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Don’t believe what you’ve heard: increasing supply won’t ease the plight of aspiring homeowners

In Dublin city last year, 94% of all new housing was apartments, 98% of which were for rent. First-time buyers there bought just 75 new houses

Home-ownership is now below the European average at just 66%. Thirty years ago, 81% of households owned their own home. Photograph: iStock
Home-ownership is now below the European average at just 66%. Thirty years ago, 81% of households owned their own home. Photograph: iStock
Lorcan Sirr
Sun Mar 31 2024 - 07:00

The Government has set its stall on an increasing supply of housing each year bringing down the price of new housing. Announcements of an improved supply of new housing is supposed to ease the plight of aspiring homeowners keen to get started on life in the hopes of a house they can afford.

But is increasing supply of new housing going to help someone like a teacher or garda living in, say, Thurles or Leixlip realise the dream of owning a home?

In 2019, the Bank of England concluded that in relation to their rocketing house prices, the “relative scarcity of housing has played almost no role on the national level since 2000″, with interest rate levels accounting “for almost all house price rises” from that date. Lest we disregard UK research because we are so different here, in 2022 the Irish Central Bank found something similar.

If it isn’t supply that mainly drives the price of housing, then what is it? Back to the Bank of England. For every 1 per cent increase in lending rates, the researchers of Threadneedle Street found a commensurate 3 per cent decrease in house prices, and vice versa.

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In other words, interest rates drive price and price are what drives supply. To encourage more development, the Government uses taxpayer-funded demand-side schemes like Help-to-Buy. The reality is that the State does not want to see house prices fall in case supply dries up.

[ Older people and big homes: the challenge of downsizing to smaller homes in a housing crisis ]

Another significant determiner of house prices is population growth. For every 1 per cent increase in the natural growth of households since 1990, the UK researchers found a 2 per cent increase in house prices. The same 1-to-2 per cent ratio also applies to immigration – people coming to work here. These people need to be housed immediately when they arrive, usually having no families with whom they can stay. Between April 2022 and April 2023 our population grew by nearly 100,000 people through immigration and natural growth.

And the third factor: wages. Each 1 per cent rise in incomes results in a 2 per cent rise in house prices. Consider that in the context of a 10.25 per cent public sector pay award (over two and a half years) and something likely to be of a similar order in the private sector. In the third circle of housing policy hell, rising house prices drive wage demands, which in turn leads to rising house prices as purchasers’ borrowing capacity increases.

Finally, housing supply itself. A 1 per cent increase in stock (some 20,000 houses) should theoretically reduce prices by 2 per cent. Since 2017 we have built 156,695 new houses, which means if supply was the answer house prices should have reduced by eight per cent. Instead, prices are at their highest level since the Celtic Tiger. Any potential positive impact of new supply is competing against other upward pressure factors such as interest rates and always gets wiped out.

Also relevant is the fact the majority of all new housing never reaches an estate agent’s window for sale in the first instance.

The proportion of new housing available for sale has nearly halved in the last six years. In 2023, about one-quarter of all new housing came to the market for sale (the rest was social housing, one-off housing and apartments for rent). Most prospective buyers will struggle to even find a new home to view, never mind buy.

As the proportion of new housing for sale plummets, despite increasing overall supply, our home-ownership rates follow suit, and are now below the European average at just 66 per cent. Thirty years ago, 81 per cent of households owned their own home. That is a staggering drop in a short space of time, but the Government is remarkably silent on (or oblivious to) the issue.

Short-sighted, market-led, politically lazy policy is making a generation of under-45s poorer by displacing private housing for purchase. Property comprises about 75 per cent of our individual prosperity: a homeowner’s average wealth is over €300,000, whereas a renter’s is €5,000. No house; no wealth.

[ Jennifer O'Connell: My parents wanted to downsize, and we needed a bigger home. There was an obvious solution ]

In Dublin city last year, 94 per cent of all new housing was apartments, 98 per cent of which were for rent. First-time buyers there bought just 75 new houses. In Cork city just 3.5 per cent of all new housing was sold with first-time buyers buying 17 new houses. In 2017, over 80 per cent of all new scheme houses (what the CSO calls housing estates) was sold on the market, and last year that was 52 per cent. Individual buyers have been sidelined and forgotten by successive governments.

Of course, every new form of housing is a cog in a large wheel, and the argument could be made that even the impact of an increased supply of new apartments only on the market for expensive rent will eventually trickle down to affect those on average wages, but that assumes there are people who want to or can pay for these new expensive rents and these workers could well be approaching retirement by the time any positive ripple effects reach Thurles.

[ House price inflation accelerates amid chronic lack of supply in second-hand market, Sherry FitzGerald finds ]

Discussions around housing policy and supply have been predictable: further deregulation of planning, reductions in standards, viability, grants, smaller houses, the market, more money please. There has not been enough analysis of the impact of current policies. Some 68 per cent of Irish 25-29 year-olds live with their parents; in Finland this is 5.7 per cent. We should be discussing that, or how a policy obsession with urban hyper-density housing and homes unsuitable for families has created unsustainable commuter sprawl under a Green Minister for Transport.

The Government is on a fool’s errand thinking housebuilders will suddenly ramp up its housing output for sale and this will magically bring down house prices. That would be very philanthropic of the private sector.

[ Costs of social housing construction in Dublin are double those elsewhere ]

Instead, the state can control planning policy (to determine the type of housing that gets built), and value-for-money (to determine affordability). In 2023, the State paid an average all-in cost, including land, of €309,000 to directly build houses and apartments, and just €219,000 in Tipperary, a price many teachers in Thurles could live with. The question is, why are they not doing a lot more of it, recycling the funds, selling it under the heading of affordable housing, and widening the band of who is eligible?

Dr Lorcan Sirr lectures in housing at TU Dublin and is currently Visiting Professor at the University of Galway