IN A RECENT interview on Ireland AM, former Taoiseach Bertie Ahern spoke about being ‘berated’ for building 70,000 houses a year.
The Taoiseach is, of course, being modest. Irish residential output peaked in 2006, at 93,000 units (houses and apartments). As we all know, the market crashed spectacularly, to a low of 4,575 in 2013. Even then, it was clear that the oversupply from the boom was being mopped up, and prices were already rising.
The priority since has been to get supply back up to a sustainable level. The policy discourse and political promises have been eerily reminiscent of the late 1990s and early 2000s.
That period is instructive both in terms of what should be possible and as a warning.
Long-term Irish housing output from 1970 to the start of the Celtic Tiger was roughly 23,000 units a year. It was relatively stable and interest rates were high enough to keep prices down.
When the economy took off from 1994, prices rose rapidly. The Government commissioned a series of reports, which recommended boosting supply to house the growing population.
This became the accepted solution by almost all commentators.
Supply was certainly one part of the problem. Another was interest rates, which fell sharply as Ireland prepared to join the euro because it became much cheaper for Irish banks to borrow from abroad.
Startling as it may sound, the fall in rates probably justified a doubling of prices. This is relatively easy to work out: paying 8% interest a year over 20 years means a mortgage much bigger than the original purchase price.
The difficulty, as we have experienced recently, is interest rates are liable to go back up, putting severe pressure on people who paid high prices when rates were low.
In retrospect, it should have been reasonably clear when we entered the housing bubble phase. One indicator is that real rents (allowing for inflation) actually fell from 2002 to 2005. If rents are falling, it means that house prices are almost certainly being driven by something other than population or income growth.
People were spending more and more on houses, but not to live in.
The second indicator was the vacancy rate.
In 2006, the OECD estimated that half of new houses built from 2000 to 2003 were lying vacant. Again, these houses were not being built and bought to live in, but as investments.
There are competing definitions of a bubble, but one of the best is when people begin buying assets based on what they can sell them for, with no real concern about the real
return from that asset – in this case, rents.
Once people realise they might get stuck with the asset, they rush for the door and prices crash.
In several respects, we are still at a much earlier phase of the cycle now.
Rents, as people will know, have risen rapidly, and we have a low vacancy rate by international standards. The reason is obvious: the supply response this time has been far more laggardly.
One can make some allowance for policymakers given that they started from a far lower base. Output has increased seven-fold in a decade. As a caveat, this certainly does not mean prices cannot fall in the event of an economic shock.
The population is much bigger than it was in the 1970s and families are smaller, so we will need far more than 23,000 houses a year.
Estimates generally hover round the 50,000 mark. Unfortunately, there is now a backlog way in excess of 100,000 houses, for all the people who would have liked to buy in the last decade but were shut out.
So we will have to significantly overshoot the underlying need for years to meet demand.
That in itself creates a new problem. Residential construction booms are volatile. Back in 2006, the OECD conducted a small study of construction booms in comparable countries to Ireland.
It worryingly concluded that ‘if a soft landing is defined as something that is both mild and gradual, there has not been a single case out of the 49 boom-bust cycles’.
Of course, we cheerfully ignored the warning and went on to become the 50th example.
Building up an oversized construction sector then smoothly bringing it down to a sustainable level will be extremely difficult, and something we need to think about properly now.
Something that has occupied a lot of my headspace during the housing crisis is the framing of what we consider politically possible or acceptable.
We rightly did the unthinkable and shut down society for months on end to protect people during Covid. Rights that were previously considered inviolable were suspended for the benefit of the rest of society.
Most people were reasonable enough to accept this. But the housing crisis, which disproportionately impacts young people, is never treated with remotely comparable urgency.
People are still entitled to leave perfectly good houses vacant just because it suits them.
People who live in an area can oppose a new development, though we never hear from the people who would like to live in that area but are shut out.
Politicians in the millennial period made abundantly clear their desire for prices to stop rising. Nobody, however, ever voiced a desire for prices to fall. Existing owners would be pushed into negative equity, which was considered intolerable.
Almost all economic policy decisions, or non-decisions, have winners and losers.
If we are unwilling to do anything to ruffle the feathers of existing owners then we are far less committed to tackling the housing crisis than we pretend.
Ciarán Casey is an economics lecturer at the University of Limerick. He is author of ‘The Irish Department of Finance, 1959-1999′ (IPA, 2022) and ‘Policy Failures and the Irish Economic Crisis’ (Palgrave MacMillan, 2018).
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