Do we need to start building houses again?

All over the Christmas period and into the new year there have been rumblings about the property market in Ireland stabilising and the need to start building houses again, especially in Dublin and the other cities.  It’s been in the news again today due to the publication of reports by daft.ie and myhome.ie.  So, after nearly six years of consistent decline in property prices do we need to start building residential property again?

The only reason to start building again is if demand outstrips supply.

That does seem to happening in some parts of Dublin.  The tentative evidence is that: housing vacancy is less than 5% in the city according to the Census 2011; prices seem to have stabilised for family homes (though they are still fluctuating a little – according to the CSO they fell 3% Nov 2011-Nov 2012); and according to Daft.ie, two thirds of properties selling within 4 months in Dublin.

It is not the case for all types of property.  Apartment vacancy is 17-19% in Dublin and apartment prices are still falling (they fell 13% last year).  In other words, there is still a large oversupply of apartments.

There is little evidence that prices have stabilised in the other principal cities, and elsewhere they are still going down, albeit more slowly than before.  There is certainly no need to build anything in rural areas as a large oversupply exists there.

That all seems straightforward.  However, there are three factors that need to be understood in relation to the argument being made.  The first is geographic, the second is demographic, the third is wider economic/property context.

All the way through the boom there was a shortage of family housing in Dublin, especially in inner suburbs such as Drumcondra, Ranelagh, Rathmines, Clontarf and Sandymount.  In these places there are only so many houses and so people compete for them, and land to build new houses on is very small (some old industrial and vacant sites).  The predominant places available for new build are around the edges of the city, not in these areas.  Houses in the outer suburbs and the commuter belt are not selling like hot cakes due to demand.  In this context there seems little immediate reason to build new houses in the Dublin region until the wider oversupply is mopped up.

With respect to demographics, the situation is not quite as some property analysts would have it.  They predict we need 30,000 houses a year based on population growth and household fragmentation.  This prediction is based on the 8% growth in population between 2006-2011 revealed by the Census.  However, the growth in that 5 year period was nearly all in 2006-2007.  Population since then has grown very marginally (c.13K per year, nearly all through new births and babies will not be buying anything anytime soon).  Moreover, the demographic of household formation is presently relatively small (for example, there are 38% less 20 year olds than 30 year olds in the state – 62,000 as opposed 83,000) and these are the group principally emigrating, have high unemployment, and have poor access to credit.  It is true, however, that population growth will be stronger in Dublin than elsewhere as that is where the jobs are principally located.  The evidence at the moment though is that there is hardly an exodus to the city.

Thirdly, there are a whole bunch of extraneous factors that will continue to dampen market activity – negative equity, mortgage arrears, unemployment, access to mortgage credit, unfinished estates, property tax uncertainties, wider economic paralysis, and lack of confidence/caution, so on.  The market might well be starting to stabilise in Dublin, but even there it will be affected by all these factors.

The call accompanying the argument being made by the property sector is that the government needs to do something to get house building going again.  This seems quite rich to me.  For years the property sector have been campaigning for market liberalisation of property and for the state to stay out of building property.  They want a free market when it suits and state-support when they mess it up.  But following their own logic, if the case for new build is compelling then private financing will surely step in to enjoy the profits/yield from development?  Yes, accessing finance is difficult, but if property really is on the rebound surely an entrepreneurial capitalist would look to invest?

Indeed, there is nothing to stop builders/developers building to capitalise on the supposed latent demand apart from finance.  All local authorities have development plans that are framed with regional planning guidelines and the national spatial strategy and there is sufficient zoned land for development.  Moreover, there are a large amount of planning permissions outstanding on unfinished estates and developers can apply for more.

One thing is certain, the State is bankrupt and does not have the finance to underwrite homebuilding.

I agree that over the mid to long term new properties will be needed in and around Dublin, though demand elsewhere will be low.  What we need is a cautious, planned approach to housing underpinned by strong evidence rather than hyperbole (we certainly need a robust demographic and planning model for the Dublin region), that ensures that oversupply is mopped up in the same process otherwise supply will outstrip demand and work to keep the market depressed.

Rob Kitchin

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Property market by sector and region for 2011

The Society of Chartered Surveyors Ireland and RICS have published their annual property report for 2011.  This report used to be a joint venture with IAVI (Irish Auctioneers and Valuers Institute) before it merger with The Society of Chartered Surveyors.  The report is based on a survey of 319 chartered surveyors who work in the commercial, industrial and residential property sectors.  It therefore reflects the opinions of members, as opposed to being drawn directly from sales/rental databases.  Nevertheless it does give us insight into what is happening in the market from the perspective of an informed group of actors.  The report provides both a sectoral and regional analysis, with year by year changes in prices for 2009, 2010 and 2011, but no detailed data on overall change since the peak of the market.

The report argues that the property market has now become geographically and sectorially specific in how it operates, with locales and types of property performing differently as the pressure of the crash has come to bear on it.  For example, they argue there is a notable urban/rural difference in rents and prices of residential properties, and whilst development land has plummeted by up to 95% in value, agricultural land has not fallen to the same degree and has risen in many areas last year.  They argue that the largest factors impacting on the property market have been the lack of mortgage credit for the residential market and the lack of capital finance for commercial purchases, along with fears over unemployment and pay cuts, and weak sentiment.  Notably there is little discussion of oversupply, negative equity, mortgage arrears, and immigration of household formation-aged population.

In terms of sectors, the report details:

Residential new houses – very low levels of activity characterised as ‘non-existant sales’; apartments falling in price more rapidly than houses; cash buyers dominate where sales are occuring (mainly in and around Dublin).

Residential secondhand houses – very low levels of activity; prices continue to fall, but influenced by location; falls generally in-excess of new homes; homes not coming onto the market unless absolutely necessary; very little trading up; some pick up in sales in Q3/Q4 but mainly for houses <175K; cash sales typically 60% from peak

Residential rental market – solid levels of activity; rental prices holding up with little fall in price over year; reports of no overhang of rental property and a shortage of family home stock in some areas, notably Dublin.

Offices – demand very low, weaker than 2010 and characterised generally as ‘no activity’ and rents/yields falling; city centre Dublin slightly better in activity but terms under pressure and rents falling; rents nationwide typically down 50% on peak.

Retail – sales ‘dead in the water’; rents down nationwide by 50-60% from peak; notable move to short leases.

Pubs and hotels – continued closure of pubs; no sales; banks won’t lend to the sector; Dublin faring slightly better than elsewhere; NAMA has unrealistic expectation re. hotel sales

Industrial property – sales almost non-existant; high levels of vacancy in small units; falling rents

Investment property – sales almost non-existant in commercial and residential property (except for limited cash sales)

Development land – prices down 95%; market not anticipated to pick up any time soon; NAMA set to dominate any activity

Agricultural land – described as the only functioning market, with prices rising in 2011; rents also rising

Price drops across sectors is generally much larger in Ulster/Connaught than Dublin, Leinster and Munster; and generally larger in rural areas than urban areas.

The report highlights that many chartered surveyors find dealing with NAMA very frustrating and that they anticipate NAMA will be a feature of the property landscape well into the medium term.  The forecast for 2012 – residential will remain weak, commercial to start to pick up in the second half of the year.

That analysis all seems pretty reasonable to me, though I’m not convinced that the commercial market will pick up to any great degree unless economic activity does likewise, especially a rise in employment that requires space. And there is a lot of vacant commercial space across the country that means that supply massively outstrips demand that will work to keep prices depressed for some time.  For office space in Dublin, vacancy is >20%, and in some parts of the city >40%.

What this report, and others from the property sector, highlight is the need for high quality, independent and public, commercial property and land data re. sales and rents.  The emphasis to now has been on establishing a house price register.  We need the same for the commercial sector, so that local authorities and government departments know what is happening across the property sector when undertaking planning decisions.  It would also aid NAMA in its work and form a backdrop that would help banks make sensible decisions re. lending for development.

Rob Kitchin