I’m a fan of the podcast and wish Chris and Jim well with its continued development.
In the recent (Sat 14th May) podcast about housing in Ireland, the guys seem to draw an incorrect conclusion in the discussion of the impact of private landlords leaving the market. In truth, it doesn’t matter. A dwelling is a dwelling whether it’s rented or owner occupied. The withdrawal of the small landlord doesn’t affect the stock of housing. Indeed, their leaving of the market could lead to the professionalisation of the rental market if they are replaced by funds.
Secondly, I think the idea that increasing interest rates and depressed property prices are good for the supply demand balance is also incorrect if you think that it will make prices more affordable. If prices fall on the second hand market, it’s irrelevant because it doesn’t increase the stock.
However, developers won’t deliver new stock if prices are falling against a background of strong cost inflation unless they are making a profit. If the individual buyer can’t pay a price that reflects a profit for the developer, the developer won’t sell to them. So, the developer will either not build at all and sit on their land bank or they will build and sell to the funds in the private rented sector who can pay higher prices.
In turn, the private rented sector will want their return on investment and to get that against higher purchase prices, they will need to put up the cost of rental.
The people who are being priced out of the market now are the first time buyers who are typically mortgage reliant buyers. As interest rates go up, their mortgage-ability will be further restricted. They can’t buy now and they wont’ be able to buy if the interest rates go up so in this scenario they will end up renting from the funds.
In the long term, the structure of the market would be tilted to long term tenancies and a large scale landlords where instead of paying a mortgage, the client pays rental. That is, it will look more like German and other continental markets.
Perhaps the good side of this is that if the market for rental is functioning, the developers and the funds can accelerate supply into the market more easily if they have an opportunity to do large scale developments. The policy choices to allow large scale development are all in the hands of the government.
Thanks for that thoughtful post. Agree with most of it but I’d reiterate something I said in a recent pod: even us ‘expert’ economists can get tangled up in movements along supply and demand curves and shifts of those curves. Disentangling that can be tricky. Large scale development clearly has to be part of the solution. One point I keep making is that even if you do increase supply, you may be surprised at how little prices come down. Higher mortgage rates will have a much bigger impact on house prices than increased supply, in my view. In other words, I think the demand curve for housing, at any given mortgage rate, is almost vertical. Maybe!
Excellent review of some key issues Chris and Jim. An important issue I want to pick up on is rental inflation. Rents are not increasing by the reported 9.3% (CSO) or 11.7% (Daft). In fact for 99% of the rental market i.e. over 300,000 sitting tenants, rents are increasing by circa 2% p.a. on average since 2017. At long last Daft reports are starting to highlight the difference in rents between sitting tents (99%+ of the market) and newly available rental properties (a very tiny segment of the market that most hysteria is based on). The 11.7% inflation rate applies to less than 1% of the market i.e. new rental homes, supply of which is dominated by the large investment funds. On May 1st this year, there were just 851 homes available to rent nationwide: this is the population of interest for the high rental inflation rates quoted. SF and others have had years of hysteria and ridiculous airtime on the subject of rents, with new rents and sitting rents being confused and substituted for one another, leading to mass misery on the subject. The big story in the rental market is not rent inflation, it is the run-rate of exits of smaller private landlords from the market. Currently in excess of 600 landlords are leaving each quarter. The supply of new rental properties from investment funds is not replacing those lost from smaller landlords exiting and so we are dealing with a shrinking number of rental tenancies. I know that many landlords are leaving due to three main factors: overburdensome regulation, penal taxation treatment, and vilification of landlords. The Left will tell you these landlords are "cashing out". Not so, returns on other asset classes are negative or very low and so it makes no sense to move from investing in residential property to holding cash, shares, bonds etc, unless the market reality of being a landlord is simply too much trouble! Which it increasingly is for many.
Finally, I also wish to comment on the supply of new homes to the overall housing market. New housing starts in the past twelve months are over 30,000 - the Government is going in the right direction with this. There was no building (for obvious reasons) for years after the GFC. When building was ramping up its starts and completions run-rate, the industry was hit with prolonged shut-downs due to the Pandemic. To have over 30,000 housing starts in the second year of a Pandemic has to be worthy of some credit. There is much more to be said on housing but the key point is that our analysis needs to cut through the politically motivated nonsense and focus on actions and progress.
Thanks Mark, that all makes abundant sense. We will keep trying to keep the discussion fact-based but I suspect we now have a fixed narrative: SF hold the keys to unlocking the housing crisis. Good PR and messaging carries you a long way these days, even when you are trying to convince people the moon is made of green cheese.
I don't know if Sinn Fein will solve the housing crisis but I don't see the current government solving it either so I don't think many people are excited about voting them back in. Particularly as the current situation is the legacy of their policy choices over decades (notwithstanding the impact of the global financial crisis).
Eco Eye had a good episode looking at the future of Irish cities and limerick in particular. The rows of Georgian terraces are 40-60% vacant on the 3rd and 4th floors in certain streets meaning a large population could be accommodated but planning restrictions, fire safety requirements (a second stairwell above 3 storeys) make it very difficult to bring them back into use as residences.
Interesting discussion, especially on how Irish citizens themselves are not willing to bend to improve supply, e.g. objections etc. Also does the dominance of Dublin (open to correction on this) contribute massively to the housing issue? Yet it's rarely mentioned in the commentary until recently with the growth in remote working. Although I doubt this will impact much. Shouldn't our university towns like Galway and Cork etc be developed further in to regional hubs?
Regional development is the focus of many governments around the world but is devilishly hard to achieve. Latest efforts in the U.K. -“levelling up” - have come to nothing. After decades of trying they always fail. The economic gravity attraction of cities is all-powerful. Changing work patterns -wfh- may change that. Irish unity is something else to consider - I would suggest the Republic’s contribution should be to offer to move the capital (and government) to Belfast.
Perhaps a topic for another podcast, the economics of Irish unity.
There are a number of sources of info that get bandied around when discussing the topic, and quite often they are cherrypicked by those exercising confirmation bias, championing their preferred outcome for cultural reasons.
The relevant topics in a balanced discussion (as I see it) are:
- the true figure for the Northern Ireland budget deficit
- how much of that spending would cease after unification (contributions to UK level spending which would cease)
- the likely additional government spending in Northern Ireland after unification (ROI level spending and aligning tax rates and welfare perhaps)
- economic growth after unification
- the bargaining power (or lack of) that ROI would hold in an exit negotiation with the UK
The point on rental inflation being distorted by the cap is absolutely right. Indeed that’s what happens when you cap rents, the market pushes the cost onto those seeking new rents - creating winners and losers.
But I wonder does that in itself encourage more supply? Capital investors face the prospect of higher rental yields on new builds compared to the locked in rental income from existing tenants. Could this in itself serve to stimulate supply?
Similarly, there was a mention from Dec about how falling prices on the second hand property market is irrelevant to supply and demand of new houses. However, the cost of new build houses will always be compared by buyers to second hand alternatives. They’re highly correlated.
A good way of causing some divergence in the second hand and new home property prices could be to link the central bank borrowing rules to BER ratings. Rather than allowing 3.5 * salary borrowing across the board, how about a sliding scale like 2.5 * salary to 4.5 * salary, penalising poor energy rated investments and providing higher borrowing for new builds? It would also incentivise the upgrading of our existing housing stock, as bringing the energy rating up would increase its market value a lot more than it would otherwise, helping to hit our climate targets. And the 4.5 * salary lending would keep the margins there for developers, helping to combat a cost squeeze.
I’m a fan of the podcast and wish Chris and Jim well with its continued development.
In the recent (Sat 14th May) podcast about housing in Ireland, the guys seem to draw an incorrect conclusion in the discussion of the impact of private landlords leaving the market. In truth, it doesn’t matter. A dwelling is a dwelling whether it’s rented or owner occupied. The withdrawal of the small landlord doesn’t affect the stock of housing. Indeed, their leaving of the market could lead to the professionalisation of the rental market if they are replaced by funds.
Secondly, I think the idea that increasing interest rates and depressed property prices are good for the supply demand balance is also incorrect if you think that it will make prices more affordable. If prices fall on the second hand market, it’s irrelevant because it doesn’t increase the stock.
However, developers won’t deliver new stock if prices are falling against a background of strong cost inflation unless they are making a profit. If the individual buyer can’t pay a price that reflects a profit for the developer, the developer won’t sell to them. So, the developer will either not build at all and sit on their land bank or they will build and sell to the funds in the private rented sector who can pay higher prices.
In turn, the private rented sector will want their return on investment and to get that against higher purchase prices, they will need to put up the cost of rental.
The people who are being priced out of the market now are the first time buyers who are typically mortgage reliant buyers. As interest rates go up, their mortgage-ability will be further restricted. They can’t buy now and they wont’ be able to buy if the interest rates go up so in this scenario they will end up renting from the funds.
In the long term, the structure of the market would be tilted to long term tenancies and a large scale landlords where instead of paying a mortgage, the client pays rental. That is, it will look more like German and other continental markets.
Perhaps the good side of this is that if the market for rental is functioning, the developers and the funds can accelerate supply into the market more easily if they have an opportunity to do large scale developments. The policy choices to allow large scale development are all in the hands of the government.
Thanks for that thoughtful post. Agree with most of it but I’d reiterate something I said in a recent pod: even us ‘expert’ economists can get tangled up in movements along supply and demand curves and shifts of those curves. Disentangling that can be tricky. Large scale development clearly has to be part of the solution. One point I keep making is that even if you do increase supply, you may be surprised at how little prices come down. Higher mortgage rates will have a much bigger impact on house prices than increased supply, in my view. In other words, I think the demand curve for housing, at any given mortgage rate, is almost vertical. Maybe!
Excellent review of some key issues Chris and Jim. An important issue I want to pick up on is rental inflation. Rents are not increasing by the reported 9.3% (CSO) or 11.7% (Daft). In fact for 99% of the rental market i.e. over 300,000 sitting tenants, rents are increasing by circa 2% p.a. on average since 2017. At long last Daft reports are starting to highlight the difference in rents between sitting tents (99%+ of the market) and newly available rental properties (a very tiny segment of the market that most hysteria is based on). The 11.7% inflation rate applies to less than 1% of the market i.e. new rental homes, supply of which is dominated by the large investment funds. On May 1st this year, there were just 851 homes available to rent nationwide: this is the population of interest for the high rental inflation rates quoted. SF and others have had years of hysteria and ridiculous airtime on the subject of rents, with new rents and sitting rents being confused and substituted for one another, leading to mass misery on the subject. The big story in the rental market is not rent inflation, it is the run-rate of exits of smaller private landlords from the market. Currently in excess of 600 landlords are leaving each quarter. The supply of new rental properties from investment funds is not replacing those lost from smaller landlords exiting and so we are dealing with a shrinking number of rental tenancies. I know that many landlords are leaving due to three main factors: overburdensome regulation, penal taxation treatment, and vilification of landlords. The Left will tell you these landlords are "cashing out". Not so, returns on other asset classes are negative or very low and so it makes no sense to move from investing in residential property to holding cash, shares, bonds etc, unless the market reality of being a landlord is simply too much trouble! Which it increasingly is for many.
Finally, I also wish to comment on the supply of new homes to the overall housing market. New housing starts in the past twelve months are over 30,000 - the Government is going in the right direction with this. There was no building (for obvious reasons) for years after the GFC. When building was ramping up its starts and completions run-rate, the industry was hit with prolonged shut-downs due to the Pandemic. To have over 30,000 housing starts in the second year of a Pandemic has to be worthy of some credit. There is much more to be said on housing but the key point is that our analysis needs to cut through the politically motivated nonsense and focus on actions and progress.
Thanks Mark, that all makes abundant sense. We will keep trying to keep the discussion fact-based but I suspect we now have a fixed narrative: SF hold the keys to unlocking the housing crisis. Good PR and messaging carries you a long way these days, even when you are trying to convince people the moon is made of green cheese.
I don't know if Sinn Fein will solve the housing crisis but I don't see the current government solving it either so I don't think many people are excited about voting them back in. Particularly as the current situation is the legacy of their policy choices over decades (notwithstanding the impact of the global financial crisis).
Eco Eye had a good episode looking at the future of Irish cities and limerick in particular. The rows of Georgian terraces are 40-60% vacant on the 3rd and 4th floors in certain streets meaning a large population could be accommodated but planning restrictions, fire safety requirements (a second stairwell above 3 storeys) make it very difficult to bring them back into use as residences.
Interesting discussion, especially on how Irish citizens themselves are not willing to bend to improve supply, e.g. objections etc. Also does the dominance of Dublin (open to correction on this) contribute massively to the housing issue? Yet it's rarely mentioned in the commentary until recently with the growth in remote working. Although I doubt this will impact much. Shouldn't our university towns like Galway and Cork etc be developed further in to regional hubs?
Regional development is the focus of many governments around the world but is devilishly hard to achieve. Latest efforts in the U.K. -“levelling up” - have come to nothing. After decades of trying they always fail. The economic gravity attraction of cities is all-powerful. Changing work patterns -wfh- may change that. Irish unity is something else to consider - I would suggest the Republic’s contribution should be to offer to move the capital (and government) to Belfast.
Perhaps a topic for another podcast, the economics of Irish unity.
There are a number of sources of info that get bandied around when discussing the topic, and quite often they are cherrypicked by those exercising confirmation bias, championing their preferred outcome for cultural reasons.
The relevant topics in a balanced discussion (as I see it) are:
- the true figure for the Northern Ireland budget deficit
- how much of that spending would cease after unification (contributions to UK level spending which would cease)
- the likely additional government spending in Northern Ireland after unification (ROI level spending and aligning tax rates and welfare perhaps)
- economic growth after unification
- the bargaining power (or lack of) that ROI would hold in an exit negotiation with the UK
A meaty and controversial topic.
Thanks everyone for some interesting thoughts.
The point on rental inflation being distorted by the cap is absolutely right. Indeed that’s what happens when you cap rents, the market pushes the cost onto those seeking new rents - creating winners and losers.
But I wonder does that in itself encourage more supply? Capital investors face the prospect of higher rental yields on new builds compared to the locked in rental income from existing tenants. Could this in itself serve to stimulate supply?
Similarly, there was a mention from Dec about how falling prices on the second hand property market is irrelevant to supply and demand of new houses. However, the cost of new build houses will always be compared by buyers to second hand alternatives. They’re highly correlated.
A good way of causing some divergence in the second hand and new home property prices could be to link the central bank borrowing rules to BER ratings. Rather than allowing 3.5 * salary borrowing across the board, how about a sliding scale like 2.5 * salary to 4.5 * salary, penalising poor energy rated investments and providing higher borrowing for new builds? It would also incentivise the upgrading of our existing housing stock, as bringing the energy rating up would increase its market value a lot more than it would otherwise, helping to hit our climate targets. And the 4.5 * salary lending would keep the margins there for developers, helping to combat a cost squeeze.