The week in housing 11/06/21

The ESRI doubles down on housing investment

Last week’s ESRI publication arguing for a major increase in social housing investment caused quite the stir. It represents another nail in the coffin of Rebuilding Ireland, and confirms the argument that the assumptions it was based on were hopelessly naïve. The arguments the paper presents are interesting for a number of reasons, but most of all because they bring together possibly the biggest issue in Irish politics (housing), with possibly the biggest issue in international politics (the shift from fiscal restraint to major state investment, especially in the US).

The starting point for the author (Kieran McQuinn) is that Covid-19 has compounded the problem of housing supply. Drawing on recent research by Bergin and Garcia-Rodriguez, we need roughly 35,000 units per annum over the coming years. Over the last few years, we have had about 20,000 units per annum. The forecast is for this to fall to around 15,000 in 2021 and 2022 – it’s difficult to overstate the significance of this in terms of our housing crisis. When we consider, as argued in this Newsletter before, that economic growth forecasts are positive and the high levels of household savings arising from the pandemic, the likelihood is that we will see significant house price and rent increases over the next few years.

The main contribution of this ESRI paper is to explore what the state can do about this and specifically what the fiscal scope is in terms of increasing capital spending on housing investment.

There are two crucial points McQuinn makes here:

1)        The very low cost of Government borrowing is a game changer. McQuinn makes the important point that European fiscal rules were ‘originated and devised under the standard assumption that interest rates would equal if not exceed the rate of growth of the respective economy in question’. That is currently not the case. In Ireland, interest rates on sovereign debt are negative up to 8 years, while the  20-year yield is 0.4 per cent and the 30-year yield is 0.8 per cent. This means borrowing is extremely cheap. This is of course linked to a wider shift in monetary and macroeconomic debates in recent years, evident in recent monetary and economic policies in the EU and in the US, for example.

2)        Economic growth is forecast at an average of 4.5 per cent growth rate between 2024 and 2030.

On the basis of the above, McQuinn argues that:

“[T]he Irish Exchequer would be able to raise approximately €4 billion to €7 billion each year in additional resources for the State while still keeping the public finances on a sustainable and prudent path”.

The above forms the backdrop to the argument that capital spending on housing should be doubled. At the moment (i.e. Budget 2021), capital spending on housing is about €2bn. This is forecast to fund 12,750 social housing units, of which 9,500 are new builds.

McQuinn argues that it is “evident that the domestic construction sector is unable to meet the scale of production required”. In a way this is the most interesting thing about this paper, it reflects a step change in Irish housing debate as there appears to be a consensus now that the private sector will not be able to provide sufficient housing. This of course has been argued by a number of academics and opposition politicians for some time. It’s not a new idea, but the fact that it is now widely accepted is new. By doubling capital investment to €4bn per annum, the state could deliver around 18,000 units every year, which would go a long way towards meeting housing demand. If we assume the private sector could delivery between 10,000 and 15,000 a year by, say, 2024, this would get us close to achieving the required overall level of housing supply.

As an aside, it is interesting to compare this with some of the figures put out in recent research by Irish Institutional Property, which I looked at a few weeks ago. As you may recall, IIP looked at a scenario in which state investment was at €1.7bn, and on this basis argued we would still need about €6.4bn in finance from international investors. At the risk of being over-simplistic, if public spending was at €4bn per annum, this would mean we only need about €4bn in international investment. In other words, it would greatly reduce our reliance on international funds.

Returning to the ESRI paper, the main novel argument is that a doubling of housing investment can be achieved in a ‘fiscally prudent’ manner. This will of course be music to the ears of Sinn  Fein – it will be much harder for Government Ministers to dismiss SF housing proposals as ‘populism’ when they are backed up by the ESRI.

But there are some caveats here which I think are important to remember:

“Clearly, such a significant increase in activity would bring sizeable challenges in terms of ensuring efficient delivery of the extra units. Who would build these extra units, for example? Could the private sector be engaged by the State to deliver the extra housing? More activity in the housing sector may lead to an increase in inflationary pressures more generally. It would almost certainly involve an expanded mandate for State agencies such as the recently initiated Land Development Authority (LDA) to identify suitable sites and coordinate on a nationwide basis the delivery of the units. As part of any relationship between the State and the private sector in providing housing units, capacity constraints in the domestic labour market would have to be carefully considered.”

These words of caution remind us of one of the most important aspects of housing policy – when you change one aspect of the system it has knock on effects which may create new problems. Nevertheless, it is certainly positive that the evidence and the debate are increasingly pointing towards a radical return to social housing as a major component of our housing system.

Events

We might soon (gasp!) be in a position to attend events IRL, but for the moment it's all still online. One positive of this is the great international events virtually every week. For the data nerds among you, this looks like an interesting training seminar on how to scrape data from Air BnB to analyse short term letting markets. Here in Ireland, Bob Jordan will be delivering a seminar on tackling homelessness on June 24th.

What I'm reading.

The debate about a referendum on the Right to Housing is heating up here in Ireland. This report looks at what the Right to Housing means in a Scottish context and how it can be translated in to policy and practice.