What ever happened to counter-cyclical housing?

The Week in Housing 31/01/25

One of the most important issues in the election was the increasingly precarious situation of Government finances. This is probably the single biggest threat in terms of the future of our housing system. Thinking about this, I was reminded about the debate on the importance of de-coupling housing from the fiscal/economic cycle in the wake of the global financial crisis.

After the 2008 crisis, housing policy making changed in Ireland. In particular, over-reliance on homeownership was deemed to be one of the causal factors for the crash, and there was a shift to a more ‘tenure neutral’ policy stance with a greater balance between owning and renting. In later years, as the crisis deepened and the fiscal situation improved, there was also an increasing recognition of the role of non-market housing in meeting our supply deficit and in providing affordable housing. To one degree or another, these changes have now become part of the mainstream policy discourse that shapes are housing system.

But there was one big idea that emerged from the rubble of the property crash that gradually but steadily disappeared from the policy debate: counter-cyclical housing policy. More worryingly, our housing policy has gone in the opposite direction; it is increasingly pro-cyclical. What might seem like a bit of a wonkish and technical issue is actually central to the future of housing policy and perhaps the main political economy issue of our moment: the increasing precarity of Government finances.

But let’s take a step back first. What is counter-cyclical housing? Social and non-market housing are obviously there to correct some of the ‘market failures’ we find within housing systems (affordability, externalities etc.). One of those failures is the highly cyclical nature of housing markets. They tend to have more dramatic booms and busts than other markets, for a variety of reasons including speculation. Moreover, property booms and busts are often tied to the wider economic cycle. A property bubble can drive economic growth, as it did during the Celtic Tiger, but a property crash can equally trigger a recession. Likewise, falling incomes or growing unemployment can trigger a property crash, and vice versa. Finally, all of this is also linked to the Government’s fiscal situation. Property tax is an important part of Government revenue in itself, but more generally property markets and the wider economy can both crash at the same time. This means that when property markets are in trouble, the Government may not, and typically will not, have the money to build houses.

So there is a clear link between property and economic cycles and housing policy. But there are a few more turns of this particular screw. As house prices decline bank lending and developer output will fall sharply, meaning private housing market supply falls. This is the very moment when social housing construction is most needed, for four reasons: (a) to make up the shortfall in supply; (2) because land and construction will be cheaper and therefore output more cost effective; (3) because social housing construction is labour intensive and can generate employment, mitigate recessionary trends, keep construction workers in the country, and keep some developers afloat; and (4) as unemployment rises and incomes fall, housing need will increase. In other words, social housing can act counter-cyclically to soften the blow.

The problem is that if the fiscal situation is deteriorating, the political economic incentives will often cause Government to cut back on social housing when it is most needed, as happened, catastrophically, during the austerity years. There are two main reasons for this: (1) funding social housing usually involves large upfront capital costs which are a drain on the exchequer; (2) cutting back capital spending is politically easier than cutting current spending, because current spending cuts (think welfare payments or public sector pay) immediately effect people. As capital spending relates to investment in things in the future (i.e. which don’t currently exist), its absence will only be felt five to ten years later (hence why we had a homelessness crisis about five years after the capital spending budget for social housing was slashed by 90%).

The challenge, therefore, is to decouple housing policy from the property-economic-fiscal cycle.

And there was lots of discussion of this in the wake of 2008. An important milestone was this NESC report in 2014 on social housing finance. My colleague Michelle Norris was very involved in advancing these arguments (she was also part of NESC at the time), and AHBs like Clúid also saw huge potential here. I was working as a post-doc with Michelle at the time, and we organised this seminar that brought together Irish policy makers and international Cost Rental experts to discuss the tenure’s counter-cyclical potential. In fact, one of the main reasons why so many different stakeholders were advocating cost rental was precisely because it is a form of non-market housing which can act counter-cyclically.

Since the crisis and the austerity years, Social Housing has grown in terms of output and investment and of course the Cost Rental tenure was established in 2021. But gradually, yet steadily, any discussion of counter-cyclicality faded from the debate. Instead, these changes were made possible by an enormous increase in capital spending, largely dependent on the exchequer. Why did this happen? I don’t know for sure, but a few thoughts:

· The scale of the supply crisis meant getting shovels in the ground was prioritized, not unreasonably.

· The fiscal situation changed in four ways: (a) the declining fiscal position of the state following the crash was stabilized; (b) the era of ultra-low interest rates facilitated Government spending; (c) Covid saw EU fiscal rules thrown out the window, which also supported expansionary budgets; (d) the more recent corporate tax bonanza.

· Counter-cyclicality is complex and takes a long time to achieve. It also (usually) involves some reliance of social/non-market housing on private finance, but Irish banks have reduced their involvement in property

· Crucially, the AHBs were re-categorised by Eurostat to make them ‘on balance sheet’, i.e. their debt is considered part of Government debt. As AHB delivery is the lynchpin of counter-cyclical social housing delivery in those countries where it works (e.g. Denmark and Austria), they were/are crucial players. When they were re-categorised (in 2016 I think) the conversation essentially stopped.

As non-market housing now represents about somewhere between 20 and 30% of total housing output, and all parties are promising to increase that further, why should we be worried? Isn’t this just an irrelevant footnote in the intellectual history of Irish housing policy?

Nothing could be further from the truth. Our housing policy is, arguably, more pro-cyclical than ever. Non-market housing is entirely Government funded and is driven by capital spending by the Department of Housing. Many large developers sell a large volume of their units to AHBs and Local Authorities. Indeed, social housing providers buy up to one third of new houses that come to market. If our corporate tax bonanza comes to an end, there will be huge pressure to cut the capital spending of the Department of Housing. If that happens, not only will our non-market housing supply fall off a cliff, but developers will get into trouble because their single largest customer has run out of money. The wider economic situation could easily lead to a house price correction, further undermining the business model of developers. It all starts to look like a perfect storm in which non-market housing, private housing, the economy, and the fiscal situation deteriorate in tandem.

It's hard to move a housing system to a counter-cyclical footing. And I fully accept the prioritization of increasing supply given the context. But we are on thin ice. And given the state our housing system is in, the water underneath that ice may well be very deep and very cold.

Events & News

Those interested in advocacy and campaigning might be interested in these two workshops (see here and here) organised by the IRC. A reminder of the Housing Agency’s upcoming series on Community-Led Housing. Finally, a seminar with Josh Ryan Collins on Financialization: drivers, outcomes, options for reform is now available to watch here.

What I’m reading

For the theory nerds, a new article by David Madden on housing and social reproduction. And for those interested in institutional investment, this article looks at its extent and nature in Vienna.