there to be some vacancy in any housing market, usually 4-6% of stock. It is pointless counting holiday homes as vacant stock, they are owned and used and are not oversupply. Oversupply is the difference between base vacancy and overall vacancy (minus holiday homes). In Ireland, oversupply off a 6% base vacancy rate is c.110,000 units. Still a lot, but less than half the total 230,000 vacant units. Working out how long any stock is liable to last has to be based on the oversupply not vacancy.
Second, it takes no account of obsolescence. In any one year would expect some housing to drop out of the housing stock because it has become uninhabitable or needs to be replaced. The housing literature would suggest 3-5 in 1000 houses becomes obsolete a year. An example in Ireland is the present obsolescence of some social housing that is being replaced through regeneration projects. We would expect the obsolescence rate in Ireland to be on the low side due to the newness of much of the stock, but it is still an issue that needs to be factored into any oversupply calculation.
Third, present population change data is useful for predicting what might happen in the next one to five years. For longer term predictions a more thorough analysis needs to be undertaken that looks at the population profile and considers patterns of migration. As we posted on Thursday, in the short term there will be a reduced demand for housing due to a small cohort of 15-25 working its way up the population pyramid. In the medium term (10-20 years), however, demand will steadily rise due to a large cohort of 0-10 year olds. To put in perspective, in 1994 there were 48,255 births, in 2010 it was 76,762. In other words, it is not enough to just look at population growth when considering housing demand, but also the cohort of household formation age. Both the CIF and DB fall into this trap when estimating short and long term demand. One also needs to consider average household size, which has been consistently falling in Ireland over recent decades. Even if the population remains the same, if household size falls then more housing units are needed to accommodate people. It is likely that household size in Ireland will continue to fall creating latent housing demand.
Taking the first three points together it is simply not the case that we have 43 years worth of supply, nor do we need to demolish 200,000 houses.
The fourth main problem with the analysis is it takes no account of the geography of housing and population. It is pointless at this stage to talk about Ireland as a single unit of analysis with respect to oversupply. As argued on this blog in the past week (here and here), the market in Ireland has become highly differentiated with respect to location, type of property, type of buyer and price. In some parts of the country, principally inner Dublin, the level of oversupply for houses (though not apartments) is low, in other parts of the country oversupply is large. The profile of the population also varies across the country, as does the pattern of migration. At present, migration is mainly from rural areas to urban areas, and from inner city to outer suburb. As such, the level of oversupply and how long it will take to work off differs enormously across the country. It is certainly the case that the four principal cities and their hinterlands will work their oversupply off first and will be first to start building new houses and this will be within the next decade. It will take longer in rural areas.
Neither the CIF or DB reports are particularly helpful as neither is realistic, based on a limited set of data and flawed assumptions. Given the political influence of both, I find it extremely worrying that the standard of their analysis is so weak. Indeed, given how poor it is, if this is the usual standard, it’s no wonder Ireland and Europe are in the trouble they’re in. What is needed at this stage is some proper demographic and housing modelling for the country under different scenarios that will give us some reasonable projections as to take-up of stock and future demand.