Debate about a housing bubble is missing the point

Ireland does have a serious housing issue as manifested in a lack of owner-occupier and rental housing, writes Jim Power

The Taoiseach may have got himself into a spot of bother last weekend with his comments that Ireland’s homelessness was not high by international standards, but the truth is that anybody who visits the majority of international cities will notice that homelessness is a strong feature of virtually everywhere and policymakers virtually everywhere struggle to deal with it.

There is no obvious solution to homelessness, because many who end up homeless do so after years of social decline.

Building more houses will not solve that element of the problem, rather a bottom up approach that addresses why people descend into social decline in the first place would probably be much more impactful.

Of course, there is now an element of homelessness in Ireland that is caused by a lack of housing, and particularly a lack of affordable rental accommodation. The manner in which Nama and the banks handed over blocks of housing and land banks to so-called vulture funds has not helped the situation and, in fact, has exacerbated it greatly.

However, that is now water under the bridge and we have a crisis that must be dealt with. The bottom line is that international comparisons are moot — the point is that Ireland does have a serious housing issue as manifested in a lack of owner-occupier and rental housing. This is resulting in spiralling house prices and rental costs.

Spiralling house prices and rents are not good for the individual or the economy as they just drive personal debt higher, tie up financial resources in bricks and mortar, and — away from productive investment in business — they damage competitiveness by fuelling wage demands, and they make a country or city a much less attractive place to live in and work in.

Stable house prices and rents represent the optimal situation, but this can only be achieved when supply and demand are in equilibrium. That is certainly not the situation at the moment.

National average house prices declined by 55.2% between the peak of the market in April 2007 and the low point of the market in March 2013. Between March 2013 and September 2017, prices have increased by 70.2%. Prices in September 2017 were 12.8% higher than a year earlier.

In the Rest of Ireland, excluding Dublin, average house prices declined by 56.5% between the peak of the market in May 2007 and the low point of the market in May 2013. Between May 2013 and September 2017, prices have increased by 61.4%. In Dublin, average house prices declined by 59.6% between the peak of the market in February 2007 and the low point of the market in February 2012.

Between February 2012 and September 2017, prices have increased by 87% and prices in September 2017 were 12.2% higher than a year earlier.

Other CSO data show that private rents increased by 5.6% in the year to October and have increased by 58.3% since the end of 2010.

This sample of statistics demonstrates clearly the heat that is in the market at the moment and it does look set to get worse. Demand is being driven higher by solid fundamentals such as population growth, employment creation, an improvement in credit availability, and a basic improvement in confidence about Ireland’s future.

On the supply side, we are simply not building enough houses for a variety of reasons, but official policy is not helping.

Not surprisingly, the debate has started about the bubble-like properties of the market. I think the argument about whether it is a bubble or not, is not really the point.

The crunch for any market comes when it is hit by a shock, such as the sub-prime crisis back in 2008.

If rising house prices have pushed debt levels higher, then the whole market and the economy becomes very vulnerable as we found out a decade ago. We need to increase housing supply as a matter of urgency. That is the only real solution.