The housing data is stark: we need to increase supply or reduce demand

Irish Times

5 days ago

One of the golden rules of economics is you can't manage what you can't measure. Managing a problem will be easier using hard evidence, backed by accurate data. It is a business school version of the expression, 'the numbers don't lie'. In contrast, trying to solve real-world problems with ideology, preordained positions, emotions or other iterations of blurry thinking leads to disaster. Only data can reveal the true picture; everything else is just noise and sloganeering, possibly interesting to debate but never the basis for practical, workable policy.
Take the biggest issue facing
Ireland
right now – the
housing
market. With data and the right model of what drives
house prices
in real life, we can set
policy
that is likely to succeed. If the
Government
really wants to stabilise house prices, it needs to make this an explicit policy objective, and reorientate all other policies around it. Everything should be measured against the benchmark of whether it will lead to stable prices. All other objectives should be subservient to achieving stable house prices for the foreseeable future.
For example, if expanding GDP, the tax base or inward investment are measures that compromise the objective of achieving stable house prices, they should be altered to be consistent with the key goal.
Basic economics tells us that prices will settle down when supply equals demand. The problem in Ireland is that supply has fallen way below demand for many years, particularly in the past decade. Up until recently, most Government initiatives have been focused on boosting supply rather than limiting demand. The problem with this approach is the data tells us we are stuck with a construction sector that can't build any more than around 35,000 new homes a year. Maybe over time this figure might creep up, but at the moment Ireland has a hard constraint of 35,000 homes a year or thereabouts. So that's the maximum supply at the moment.
READ MORE
Adjusting the demand for housing downwards to meet this supply would help to stabilise the market. So what drives the demand for housing in Ireland?
There are four essential variables driving the housing demand: the natural increase in the population; the average size of an Irish household; the amount of existing housing stock that is old and must be demolished every year; and immigration. Immigration is the only variable that the Government has any material control over. Reduce immigration and housing demand falls, easing the upward pressure on prices, given that we can't build more than around 35,000 houses a year. It is pretty straightforward.
Other economic targets – such as expanding GDP, garnering more foreign investment, maintaining the health service by employing immigrants to keep the system afloat or increasing profitability in the economy – might suffer, but if the objective of stabilising house prices is paramount, everything else comes second.
[
Ireland needs immigrants. But our economy can't accommodate an infinite number
Opens in new window
]
Let's look at the data in a bit more detail.
An overlooked factor critical to assessing the amount of homes we need for the population is the size of Irish families. When I was a kid, most families on our street had between three and five children, which meant that one house contained possibly seven or more people. We now have 2.5 people on average per household – still the highest in the EU, but falling. Simply put, we need more houses to accommodate families because fewer of us are living in each home. Therefore, to get the amount of new houses we need for the population we must divide any population increases by 2.5.
Now let's examine the natural increase which is annual births minus deaths. More babies, more future homes needed. This figure last year was 20,000 – around 55,000 births, versus 35,000 deaths. This 20,000 divided by 2.5 implies 8,000 new homes just to satisfy the natural increase in the State's population.
[
The people behind the numbers as Ireland's population grows by nearly a third in 20 years
Opens in new window
]
A third factor affecting supply is obsolescence, which is basically the number of houses that must be built to replace the decaying old stock.
About 150,000 Irish households live in buildings that are over 100 years old, mainly in rural areas. There are around 2.1 million houses in Ireland, therefore an obsolescence rate of 0.5 per cent, which adds up to an additional 10,000 units annually. If you want to be conservative, we'll put this somewhere in the 5,000 – 10,000 range, so let's settle at 7,500. So before we talk about immigration, taking in these three factors above, we need about 15,000 new houses per year just to stand still. How many homes do you think were built in all of last year in Ireland? It was 30,330. This means we have about 15,000 spare new homes for the people who want to come and live here.
The data tells us that,
in the 12 months to the end of April 2024
, 149,200 people came to Ireland and more than 69,000 left, meaning a net immigration figure of around80,000. Of the more than 140,000 people who came into the country, about 62,400 are either Irish or EU and UK citizens, leaving around 75,000 coming here on work or study visas, or as asylum seekers. These are the only people that the State can refuse entry to. (Although, for example, visa requirements for Ukrainians travelling to Ireland were waived as an emergency measure.)
Going back to our model of the housing market, we can see that when the State is building only 30,000 homes a year, we have 15,000 left after the natural increase and obsolescence are taken into account. At an average house size of 2.5, the implication is that to keep house prices stable and keep supply and demand in line, the maximum number of immigrants the Irish housing market can sustain is between 30,000 to 40,000 tops. This figure is a long, long way from the figure for non-EU immigrants who were given work or study visas or asylum last year, let alone the migrants who came from the EU or returning Irish citizens.
[
Ireland's dissatisfied voters are moving, but not towards the left
Opens in new window
]
Now that we have measured, who is going to manage?
The data cannot be emoted away. Ireland has a capacity problem. This is not the fault of immigrants who are given visas, but without a rapidly expanding supply of houses, the number of newcomers means prices can't stabilise. The most sensible policy would be to accelerate supply and decelerate demand, increase home building and decrease immigration. The numbers are stark. We can debate, moralise and criticise all we like but the honest conclusion must be that if we want stable, affordable house prices, an honest discussion on population, underpinned by data not emotion, is the only sensible way forward from here.