Developers are bluffing when they say lower prices would undermine viability of house building

Irish Times

6 days ago

With full employment and buoyant public finances, Ireland has never been wealthier. Affluence, rather than insufficient home building, is the true source of our
housing challenges
.
Recognising this, and adopting more appropriate policies, is crucial to avoiding a deeper housing crisis.
In the popular debate, housing demand simply equals population growth. However, the economic definition of demand is the quantity of housing that society is willing and able to consume at each price.
Population growth is relevant to this. It creates competition that influences consumers' willingness to pay. But willingness does not translate into demand unless there is also an ability to pay. This explains why
the world's most densely populated cities
, which are in countries such as Bangladesh and Somalia, do not have the highest house prices.
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Further emphasising the imperfect relationship between demography and housing demand, Bulgaria and Poland had the EU's hottest housing markets last year, despite contracting headcounts.
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Residential construction fell 10% in first quarter of 2025 compared with last year, says CSO
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In Ireland, rising prices and rents signify that housing demand currently exceeds supply. Contrary to the mainstream view, this does not stem from demographic growth outstripping housing supply.
Between 2011 and 2022 the number of households in Ireland rose by 187,000. The housing stock only rose by 117,000, but the perception that this left a backlog of unmet housing need is mistaken, because 67,000 vacant homes were also reoccupied over the same period.
Together, these sources provided 184,000 units of accommodation – closely matching the growth in household numbers. Our economic definition helps explain how demand can exceed supply even when we are building enough homes for everyone.
This is possible because multiple factors, besides the number of bodies seeking beds, influence a society's willingness and ability to pay for housing. These include consumer preferences and wealth, with rich societies typically preferring, and having the resources, to live in smaller households.
All of this suggests that excess capital, rather than insufficient building, is the source of Ireland's housing challenges. This raises fundamental questions about the Government's fixation with increasing housing output.
Rather than striving to boost supply, Government should desist from fanning the flames of demand with subsidies such as
Help to Buy
and the First Home Scheme.
The unspoken purpose of these is to incentivise building by driving up property values. This is unnecessary and self-defeating. The State should subtract capital from the market by tightening credit conditions.
The Local Authority Home Loan is a flawed concept, while the
Central Bank of Ireland
's 2023 decision to relax mortgage rules unnecessarily fuelled demand. As a dominant buyer and renter of property, the State should also exercise its market power to pay less.
Government is frightened of flexing this muscle by the tacit threat of a developers' strike. Industry's trump card - which it recently played to have rent controls relaxed – is to scare up a panic that suppressing property values would undermine construction viability, causing the Government to miss its housing targets.
This is bluff. Developers only earn when they build, and development costs would adjust to reduced sales price expectations if the Government called it out.
Moreover, as outlined above, we are already constructing enough homes – regardless of what the industry-led targets say.
Six months ago, nobody was contemplating a global recession or plunging corporation tax receipts. But both are now clearly possible
Unfortunately, given the powerful interests that profit from housing development, none of this is likely. For now, the subsidies will remain and the State will continue competing against private households in the property market.
Consequently, house prices and rents will rise further. This is clearly negative for consumers. But higher rents and prices will draw out more supply and, somehow, this has become a greater political priority than providing affordable homes.
With population growth now slowing, increased housing output will unfold in one of two ways. If the economy remains strong, the additional homes will be occupied. By making sacrifices and taking on bigger mortgages, wealthier tenants and buyers will manage to fund themselves.
For the growing remainder, the State will simply increase the subsidies. The cost of this, and the environmental costs associated with excessive building, mean everyone will face higher taxes.
In this best-case scenario, the average household size will fall. Ireland currently has the EU's third-biggest households, and some consider this incongruous with our prosperity.
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Median value of homes bought by first-time buyers has risen to nearly €372,000
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However, while Ireland's citizens aspire to small households like those in other wealthy countries, we also have the EU's highest proportion of children and teens. This makes larger households natural for us.
A salutary lesson can be learned from the last time affluence and ambition seduced us into overruling this reality.
Between 1996 and 2011, the average household size plunged from 3.14 to 2.73 persons. This was funded by prolific mortgage lending that facilitated a sharply reduced proportion of 18- to 34-year-olds living with their parents. However, the debt proved unsustainable when the economy turned, the banks failed, vacancy surged, the housing market crashed, the boomerang kids returned home and the average household size abruptly stopped falling.
We are in danger of repeating this mistake. This time, however, the State, rather than the commercial banks, is bankrolling the appetite for smaller households with its subsidies and schemes.
Six months ago, nobody was contemplating a global recession or plunging corporation tax receipts. But both are now clearly possible. In this scenario, the State would be unable to underwrite the occupancy of homes produced by excessive building targets – and we should know what follows.
Dr John McCartney is a lecturer in property economics at TU Dublin and adjunct associate professor at UCD