DEBATES OVER THE causes of the 2008 crash in Ireland have recently reignited, partly in response to comments made by architect and planning expert Conor Skehan on Newstalk.
Skeehan implied that an oversupply of housing “wrecked the Irish economy in 2008”, and that he saw the “attitudes” of that same issue again today.
In a response to inquiries from The Journal, Skehan confirmed that this was his intended meaning. “Oversupply was the direct cause of the banking crash,” he wrote. “There is substantial current evidence of the ‘attitude’ that ‘you can never have enough housing’.”
While the property market played a substantial role in the 2008 crash, Skehan’s comments on oversupply caused controversy, particularly as they were made in response to the government’s efforts to tackle the ongoing housing crisis – more commonly criticised for undersupply.
The Journal asked experts in economics, as well as the head of the state’s inquiry into the banking crisis: was the 2008 crash caused by an oversupply of housing? And are there signs of an oversupply in the Irish housing market now?
Did oversupply cause the 2008 crash?
“What we had was an overdevelopment of property in locations, which weren’t actually desirable or required,” Ciarán Lynch, the chairman of the Report of the Joint Committee of Inquiry into the Banking Crisis, told The Journal. “But when the crash came in 2007-2008, it was caused by overvaluation, not oversupply.”
The more-than-450-pages of main volume of the banking inquiry report mentions oversupply of housing only once, in relation to tax incentives creating a property bubble.
“The laws of supply and demand, as normally understood, were not applying to the housing market, where there were increases in supply, and the cost of housing was increasing at the same time,” Lynch said of the run-up to the crisis.
“There wasn’t a singular cause of the crash that was experienced in Ireland. The crash is far more complicated,” Lynch told The Journal. “What were the key drivers of the crash? The overvaluation of property, cheap credit (which is not available now) and the banks had an incredible risk appetite.”
Economists who spoke to The Journal also said that oversupply was not a primary driver of the 2008 crash.
“Ghost estates and houses being built in incorrect locations where there wasn’t the demand was a feature of the Celtic Tiger, but it wouldn’t be correct to say the global financial crisis was caused by an oversupply of housing,” Rachel Slaymaker, research officer in the Economic and Social Research Institute (ESRI) told The Journal.
“If it were simply an oversupply of homes, the only consequence would be that all homes become cheaper,” said Ronan Lyons, an economist at Trinity College Dublin (TCD) who has described the belief that Ireland had built too many homes before the crash as a “myth”.
However, while neither said oversupply in general was a driver of the crash in Ireland, Lyons agreed with Lynch that houses were built in areas where there was little demand for them.
“What happened in the 2000s was a confluence of two factors,” Lyons said. “Very loose credit in Ireland (as in much of the high-income world, including the US, UK and Spain) and a tax policy that specifically directed construction activity away from urban centres (where the housing requirement was greatest) and into more rural areas that had far smaller housing requirements.”
Skeehan was also asked if he saw early signs of oversupply, and had responded that he saw “the attitudes of it, yeah”. So, are there signs that we are currently going into an oversupply of housing?
Is oversupply still a risk?
“In short, no,” the ESRI’s Rachel Slaymaker told The Journal. “The Irish housing market is hugely undersupplied relative to the level of demand and has been consistently over the past decade.
“Demographic pressures and the fact supply has not kept up with demand over a sustained period means the level of undersupply continues to accumulate.
Definitely not an oversupply of housing now nor in the near future.”
Slaymakers also noted that regulations have been brought in since the crash to combat overextension of credit to high risk borrowers for mortgages, which she describes as a major factor in the 2008 crisis.
Banking Inquiry chairman Ciarán Lynch agreed that there was little risk of an oversupply of housing. “There is an under supply in the Irish market right now which will maintain a current overvaluation in the market until the supply is adjusted to what’s required,” he said.
“The crash that we had was both a banking and property crash, but it was also a fiscal crash. One of the things that was a key contributor was that the economy was based upon incomes in the construction sector, such as stamp duty,” Lynch said. “So we were overly exposed.
We’re not in a situation like that at the moment.”
TCD economist Ronan Lyons explained to The Journal that the two main factors he identified as driving the crash are absent. “Neither of those factors – loose credit or distorting tax reliefs are present in the Irish economy today.”
Lyons argued that there had never been an oversupply of housing in Dublin, even during the Celtic Tiger, which is reflected in the increase in house prices since 2000.
“With an extraordinary lack of construction over the last 15 years, the consequences can be seen in many ways, including higher sale and rental prices obviously – but also in the inability of younger adults (roughly 18-34 year-olds) to form their own household,” Lyons said, citing EU data showing that Ireland has seen one of the biggest increases over the last decade in the typical age at which adults leave the parental home.
“All in, the country probably requires an average of between 45,000 and 60,000 homes built every year until mid-century. Technically, if we built 100,000 homes per year, rather than say 50,000, there would be a risk of oversupply,” Lyons said.
“But given that recent completions have been more like 20,000, we certainly should not be placing undue weight on an extremely remote risk of too many homes, when we are experiencing in very real terms, and on a daily basis, the costs of having too few.”
To embed this post, copy the code below on your site
have your say