Dermot O’Leary.

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Builders cannot deliver houses at the right price

Conventional wisdom on the housing situation states that while supply has picked up, there is still a long way to go to catch up with annual household demand, writes Dermot O’Leary.

Builders cannot deliver houses at the right price

Conventional wisdom on the housing situation states that while supply has picked up, there is still a long way to go to catch up with annual household demand, writes Dermot O’Leary.

Headline numbers would seem to back this up. Estimates of housing demand vary but are generally thought to be over 30,000 units per annum, but only 18,000 units were built in 2018. Until this gap is closed, house prices will continue to rise, correct?

Not so fast. It is overly simplistic to only compare the current levels of supply and demand without considering the price of the new stock and the income levels of potential homeowners.

In 2018, there has been a growing number of new houses on the market that are outside the reach of most of the income-earning population. It is little surprise that signs of weakness have emerged at the upper end of the housing market this year. With lending restricted to three-and-a-half-times income, affordability is biting.

In 2018, 31% of new houses sold were for more than €350,000, up from just 23% in 2017. In Dublin, more than half of new homes were sold for more than €350,000, and one in five were for over €500,000.

New build prices reflect the cost of their delivery. This is determined by factors, including construction costs, regulation, density, height, taxes, infrastructure, profit and, importantly, land.

While the Government introduced numerous measures to reduce the cost of delivering homes, it is still the case that costs are substantially higher than they were 10 years ago.

And land prices have boomed, with foreign capital or foreign-backed Irish buyers competing aggressively for sites. To meet return targets, many of these investors must build homes for the higher end of the market. However, demand at that end of the market is quite thin.

Revenue statistics show how incomes are distributed. A total of 2.9 million income earners are in the figures, covering part-time and full-time workers and people who have retired and are receiving a pension.

Two features are particularly striking in the data. Firstly, there is a very large proportion of the population who cannot afford to get on the housing ladder without significant outside support, be it from the Government or family and friends.

Assuming joint income earners on the same income, roughly half of the 1.5 million notional couples have a joint income of less than €45,000 per year.

Assuming these couples can raise a 10% deposit, the maximum they can afford for a house is €175,000. The private market cannot deliver homes at this price point.

The second observation relates to how the numbers drop off substantially once household income rises above €110,000. This couple can theoretically borrow enough to purchase a house worth €430,000, with a 10% deposit. Just one-in-10 couples could afford to pay this price, yet one-in-six new houses this year were sold above this value.

If housing is to be provided for everyone, and there is movement advocating that it should be a basic human right, the public sector will have to play a substantially larger role in providing it directly.

There is a very significant level of demand for new houses, but affordability must be the key factor.

The focus of the construction industry must be to deliver houses in a range of €275,000 to €375,000. There will, of course, be calls to loosen the Central Bank rules on mortgage lending. We will not be joining in, and any pleas will fall on deaf ears in any case.

Instead, the Government and industry must respond appropriately to consequences of the mortgage rules.

- Dermot O’Leary is chief economist with Goodbody

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