One of the questions I’ve had from the media and also on a blog is why is there a difference between the NIRSA (and DKM/DEHLG) oversupply figure and the number of unsold units on unfinished estates as calculated by the DEHLG in their recent survey. Essentially the difference is oversupply versus overhang, and the overhang consisting of more than unsold units in unfinished estates. In the last few days there seems to be an attempt to shift focus to the overhang, and in my view that’s a big mistake.
Oversupply is the rate of vacancy above a base 6% vacancy rate once holiday homes have been accounted for. It is concerned with the number of households with respect to the supply of housing units. At a basic level, according to the DEHLG and CSO, in 2009 there were 1.96m units in the country and 1.63m households (the latter figure only released a couple of weeks ago), a difference of 330,000. The NIRSA model estimated a difference of 338,031; DKM/DEHLG 301,682-326,685; and UCD 345,116 (so each study had pretty good alignment with the latest data – see our key housing statistics post, which also gives links to all data). We need to take out holiday homes, as these properties are bought and serve a purpose. We also need to take out the expected base vacancy rate – all housing markets have an expected rate of vacancy, in that not all homes are expected to be occupied. Both NIRSA and DKM/DEHLG use a base vacancy rate of 6%. On 1.96m units that would be 117,600 units one might expect to be vacant. The difference between the overall vacancy minus holiday homes and the base vacancy rate is the oversupply. These are effectively houses surplus to either holiday home use or household demand to live in them. NIRSA estimates oversupply as of the end of 2009 as 120,248, and DKM/DEHLG estimate as 122,029-147,032. UCD estimate that it is 171,178 (using a 5% base rate)
Overhang on the other hand refers to the number of unsold units in the state, regardless of whether there is anybody to occupy them or use them. The unfinished estates report details that there are 33,226 unsold units (23,250 complete, 9,976 nearly complete) and another 9,854 where construction has started.
So why is there a substantial gap between estimated oversupply (120K) and potential overhang (43K), and why does it matter?
Explaining the gap is not straightforward because we do not have any definitive data. It seems likely, however, that the difference consists of three types of property:
- Other unsold houses. The unfinished estates survey had some parameters – an unfinished estate was defined as estate with 2 or more houses where development and services had not been completed and estates completed from 2007 onwards where 10% or more of units are vacant. Therefore unsold houses in estates completed prior to 2007, for example in the second half of 2006 when the market was softening were not included. Nor does it include unsold houses in estates with less than 10% vacancy. Nor does it include new, unoccupied one-off housing. Unfinished estates remember only refer to 6.1% of all units in the state.
- Excess second hand vacant houses that have either come onto the market or which have not done so when one might have expected them to. There are c50,000 second hand houses on the market, a proportion of which are vacant. They might be the houses of recently deceased or those who have moved area or country. Some of these won’t be on the market because the fall in house prices has led to the perception that the owners will not realise the full value of the property or because of issues of negative equity.
- Vacant investor properties bought at the height of the boom with the aim of buying to flip or buying to rent. In some cases these properties may have no mortgage (bought for cash) or a relatively small mortgage, and therefore there is no pressure to get tenants in. In other cases, the property may have been bought in marginal, rural locations where it is all but impossible to source new tenants given out-migration and competition. At the height of the boom, a significant proportion of property was being bought as investments. For example, 27% mortgage business in 2006 was investor mortgages according to data cited in Derek Brawn’s book, Ireland’s House Party. The bottom line is that in many cases units were bought for which there was no immediate household demand.
So, why does the difference between overhang and oversupply matter? Surely, if property is bought it is no longer a problem? All we need to do is work off the overhang and we’re back in business. In fact, shouldn’t we start building again before the overhang is worked off to make sure we don’t end up with a shortage?
The difference matters because the rate of oversupply suggests there is a strong mismatch between the number of households and housing units. The difference between overhang and oversupply effectively represents latent supply. They are units where there is a strong possibility they will come onto the market when the conditions are right, especially once they come out of negative equity. Even if they become rental properties, there’s presently not enough households to fill them given net out-migration and weak population growth through natural increase.
For the housing market to recover we need supply and demand to tighten right up so that there is active competition for property. As prices rise, latent units will come onto the market, especially as negative equity thresholds are crossed. And even if this additional supply is slow, an expected 6% base vacancy is very generous and this could be eaten into as the new build gets going again. In most countries base vacancy is 3-5%, so there is some slack there. There are also the c. 50,000 secondhand houses presently on the market, some of which are presently vacant. Starting to build before we’ve fully aligned supply and demand could extend the problem and keep the market flat.
Of course, the market is going to remain flat whilst the economy is in the doldrums, access to credit is restricted, and unemployment and underemployment remain high. The housing market will not be well served, however, by focusing solely on the overhang and ignoring the issue of oversupply. Ultimately reducing both overhang and oversupply is reliant on a growth in, or redistribution of, households (the latter will, of course, leave vacant units elsewhere in its wake, as will moving from rental into new build). Unless households grow in number, then the issue of oversupply will continue for quite some time.
Talk of there being only 18 months supply of housing units based purely on the overhang figures in unfinished estates needs to be treated with caution. It takes no account of the latent supply implied by the rate of oversupply. It was only a couple of months ago that a figure of 3-4 years supply was being talked about based on the oversupply figure. Nothing has changed other than swapping from oversupply to overhang, which suits the government, construction industry and aligned interests such as estate agents because it makes the size of the problem appear much smaller. Of course, all of this varies geographically, and some areas will align supply and demand more quickly than others, but 18 months seems very optimistic regardless of location given the present market and the fact that many estates need finishing off before new ones are started and few, if any, developers can access finance to fund existing, let alone new, estates.