Arrested development: are we in a new housing system?

The Week in Housing 03/03/23

Before we get started today, I understand that CATU face the threat of legal action and are asking for support. Donate here or check out other ways to support on their Twitter. Also, mid-term grading is here so there will be no Week in Housing for the next couple of weeks.

Today I want to return to a question I’ve written about before: is there, in fact, a housing crisis? Given the problems of supply, homelessness and affordability, the answer may seem obvious. But a crisis suggests more than a set of bad outcomes. A crisis suggests that the system is in some way broken or not fully functioning. Perhaps, as I argued before, what we are witnessing is not a crisis of the housing system, but a transition to a new type of housing system. In my previous piece, I suggested that some of the key features of our new housing system are:

·         House price inflation, very high demand in urban/desirable locations

·         Concentration of ownership of residential property

·         Declining homeownership

·         Gentrification

I think this line of thinking makes sense. But I also think that the above are perhaps symptoms or consequences of the new system, rather than core structures. So, if we are, indeed, in a new housing system, what are its core structures? From a political economy perspective, we can consider this through two lenses: financial structures and key actors in the production of housing.

Beginning with financial structures, there is certainly a very strong case that we are in a new era. The previous era, roughly 1990-2008, was characterized by the dominance of Irish banks in financing housing construction, as well as (to a lesser degree) the entry of foreign retail banks into the real estate market here. The post-GFC era is characterized by the almost complete absence of Irish banks from financing development, and the dominance of non-bank finance.

Sometimes this change is understood as the shift from domestic to international finance (indeed I argued as much in my work on NAMA). But this framing may be a bit misleading. Consider two things. First, Irish banks were able to finance the property bubble by borrowing internationally, made possible by deregulation of capital flows from the 1990s and European banking and monetary union (and with it low interest rates for inter-bank lending). In this sense, the Irish banks were a vector of international capital, rather than purely domestic. Second, while much of the focus in recent times has been on private equity, hedge funds and REITs, the other big change has been the emergence of large, national housebuilding companies, especially Glenveagh and Cairns. Indeed, it would be very interesting to know what proportion of scheme housing (i.e. housing estates) in the Greater Dublin Area (i.e. the commuter counties) is delivered by these two companies. Anyway, the important thing is that both of these companies domestically based (i.e. not international), but both are public, i.e. they are financed (at least in part) by share issuing.

So the common denominator of the now dominant forms of development finance in Ireland is perhaps not so much that they are ‘global’, but that they are non-bank. This is no doubt a consequence of (a) how badly burnt Irish banks were after the GFC and (b) the much tighter regulation of real estate investment by banks after the GFC.

Moving on to the second key issue, how have the key actors in housing production changed? It seems that the two key sets of actors are institutional BTR and large national homebuilders. The former dominate apartment supply in urban areas, the latter scheme housing. This can be contrasted with the Celtic Tiger era, in which there was a mix between large Irish developers, especially in the apartment and commercial real estate sectors (like Ronan so on) and a very wide array of small-to-medium sized builders who built scheme housing across a very wide geography, from the Greater Dublin Area to small towns in Leitrim.

So what does this all mean in terms of the present ‘crisis’. I think there are two possible paths forward that are useful in considering the significance of all this.

One possibility is that many of the issues we currently face are the ‘teething’ problems of our new housing system. From this perspective, the key point is that most of the key actors in the current housing system are either new companies (like IRES, Cairns and Glenveagh) or new to Ireland, like Greystar. These companies will require time to develop the institutional capacity and landbanks to be able to deliver a steady flow of supply at the required level. With a few more national homebuilders and some improvements in apartment viability (assuming labour market issues can be surmounted), we may well see much more healthy levels of supply. Let’s call this the ‘teething hypothesis’.

The second possibility is that the new system is fundamentally supply constrained and will never deliver adequate supply. There are some plausible reasons why this might be the case. The first is market concentration - the new system, especially in the scheme housing sector, appears to have very high levels of market concentration. As the Australian economists Cameron Murray likes to argue, why would such actors flood their own markets with new supply to the extent that it causes prices to decline? Some people also argue that there is excessive market concentration in the Build-to-Rent sector.

Second, the business model of the new players appears to be quite targeted in terms of housing typology and geography. The BTR players seem to primarily interested in apartments in core urban areas. The homebuilders seem to be overwhelmingly focused on scheme housing in the Greater Dublin Area, or around other cities. It is plausible that housing supply will be too narrowly focused, and that there will be a missing chunk of supply in the form of smaller scheme housing, e.g. in small, less well connected towns.

It is also very important to point out that in the absence of the Irish banks, there is essentially no mechanism to turn the savings of Irish households into lending for housing development. It is very plausible, and I have not seen this point made very often, that without such a mechanism supply will be (a) inadequate and (b) worryingly reliant on international sources of capital.

Under this hypothesis, let’s call it the ‘arrested development hypothesis’, under-supply will be a permanent feature of our housing system. Note that this is particularly worrying because, as I argued in that previous piece, housing demand is going in the opposite direction, driven, among other things, by the labour market. If this ‘arrested development’ hypothesis turns out to be true, we would expect high house/rent prices and the concentration of ownership of residential property to continue.

One thing that it is important to note is that there is no systematic empirical evidence to properly assess most of the arguments made above, so they are merely tentative suggestions at this stage. Nevertheless, I do think it is worth considering at what point the concept of crisis merely serves to distract from the fact that our housing system has fundamentally changed, and that many of the things we experience as crisis, are features rather than bugs.

Events & News

A great event next Tuesday looking at the repurposing for BTR development. This call for papers for a conference on How to be an anti-capitalist city really go me thinking.

What I’m reading

The latest DRHE homelessness report is now out. This fascinating new report on accommodating Ukrainian refugees across Europe is well worth a look. And finally a really interest piece from Fiadh Tubirdy, of CATU, on local tenant organising, history and place.