The right to housing is a basic human right. This has been established in a range of international human rights instruments and is regularly monitored at United Nations (UN) and Council of Europe level (Kenna, 2005). Whilst not enshrined in the Irish Constitution, everyone needs a home. A healthy housing market underpins the health and welfare of society.
IBEC, Ireland’s largest lobby group representing Irish business suggest that the shortages of affordable housing will jeopardise overseas investment into Ireland. In addition, the ‘lack of housing is a key driver of an acute social crisis’. They stress the clear link between housing availability, affordability and economic competitiveness (Ibec.ie, 2018).
Evidence of Market Failure
Ireland currently has rising house prices, increasing homelessness, an acute lack of supply and high rents. A Daft report indicates a 9.8% percent increase in listed rents nationally in 2018, pushing national average rents to an all-time high of €1,347 (Threshold – The National Housing Charity, 2019). Yet at the same time, the number of private landlords is falling, despite high rental prices and record demand (rtb.ie, 2019).
The graph above shows the trend for rising prices nationally with a 7.1 % increase in 2018. It’s predicted that property prices will continue to rise until supply came in line with demand.
As a result of the current housing crisis, homeless numbers continue to rise. The number of people accessing State-funded emergency accommodation in November 2018 was 9,968 – an increase of 244 from the previous month (Housing.gov.ie, 2019). According to the Irish National Teachers Organisation, 35 school children became homeless every two days in February 2018.
The chart below demonstrates the vicious circle effect and how the contributory factors feed into supply and demand. As each feeds into the other the problems are compounded. The supply of social housing has reduced substantially since the recession with the emphasis on private landlords as the main source of supply.
Efficiency & Externalities
The market system is the main means of allocating housing in Ireland. A decent, affordable, liquid housing stock provides public good benefits to the economy over and above the private benefits of the individual houses. But public goods are subject to incomplete markets – there is no market mechanism that efficiently provides them.
An efficient market would react to increasing demand by increasing supply. But due to the length of time required to build houses and apply for planning, supply cannot catch up with demand in the short term. Furthermore producers want to maximise their returns and the building of one person units does not yield as much as a family home—it is not just a case of building more houses, but what type of houses. Location is also key – housing is very specific to the area. An individual wants to live in an area with family ties or is convenient for work. Increasing the housing supply in one area will not fix the problem in another.
Furthermore, there is no equilibrium in the rental market. You have a producer surplus where the landlords are achieving in excess of what they require due to high demand. Consumers are having to pay in excess of what they can afford. When you have high yields (ratio of rent to house sale price) this will also attract investors to the market. Up to half of the property sales in 2018 were to cash buyers. With cash buyers any attempts by the Central Bank to regulate prices through credit controls become ineffective.
If left to the market, individuals will only consider their costs and benefits. But the spend on housing has far reaching effects on others in society — these are called externalities, which can either be positive or negative. An example of a negative externality in housing is rising health care costs. If renters are having to forfeit their disposable income to meet rising rents, they are forgoing other costs. A high housing cost burden can impede the capacity of families to account for other necessities that affect wellbeing such as food, clothing and health care (Bratt 2002).
A study in Scotland found that the homeless population cost the health service 71% more than the non-non-homeless population (Healthscotland.scot, 2019). According to Scanlon and McKenna, 2019, homelessness is damaging children’s participation and engagement with education.
Housing tenure, cost burden and desire to stay in own home are all associated with higher levels of C-reactive protein (CRP), a biomarker associated with infection and stress (Clair and Hughes, 2019). These are all factors affecting the 708,825 people living in private rented accommodation. And the trend for private renting will continue to increase as buying your own home becomes less affordable.
Prudently the government should consider that if the current generation cannot afford to buy homes, or save due to high rental costs, in years to come an ageing population will not have the wealth from property ownership, nor savings, to draw upon to support them through their retirement years.
Ireland has a number of vacant properties where landlords are speculating over rising prices and choosing not to sub-let. This is further evidence of market failure with no optimal allocation of resources.
If the market was able to regulate itself you would not have rising homelessness, severe shortages of rental accommodation nor lack of affordable homes.
Equity
In addition to inefficiency, the market is also not equitable. The current market mechanism fails to allocate resources in a manner which maximises welfare. Ireland currently has large sectors of society that are being excluded from the housing market with no fair allocation of housing.
To address inequity the government introduced Housing Assisted Payment (HAP). The applicant must find their own private rented accommodation within specific rent caps.
For example in Galway the rent cap is €875 for a family of four, yet the average rent is €1239—a rise of, 13.1% on the previous year. As a result HAP tenants are excluded from the market. Moreover a report on Discrimination and Inequality in Housing in Ireland found that tenants in receipt of rent payments are discriminated against in the search for property (Grotti et al., 2018).
The same applies to those on lower wages. Unable to afford market rents, the growing gap between house price inflation and wage growth means young people cannot afford to buy, nor save to buy, as they pay increased rents, thus creating inequality. The average annual salary in Ireland is €38,878 and the average price for a 3 bed house can range upwards to €315,000 in Dublin (cso.ie, 2019). Prudent lending rules advocate 3.5 times a salary which is not achievable on these rates.
Rising house prices will create an even greater wealth divide between homeowners and non-owners. With house prices much higher than the average earnings, there is evidence that inherited wealth plays an important part in financing house purchases. (Le Grand, Propper and Smith, n.d.). House prices have grown by 46 percent in nominal terms since 2013 (Lawless et al. 2017).
All of these factors associated with rising housing costs contribute to rising social inequality and create future economic problems for the government to address.
Government Intervention
The Irish Government intervenes in the housing market to address equity through Social Housing policy and efficiency through Supply and Asset Factors
In 2016 they published their housing policy, Rebuild Ireland (Rebuilding Ireland, 2016) outlining their policies to tackle Housing and Homelessness. The main thrust of the plan was to accelerate housing supply. It includes measures to increase the provision of social housing, address the needs of those in emergency accommodation, deliver more housing, utilise vacant homes and improve the rental sector.
Social Housing
Previously the social housing system in Ireland mainly funded itself from rent and rates. This was a counterweight measure that would provide additional housing in times of undersupply. When this was decentralised from local authorities, and central government took control, the recession hit and spending on social housing drastically cut. As a result; a decrease in supply.
Supply
According to the CSO, only 14 446 units were built in 2017, which is less than half the amount required to meet market demand. To boost supply, measures include tax breaks and incentives to private landlords and developers. In the interim, to try to address rising rental prices, Rent Pressure Zones have been introduced to prevent landlords increasing prices with no cap. However, the number of private landlords leaving the rental market can be seen as evidence that this is having an unintended consequence of reducing supply. In addition tax breaks for property refurbishment for private landlords which were designed to improve the quality of supply, and bring new properties back into the market have in effect provided landlords an ‘escape’ clause to get out of the RTB rent caps. A landlord can evict a tenant if they can prove they are going to do work on the property. Once the property goes back on the market they can list it for any rent they choose.
Whilst the government’s aim is to address supply and cost of rental through market forces, it does not attempt to bring rents in line with what is affordable for the poorer sectors of society.
Asset Factors
The government can attempt to address the market failure through a number of financial measures. To prevent a housing bubble the Central Bank has introduced stricter Loan to Value (LTV) rates. Buyers need a minimum of a 10-20% deposit. If prices were to fall, this ‘cushion’ would keep them out of negative equity. The Loan to Income (LTI) rate typically only allows borrowing of 3.5 times annual income.
Improvements
It will take some years for the market to achieve obdurate equilibrium but this will require a change from the current policies in place which have contributed to the ongoing market failure. The government spends heavily on HAP. This is an inefficient use of their resources with no investment for the future. If this money was redirected towards direct building and long term leasing arrangements in schemes like Housing Associations it could deliver better value for money and provide long term security for tenants.
If wages were to rise to meet the cost of purchasing a house, the economy would overheat. The government must look at ways to make properties more affordable through policies that reduce the cost of development.
The IBEC report suggests that ‘The relative imbalance between the strong supply of commercial property and ongoing weakness in the residential sector is also evidence that margins in the housing sector are insufficient to support a market equilibrium (Ibec.ie, 2018). They recommend a reduction in VAT in the residential sector to help improve supply.
Conclusion
It is evident that current policies and intervention are not working. Brexit is likely to put more pressure on the housing market with an increase in the number of people coming to live and work here, which would increase housing demand. The cost of labour and materials from the UK could also increase costs, all contributing to affecting the supply of housing Targets that were set out in their Rebuilding Ireland plan are not being met. Indeed the numbers of homeless continue to rise. Housing is an essential need for society with several consequences that ripple out into all areas of health and wellbeing if not met. Evident by the boom and bust cycles of the housing market in Ireland of several decades, the solution to repairing market failure is a complex and elusive one.
24.02.2021