The ESRI published a report this morning concerning housing supply projections up to 2021. Along with the Housing Agency housing supply report published in April 2014 and the CSO regional population projections published in December 2013, it suggests the need to create substantial new supply in the Dublin region and the other principal cities — no surprise to anyone who has been trying to buy in the region or is on the social housing waiting list.

To summarise: housing need projections

The ESRI report details projected housing supply need until 2021. It argues that there will be an increase in household demand of 180,000 units, but because of oversupply in many parts of the country only 90,000 new units will need to be built, some 12,500 per year. 56,000 (60%) of these need to be in Dublin, 8000 per year. 26% more will need to be in the Dublin commuter counties of Meath, Kildare, Louth and Wicklow. Overall, 86% of all new build will need to be in the Greater Dublin region. However, in many counties, the report suggests that new supply will not be needed because of existing oversupply. Indeed, Donegal, Kerry, Mayo, Tipperary, and all the Upper Shannon counties of Leitrim, Sligo, Cavan, Roscommon and Longford are projected to still have oversupply in 2021.

The Housing Agency report analyzed housing need for 272 towns and cities across the country for the period 2014-18. It argued that there was a need for 80,000 new units, or 16,000 per annum. 37,500 units (47%) would need to be built in Dublin, or 7,500 units per annum.

Both reports use a fairly standard housing projection model using housing stock, population projections, household size, vacancy and obsolescence.

The CSO regional population projections gave a mid-term estimate of population numbers in 2031 using two scenarios. The projections predicted that Dublin population would grow by between 96,000 and 286,000, and the Mid-East region by 77,000 to 144,000. In the upper scenario the Greater Dublin region would therefore see its population grow by over 400,000. In contrast, in the lower scenario, the Border region population would increase by just 18,000 and the West by 17,000. Although these figures relate to population, they will clearly need to be housed and these figures suggest the need for substantially more housing stock over the next 17 years.

There is pretty good harmonisation between the ESRI and Housing Agency reports, both suggesting that c.8000 houses need to be built in Dublin per annum to meet demand.  The overall national required rate of between 12,500-16,000 per annum is actually quite modest.  Typically over the past forty five years new build has been 20-30,000 per annum, rising to 40,000+ post 1998.  12,500 is in fact lower that the lowest build rate going back to when DECLG records start in 1970.  In other words, this is by no means an excessive ambition.

So why do we need supply in Dublin given the crash, oversupply, emigration, etc?

In short, the oversupply of the boom for houses in Dublin as a whole was relatively small, and there wasn’t one in South Dublin. There was, however, a reasonably large overhang of apartments. However, since 2008 the three main drivers of housing demand have been growing: natural increase, in-migration to the city, and household fragmentation. These have soaked up the oversupply. On the other side of the equation housing supply has been minimal. In 2013 only 1360 units were built in the four Dublin local authorities (only 8301 nationwide, over half of which were one-offs and generally not for sale on the open market). In short, over the past seven years we’ve moved from having excess supply to excess demand in Dublin and some other urban locations.

So if there is demand why isn’t there supply?

Good question. Housing supply is shaped by a number of factors: demand, available zoned land, planning permission, building costs (materials, labour), regulatory conditions/costs (taxes, levies, fees, etc), finance (for developers and consumers), and ability to make a profit.

In theory a lot of the right criteria for creating supply exist. There is an excess of demand. There are 6400 acres of zoned serviced land available in the four Dublin authorities for 132,000 units. There are a lot of outstanding planning permissions still in effect and LAs want to give permission for developments that meet development plan/zoning criteria. Material and labour costs of significantly lower than the boom time.

And yet, supply does not seem to be coming on stream and there seem to be blockages across the board. With respect to land, it may be the case that owners are not bringing it to development because they bought it in the boom and can’t afford to develop at present house prices. With respect to planning, it may be that developers are seeking permissions that contravene development plans or are trying to alter existing permissions. The property industry also say that the system needs streamlining and simplifying. They also make the case that there are too many taxes and disincentives attached to building such as development levies, VAT, stamp duty, building reg costs, etc that amount to a sizable proportion of any sale price. Finance is a critical issue. Developers need a sizable amount of upfront cash to secure development loans, yet many are bust from the boom or do not have such reserves.

So what are we to do?

The government needs to quickly evaluate each of the potential blockages and work out solutions that are fair and do not undermine good planning and build quality or excessively boost profit at the state’s expense. By quickly I mean weeks, not months and certainly not years. The longer that supply is constrained the more demand there will be on existing stock and house prices will continue to rise. The Construction 2020 strategy is full of task forces, review groups, consultation exercises and very short on actual policy and implementation. We need supply coming on stream as quickly as possible in the Dublin region and some other urban locales (though certainly not in many parts of the country). Construction 2020 thus needs to be fast tracked. After all, 2020 is meant to be an end date, not the date ground is broken.

Rob Kitchin

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On Sunday I blogged on what is happening with respect to housing in Ireland, including a breakdown of some key stats, and also did an interview on This Week on RTE Radio 1.  In response, I got the following question via twitter: “So is it a bubble in Dublin then? And will govt. plans to build more houses help normalise?”  These are not really questions that can be answered with 140 characters.  I’ll take each question in turn.

Is a new bubble forming in Dublin?

Having fallen by 57.4% from the peak in 2007 (houses 56%, apartments 63.3%), since August 2012 prices in the capital bumped along the bottom for a few months then started to rise.  Between Nov 2012 and Nov 2013 prices grew by 13.1% to be 49.2% lower than the peak.  It is clear that property prices in Dublin are rising steadily at present (see CSO data and AIRO interactive graph).

Housing bubbles generally form when there is an excess of demand, credit and confidence in prices.  This is not the case in Dublin at present, with the rise in prices being principally driven by two related forces.  First, both residential buyers and investors are seeking to enter the market at its bottom; this way they minimize their cost, maximize any growth in equity, and for investors gain rental yield.  Second, they are competing for a small number of available properties leading to bidding scuffles.  Unlike a normal bubble when there is a large number of property transactions and mortgage draw downs, transactions and draw down in Dublin are presently at 40 year historic lows.  Slowing properties coming to the market are very high levels of negative equity (c. 50% of all properties with a mortgage) and low levels of new build (less than 10% the number built in 2006, and over 50% are one-offs that are not coming to the market).  Ergo, prices rise as demand outstrips supply.

Does this constitute a new house price bubble?  Not in the classical sense and it is only a bubble if prices rise in excess of what one might expect given the wider economy (and given they are still almost 50% less than their peak at best we’re only at the start of a potential bubble).

Will building more houses help normalise any bubble effect/slow house price rises to maintain affordability?

One proffered solution to tempering rising prices caused by a supply shortage is to increase the level of stock.  New supply might come from six sources:

  • new build by the private market
  • new social housing provision through government investment
  • defaulting properties due to mortgage arrears
  • second-hand properties coming onto the market
  • new areas becoming active as market activity spreads
  • completion of unfinished developments

With respect to new supply by private developers and government.  Whilst there is sufficient land zoned in the four Dublin local authorities (2,575 hectares/6400 acres for 132,166 units) and there are still a large number of outstanding planning permissions, the big issue is development capital and perhaps re-jigging planning permissions to cater for high density housing in some cases rather than mostly apartments.  The same issue applies to the government who have little money to invest in capital expenditure programmes, which they have significantly reduced over the past few years.  In both cases, even if development capital was sourced, it would be 12-24 months before new supply was available to the market/social housing waiting list.  As a consequence, new supply from these sources will be limited throughout 2014.

There are significant levels of mortgage arrears nationally (we don’t have figures for Dublin alone).  With respect to principal residential dwellings 141,520 (18.4%) of all mortgages are in arrears and of those 99,189 (12.9%) are more than 90 days behind in payments.  The situation is worse for the buy-to-let sector where 40,426 (27.4%) are in arrears, where 31,227 (21.2%) are more than 90 days in arrears.  Whilst repossessions have so far been small, it is expected that they will grow over the next couple of years.  This will increase housing stock available to the market.  However, their present occupants would still require accommodation having knock-on effects with respect to the social housing waiting list and the private rental market.

As house prices rise and household emerge from negative equity those wishing to trade-up or down, or to move to a new area, are more likely to place their property on the market.  This would create some supply, but may not lead to prices levelling off.  This is for two reasons.  First, part of the reason that house prices fell so much is that the stock on the market was not representative of all stock, but rather distressed assets that owners felt compelled to sell in a falling market, with owners who could afford to avoid selling staying out of the market (typically those who are better off).  Second, the majority of trading that has taken place has mainly been related to lower priced property rather than higher-end stock.  We might therefore expect prices to rise a little simply as function of the nature of stock coming to the market changing, with better stock demanding higher prices and higher value properties starting to be traded more frequently.  This effect would probably be little affected by more supply.

We lack detailed data concerning market activity in Dublin, but industry sources are suggesting that it is most prevalent in the city core and South Dublin.  As competition for property grows in these areas it is likely that other parts of the city will become more active.  The Dublin housing market stretches far beyond the M50 to the outer suburbs and commuting belt.  These areas still have locales with some oversupply.  Moreover, the completion of some unfinished developments would also add some new supply (though the number of such developments in and around Dublin is quite small).  Both the activation of other parts of the Dublin market and the completion of unfinished developments will re-distribute some demand and work to counter supply driven price rises.  Nevertheless, given the desirability of central and South Dublin and limited new supply in those areas in the very short term, one could reasonably expect rising prices to continue in the city core and South Dublin in the immediate short-term.

Two factors that might disrupt this scenario is a tailing off of demand and limited access to credit.  A phenomena that occurs after some house price crashes is a dead cat bounce wherein prices rise quite quickly from the bottom, but then slow and fall again before finding an equilibrium or rising again (this happened in London following the crash at the end of the 1980s).  The reason for a dead cat bounce is that those who have been waiting for the right time to enter the market (both residential buyers and investors) have done so and market demand drops leading to less competition for property, or supply has risen to meet demand.  Given the level of cash sales at present (c.50%), it is possible to envisage such purchases drying up and the market returning to a more balanced status where mortgage-backed sales predominate, thus removing a significant source of competition-driven pricing.  As such, a dead cat bounce could occur in the case of Dublin.

Moreover, access to credit at present is limited.  In the first three quarters of 2013 only 8,711 mortgages nationwide were drawn down.  Caution on behalf of lenders will limit the number of mortgages issued and the value of such mortgages, thus restricting credit-fuelled speculation and associated price rises.

With respect to the mid-to-long term it seems likely that there will be a continued rise in demand that may create supply issues in the Greater Dublin region.  The new revised CSO regional population projections 2016-2031 predict: “The Greater Dublin Area will see its population increase by just over 400,000 by 2031 if internal migration patterns return to the traditional pattern last observed in the mid-1990s.  … The population of Dublin is projected to increase by between 96,000 and 286,000 depending on the internal migration pattern used, while the population of the Mid-East is set to increase by between 78,000 and 144,000.”  These figures are based on projected national increase and internal and external migration and seem reasonable given the dominant economic position of Dublin in the Irish economy.  In addition, household fragmentation will also be a source of demand.  The extent to which such population growth/household fragmentation will affect property prices is dependent on the extent to which housing supply meets demand as and when it is required.

In summary

In the short term there are potentially different scenarios as to what might happen with house prices in Dublin — they might rise steadily, rise and then level off, or suffer a dead cat bounce.  Or a two-speed market might emerge in the Dublin region, with a division in market activity and pricing patterns between the city core/South Dublin and the rest of the city.  Which scenario plays out is dependent on a range of factors that shape supply and demand and how they evolve.  As I noted on Sunday, the market is far from normal at present and in need of a lot of correctives that could alter how the market behaves, and other factors such as the wider macro-economic context could re-cast how the market evolves.  What we really need right now is some decent modelling using detailed housing, demographic and economic data of potential housing demand and supply for the Dublin region and what we might expect to happen to prices under different scenarios.  We also need similar models for the rest of the country, which has a very different set of issues.  Perhaps the government might commission such work?

Rob Kitchin

Bookshops, dating agencies and estate agents have one thing in common. They need surplus stock. A bookshop with no unsold books on the shelf, or a dating agency with no un-attached people on its records would be as useless as an estate agency with no houses in its window. You’d be fairly shocked to walk into Hodges Figgis only to find their shelves empty because of a failure to restock. Similarly, can you imagine looking at myhome.ie and seeing that there was nothing for sale? This is the image is created when there are predictions of shortages of new houses. The argument is that as demand for property picks up and the completion of new houses falls, there will be an inevitable moment where the country runs dry of new properties.

According to this approach, the only way to avoid some form of Weimar Republic hyper-inflation of house prices is to anticipate increased demand by beginning the process now of bringing new properties on to the market.

Based on the leading indicators (planning permissions, commencement notices and registrations), it is likely that there will be 5,000 houses built in 2012, and roughly the same number in 2013. Indeed, until the economic crisis is over, housing output will not grow beyond the 5,000 figure. Depending on your perspective, the immediate response to this fact is either “why so few?” or “why so many?” Writers on this blog, and others, are asking the latter question. They are also asking whether Ireland needs 5,000 new houses this year; who is building them and who is going to buy them?

We will build 5,000 houses because that’s how many are needed. In 2011, for the first time since the emergence of the property boom, 62% of all new houses were one-off houses. Around 25% of completions were scheme houses and 13% were apartments. In 2012 and 2013, as developers complete housing schemes, the only people active in the new housing market are self-builders undertaking one-off projects.

There is little evidence from either the property market or demographic analysis to suggest that if 25,000 houses are built each year they will sell. Based on current regional and property-type trends in the market, the only new properties which will find a purchaser in the next few years are the right type of property (three-bedroom townhouses, or spacious two-bedroom apartments) built to the best standards (ignore building regulations. The only new houses which are selling have a BER A rating) in the right area (Greater Dublin, preferably within the Canals) and at the right price.

Speculatively building properties in the hope of matching a notional national demand while ignoring these three criteria will simply exacerbate the large surplus stock of empty houses. Put simply, trends in the market show an unsurprising truth – the houses which are not selling are the wrong type built to inferior standards in the wrong location. The 2010 and 2011 SCSI Property reports, based on market activity clearly show the link between quality, type and location, and sale price. The greatest “churn” of transactions is taking place in quality houses in Greater Dublin. Rob Kitchin’s work on demographics show what estate agents already know, that in many rural or depopulated areas of Ireland, demand for property will never return to Celtic Tiger periods and the process of working through the over-supply of the wrong types of property in the wrong areas will be decades-long.

Until over-supply is worked through, those regions will not see a bottom to the market. And if there is no bottom, there is no need for any more supply.

The banking crisis has effectively closed down the mortgage market, but when the crisis ends, the banks are certain to begin lending again; and hopefully the “churn” of properties will speed up as mobility improves. We should not, however, expect a return to Celtic Tiger levels of lending. Having been burned by the Celtic Tiger, there will not be a mortgage for everyone who seeks one, irrespective of income or circumstance. Quality and affordability in new housing should not become an either/or game, and those developers who sacrifice one in the hope of capitalising on the other will only be adding their property to the stock of unsellable buildings.

We should ignore pronouncements on medium-term nationwide annual need for property, and begin to understand that there is no such thing as the Irish property market. There are regional markets and there are markets for specific property types. Those developers who understand the nature of the real demand, and supply to fill it will surely see some success. Because the pockets of activity are so small, the property churn is so slow and purchasers are so demanding of getting exactly the property they want, it does not require 25,000 houses annually to satisfy these small pockets of demand.

I began this post with an image of a bookshop with no books on its shelves or a dating agency with no unattached people on its books. In order to respond to where demand exists, the market needs a supply of unsold new and older houses. But would a bookshop which had a massive stock of  unsold and secondhand copies of the same book on its shelves, that are selling extremely slowly and at half the price of what they were selling for a few years earlier, really order 25,000 more copies of the same book each year?

Dr Peter Stafford is director of policy and public affairs in the Society of Chartered Surveyors Ireland

The SCSI Annual Property Reports 2010 and 2011 are available at www.scsi.ie

The CIF are at it again.  Apparently we need to start building houses again, as reported in the Sunday Indo.  As usual, they use a selective choice of data to make their case, principally focusing on the supply side of things and ignoring the already existing oversupply and weak demand.  Here is the glaring hole in their analysis.

The Census 2011 reports that there are 230,056 vacant units in the country (excluding holiday homes), of which 110K constitute oversupply on a base 6% vacancy rate.  36,000 of those are either brand new vacant or underconstruction units in unfinished estates.  There are dozens of these estates in the Greater Dublin region and a lot of stock for sale/rent.  Only South Dublin has a vacancy rate below 6 percent.  According to the CSO, population growth in 2010 was 11,400, in 2011 it was 13,600.  This was population not households.  There was net out-migration of 34K in 2010 and 2011, principally of people aged 20-40 (household formation age), the big growth in population between 2006-2011 was children under the age of 5 (they aren’t buying anything soon).  Where is the figure of 25K demand coming from?

There is a reason why only 8,000 units will be built this year – we don’t need any more.  Between 1991 and 2011 there was 933K housing units built in Ireland, households went up by 625K, in other words we built 1.5 units for every one household.  We need to work off this oversupply before we start building again. If supply and demand were in-line we would not have had a drop of 50% (so far) in house prices.  We do need construction – green energy, ICT infrastructure, public utilities, public transport – stuff that will serves domestic and FDI companies and the general public, but not housing (we also don’t need offices or retail space – over 20% of office space in Dublin is vacant).  Even if the units are built where is the mortgage credit coming from for buyers?

The CIF is a lobby group for house builders.  No great surprise they want to build – they need the money to pay back NAMA/foreign banks on the other houses they built in-excess of demand.  If they got their way and built more units then all they’d succeed in doing is continue to flatline the market by adding supply to oversupply.  Of course nothing is stopping them from building other than finance and if they really believed their own mantra then there are thousands of sites with planning permission already granted and they can get on with it.  The reality is that 1,822 unfinished estates have outstanding building work around the country where the developer is inactive due to lack of finance.  Why would developers get finance for new developments when they can’t even finish off existing jobs (and who in their right mind is going to lend for construction given the data above)?  Their plea suggests they want the government to do something – like commission house building or provide tax incentives.  Hopefully their call will fall on deaf ears.  We’re already paying the price for a spectacular property crash.  We don’t need that situation made any worse.

Rob Kitchin