The Irish learn the hard way on housing

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By Leith van Onselen

In 2005, the UK’s Policy Exchange released a fascinating research paper describing (amongst other things) Ireland’s dysfunctional urban planning system, whereby the Government granted planning permits too late in response to rising demand, resulting in the building of large numbers of standardised, small, poor quality homes in satellite locations far away from the major cities:

According to Dr Stevenson of UCD Dublin, development for new housing actually took off much too late. “In the early years of the boom, we did not see much building in Ireland”… Because supply was late to meet demand, by the time construction activity actually took off it was too late to deal with the backlog in a reasonable way. All that planners and developers could do was try to satisfy the huge pent-up demand quickly. The result was a quick fix, not a thoroughly reasoned solution…

First, large numbers of flats – something the Irish were not used to – went up, in the form of large apartment-blocks. Second, whole new housing colonies were built, often consisting of hundreds of virtually identical semi-detached or terraced houses lacking any individual character. However, these were often far away from existing amenities, hardly provided any amenities themselves, were poorly built, and served as dormitory towns for existing cities (mainly Dublin). They were also much smaller than comparable houses built twenty or thirty years ago…

To sum up, in the words of Dr Brendan Williams: “The quantity of our supply is very, very good. The quality leaves a lot to be desired”…

Much of the hasty development that Ireland has seen over the past few years could have been avoided if supply had reacted earlier and in a more flexible way to rising demand. But in the early years of the boom, central government had still not realised how important it was to encourage housing development, and local councils, left alone without an independent tax base and lacking the incentives as well as the means to engage in proactive planning, did not plan for enough new houses.

Then, when it was almost too late and prices had already skyrocketed, the government realised the dangers of this situation and encouraged building. But, as Ronan O’Driscoll put it, “the government only thinks in numbers and units” – thus failing to understand that good, flexible and strong supply means more than just “throwing in a few hundred two-storey, three bedrooms semis” (Liam O’Donnell). And this “thinking in numbers” was passed down from central government to local planners, who could basically declare that they had done their jobs properly if they could only show that their numbers had gone up. The quality of these developments does not appear in the statistics and is hard to quantify anyway.

And the outcome of Ireland’s restrictive urban planning regime was summarised by Michael Warby in the March 2011 issue of Quadrant:

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In Ireland, local government areas with the highest vacancy rates were the most liberal in releasing land, while the areas with the lowest vacancy rates were the most restrictive. This led to the worst of both worlds, as housing estates were built where they were permitted, rather than where the demand was, while quantity controls in the more desirable areas still drove prices up. The post-bust result is empty estates of unwanted housing.

The rest is history. In the six years to 2012, Ireland’s house prices declined by around 50%, wiping-out an estimated €257bn inequity, according to the Irish Independent newspaper.

Over the weekend, The Independent’s Colm McCarthy published a great article explaining how the land-use system around Dublin, which was modeled on the UK’s Town and Country Planning Act of 1947, helped the housing bubble to form, which along with ridiculously loose credit, created the ingredients for one of the biggest housing busts in history. McCarthy also notes “reasonable measures” proposed by the Irish Government to remedy the supply-side, but also its short-sighted ambition to juice credit by encouraging high loan-to-valuation lending:

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In the bad old days, before banking crashes, it was difficult to get a mortgage…

Then along came 100 per cent mortgages, parental guarantees, fictional income statements and, hey presto, everyone with a pulse became a plausible credit risk. The banks lent into both sides of the market…

There was then, as there is now, excess demand in Dublin and a shortage of zoned and serviced land in the right areas. Builders decamped for the midlands… The builders chose these locations not to meet local demand but because they could get planning permission in these areas. The demand was expected to come from Dubliners expected to commute…

Not merely were far too many houses built nationally, many of them were built in the wrong places. Far from being developer-led, as is so often alleged, the pattern of over-building in the wrong places was planning-led…

It is clear that, especially in Dublin, there is now a shortage of certain types of accommodation and prices have begun to increase…

The Government’s solution, revealed in the Construction 2020 document, is a series of reasonable measures designed to free up supply, particularly in the Dublin area where prices have been rising most rapidly. But ministers have also been hinting at providing State guarantees which would result in 95 per cent loan-to-value ratios on new mortgages…

Offering a demand-boosting initiative nationally in the face of a local supply constriction looks like a thoroughly bad idea…

The problem in Dublin is a supply problem, not a shortage of people willing to take a punt on house prices without having to put serious money down. If anything has been learned, it is surely that the combination of restricted supply and no-money-down mortgages does not lead to good outcomes for anyone…

The best inoculation against another price bubble in Dublin is credible policy commitment, from central government and from the local planning authorities that shortages of zoned and serviced land will never again be allowed to emerge in the Dublin area, or in any other area where price bubbles appear to be emerging.

One of the components in the price explosion during the last bubble, not the most important but a revealing factor nonetheless, was the escalation of development levies, especially in Dublin. The overdue return of residential property taxes and the imminent introduction of water charges should see these levies reduced sharply and this process has already commenced in Dublin.

Colm McCarthy’s article nicely encapsulates many of the unintended consequences of forced urban consolidation, as well as the toxic mixture of easy credit, which increases susceptibility to boom and bust price cycles.

There are lessons here for other nations, including Australia, which has adopted similarly restrictive planning policies despite being blessed with an abundance of land.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.