In Ireland, hidden behind a guise of Guinness, pubs and charm, homelessness runs rampant. The soaring price of houses has made renting the far more attractive alternative. But landlords have seized the opportunity to increase the price of rents too. It is estimated that 50,000 new homes need to be constructed every year in order to ease the shortage, but the real rate of construction has been half of that.
The failure of the property market to meet the demands of consumers impacts their welfare and has long-term macroeconomic ramifications. For consumers who cannot afford houses, it means that they have little geographical mobility, and are restricted to jobs within their area. This is bad as jobs in areas with cheaper housing usually have low pay. Consumers who take mortgages out to afford more expensive houses also suffer. They have to take on a larger debt, which makes them more vulnerable to interest rate increases, which now are happening to combat inflation. Higher mortgage payments also make people worry more about their personal finances.
Rising house prices also creates inequality. The people who already own houses see their wealth increase. Those who have to rent are barely able to afford their necessities and do not save much, as on average more than 50% of their income goes towards paying rents alone. High prices also make the country less attractive to foreign workers, decreasing its productive capacity. In addition, previously, high house prices played a large part in speculation, and resulted in unsafe lending and thus instability.
Housing prices have proved pro-cyclical. Recent Irish history shows that housing prices were not the only cause of strife, but other things such as poor economic management did too. Moreover, high prices were accompanied by periods of high growth, as demand in the economy was high, and so people could still afford houses. What is different now, is that although high prices are accompanied by high demand, the supply of houses is not able to keep pace, resulting in bottlenecks and the necessity of increasing prices.
Before the 1990s, Ireland was one of the poorest Western European countries. Unemployment was at 20%, and income tax reached as high as 60%. Known as the ‘sick man of Europe’, the country was unattractive for foreigners, and emigration was around 1% of the population annually. The country was further burdened by an overvalued Irish Pound, and most of the capital borrowed was spent bolstering its value.
However, the country had many features attractive to corporations: low corporation tax, an educated workforce, and EU support. For example, to take advantage of these things, Intel moved operations there. Between 1995 and 2000, its economy expanded by an average of 9.4% every year. Ireland’s adoption of the Euro in 1999 increased the economy’s credibility and led to more international financing, which boosted growth. By 2005, an Economist study claimed that Ireland had the best quality of life in the world.
During this period, Ireland experienced a property bubble. Increased prosperity meant people could afford to spend more. Mortgages were made easily available to everyone. Media hyped up property. Increased borrowing from Germany also furthered investment. All of these factors increased demand for housing, driving up its price. The increase in price, however, was unsustainable. It was fuelled by extraordinarily high levels of demand, and any shock to that demand would have caused prices to plummet, as firms would be left with so many excess houses that would be costly to maintain.
That shock came in the form of the 2008 financial crisis. Banks restricted their loans in response to the U.S. subprime mortgage crisis, meaning households could no longer finance their house purchases. Businesses also had reduced access to loans, meaning they were forced to reduce their investments, leading to job losses. Demand decreased as people lost their income. In September 2008, Ireland was the first Eurozone country to enter recession. The loss of demand was long-term, feeding into itself, as households became more and more worried about the future, and less willing to spend. In the first quarter of 2009, GDP was down 8.5% from the same quarter of the last year. Unemployment rose from 4.2% in 2007 to 14.6% in 2012. By 2012, average house prices were down 57% from their peak.
Importantly, in comparison to between 75,000 and 100,000 houses being built per year between 2004-7, in 2010, fewer than 9,000 houses were built. This was a result of the low demand from households, meaning private firms had no incentive to supply more. The government was also unable to continue funding housing projects; the country’s debt to GDP ratio had reached 120%.
Although the economy recovered by 2014, property supply was still low. This was because many of the firms that used to supply housing had gone bust during the recession. Ireland’s population had increased by 400,000 since 2008, but less than a third of that number of homes were constructed over the same period of time. With more people demanding houses, prices began rising again.
The Irish government took a clear stance to invest more into construction in order to meet the rising demand and maintain prices, and this can be seen by the fact that the number of houses built in 2021 were 3.5 times as many as the number in 2015.
However, with the pandemic came a bout of record unemployment. Incomes decreased, leading to lower demand for housing. This controlled its price for a short period of time. But the bigger problem that came with COVID was the effect on the supply of houses; the government scheme was no longer effective, since construction workers simply could not travel to their jobs due to lockdown.
The war in Ukraine has further bolstered the lack of accommodation in Ireland; refugees who have nowhere to live are now cramped into empty spaces such as warehouses. But it is not just the influx of refugees that has the worsened the situation; the global rise in cost of commodities makes building even more expensive.
The government strategy to solve the housing problem is to build more houses. However, the rate of construction in the status quo is too low to solve the issue. A solution around this would be to borrow to build more. Ireland’s government debt is currently decreasing and was at only 56% of GDP in 2021, meaning they have capacity to borrow. Taking on debt will be a worthy sacrifice for the increased welfare associated with the benefits of housing.
Another government solution is the Help to Buy scheme for first time property purchasers. This scheme allows consumers to claim up to €30,000 refund after purchasing a house of up to €500,000. This provides some relief for those unable to currently afford houses, but it doesn’t solve the larger issue; in fact, with more incentives to buy houses, demand increases, and if supply cannot match the new level of demand, prices merely increase. It could be argued that upon seeing this increased demand, new entrants are attracted to the market, and supply will increase. However, demand for housing is already high, and market forces theoretically should work to allocate resources efficiently, but are failing to do so anyway.
A third possibility would be to further incentivise firms to increase supply via methods such as subsidies or tax incentives, as well as decreasing land and planning restrictions. This would decrease unit costs of production for firms, and thereby increase their profit margins and willingness to supply, without the need for governments to fully finance the projects.
The private housing market in Ireland has failed as firms’ willingness and ability to supply are not enough to keep up with increasing demand and the high costs of supply discourages new entrants. If Ireland wants to stop this perpetual oscillation between high booms and low busts, and guarantee better living standards for its citizens, some sort of government intervention is necessary to ensure correct resource allocation. Until supply meets demand, prices will remain high, and citizens will suffer.