Will Housing for All work?

The week in housing 10/09/21

Last week I looked at what I think is most significant about Housing for All in terms of what it means for the nature of housing policy in Ireland. This week, I want to look at the question which has dominated the debate over the past week - will Housing for All work?

Will Housing for All work?

If by 'work' we mean eliminate the structural supply/demand imbalance and make housing significantly more affordable (as a proportion of income, for example) then the answer is a pretty emphatic no. Increased supply is of course crucial and can have a positive impact on affordability (which doesn't mean it automatically reduces prices), but the real issue is the relationship between supply and demand. The 300,000 units promised between now and 2030 (assuming they materialise) are certainly needed, but there is a real concern they will not be enough, and certainly not enough to bring prices down, because demand has proved so strong in recent times - even through the enormous economic turmoil of the pandemic.

After the 2008 crash Ireland experienced 'five lost years' of housing supply (roughly between 2010 and 2015). The period between 2015 and today was crucial because it was the period in which we had an opportunity to correct the course of the housing system. Our failure to do that is something we will live with for a long time. On top of our 'five lost years' we now have 'five wasted' years in which, while supply improved, it remained inadequate and insufficiently focused on non-market, affordable supply. And on top of this we had the pandemic, so even this year output looks to be a mere 22,000 units, if we're lucky.

For this reason there is huge latent demand built up, evident for example in the number of adults living at home with their parents (listen to Rob Cass on these issues here). To make significant impact on affordability, supply not only needs to increase but it needs to increase significantly faster than demand.

But demand won't stand still. It will continue to grow and most indicators suggest it will grow fast. First,  household savings have increased very substantially during the pandemic. Cash rich households will continue to push prices up. Second, low interest rates look like they aren't going anywhere, and many economists think this is one of the main drivers of house price increases. Third, the sectors of our economy which have performed best are those which have high wages and are concentrated in city centres or close to them. They thus bring higher income workers into the areas of highest housing demand, pushing up prices and rent, beyond the reach of low and middle income households. Labour market polarization is a real problem when combined with a supply/demand imbalance (although we need more research on this). Fourth, Housing for All does not take seriously the financialization of housing and land markets via institutional investment, and indeed commits to continuing to attract this form of capital, and this will likely continue to push up asset prices.

It is possible that (a) we have an economic downturn and (b) working from home changes the dynamic of employment and housing markets. But otherwise there is little chance, in my view, that 30,000 units per annum until 2030, even if we can achieve it, will be enough to outstrip demand, especially in the cities.

The concerns expressed here are supported when we look at the international picture. House prices are growing across many jurisdictions at the same time, even in countries with normally stable housing systems like Austria. This supports the idea they are being driven by  deep, structural factors which will prove difficult to tame (I strongly recommend this FT article on this point).

There is one other aspect to this I think we still do not know enough about. Most analysts agree the last property bubble was driven by credit. This was what enabled prices to rise so quickly across many different countries. Indeed credit is central to how housing bubbles are usually defined. However, we appear to be seeing what we might call an 'equity bubble', which is something we don't fully understand.

Given all this, I find it hard to understand why Fianna Fáil (and the Government as a whole) are investing so much political capital in this given the likelihood of failure.

Can a reduction in prices be achieved?

Some commentators have assessed Housing for All on the basis that it will not reduce house prices or rents. To my mind, this is not a very sound basis for assessment because, given the huge discrepancy between supply and demand and the ongoing demand side pressures (as described above), I struggle to see how a fall in prices or rents can be achieved. This is especially true in the short term (e.g. within a five year framework). Ramping up supply to the extent that would be required is very difficult due to both budgetary and capacity constraints (especially the latter). Moreover, some of the measures that would be required to reduce prices and rents (for example a more radical version of rent controls) would run the risk of destabilising private sector supply of housing. To be clear, I am not saying this cannot be done but the reality is that in terms of housing research and policy I think it is fair to say there is no consensus on how this could be achieved.

So, on what basis should we assess Housing for All? In my view, the key issue is to bring around long-term sustainable supply of housing which would stabilise prices and rents and make non-market housing a major pillar of our housing system. If prices and rents can be stabilised (i.e. avoid sharp, ongoing increases) then as the economy grows and wages grow, affordability can be restored (i.e. even without prices falling at all). This long term project should be supported by measures that would protect households from the worst effects of the current affordability problems, such as tax relief for tenants, security of tenure for tenants etc. (That said, Housing for All also fails according to this approach because, as argued above, it does not do enough to stabilise prices and rents and because it does not protect households from the worst effects of the current crisis).

To give an example of why this distinction is important, take rent prices in the cost rental sector. Housing for All claims rents in the sector will be a minimum of 25% below market rates. As market rates are currently very high, some commentators have argued these rents are not affordable. My argument is that we should not assess cost rental on the basis of initial rent setting, but rather on the extent to which it can generate an overall, sustainable increase in the supply of housing and do so in a way which moderates rents over the medium and long term. This is much more important than the headline rent. Moreover, asking cost rental to deliver cheap rents in an overheated market risks asking too much; low rents will simply make the sector less financially sustainable.

Housing policy should not be assessed on whether it will deliver cheaper houses in the short term (it won't), but on the basis of whether or not it moves us towards the kind of housing system which could deliver affordability in the future.

The real failure of Housing for All is that it underestimates the structural imbalance between supply and demand and it does not attempt to understand how urban housing/land markets have changed (internationally as well as in Ireland) in ways that place it under a kind of pressure we have not seen before. The long-term, structural issues run very deep and call for a more radical transformation of our housing system. Housing for All starts out on the right path by supporting cost rental and giving the LDA a more active role in land management and coordinating development, for example. But it only takes a few small steps down that path, before retreating to more familiar territory.

Events

Myself and Juliana Sassi are presenting as part of the Focus Ireland lunch time series on Wednesday, 15th of September. We'll be talking about our recent research on how the pandemic impacted tenants in the PRS. Our previous publication focused on the main general trends (read it here). This seminar will look especially at lone parent and migrant renters, and ask if #HousingForAll has learned any lessons from the pandemic. As mentioned last week, on the 14th of September the ESRI are hosting a webinar to launch their research (in conjunction with IHREC) on monitoring adequate housing.

What I'm reading

There's a new issue of the journal Housing Studies out, including this article looking at post-crisis rental sector in the US. Not a reading but a podcast - Juliana Sassi interviewed on Reboot Republic gives a renter's assessment of Housing for All.