Irish Housing Supply points to further pressure on Rents and Prices

The supply of new housing responds to changes in price with a time lag, which can lead to periods of excess building and , as in Ireland of late, a chronic  excess demand for residential property, particularly in areas where people want to live. Housing completions  did rise significantly in percentage terms last year, by 33%, but such was the collapse in house building in the period 2007-13 that the recovery  in 2014 left  actual completions at  11k.This added just  0.5% to the existing housing stock (around 2 million) and  as such is  below the depreciation rate. Moreover, it compares with a figure of   25k that has become the consensus view on the  annual supply required over the next 5-10 years.

House prices rose by 22% in Dublin last year and by over 10% elsewhere in Ireland which  indicates  a clear price signal. Completions in the first quarter of 2015 amounted to 2.6k , representing a 26% annual rise, but the pace of growth slowed sharply in q2, to 9%, with  a supply figure of 3k. So completions over the first half of the year came to  just 5.6k and our model now indicates an annual figure of less that 13k. The official completions data is based on connections to the electricity grid so  the total can also include properties previously partially or largely completed as well as new builds, which adds a further uncertainty to any annual forecast.

Housing demand projections tend to put the figure for Dublin (city and county) at  around 30% of the national total, implying an annual supply requirement of 7k-8k. That ratio was met last year although the actual supply in Dublin was only 3.3k, no doubt also augmented by previously unfinished developments.  Still some way to go then to match forecast demand, particularly as  the Dublin figure in the first half of this year was only 1.4k , less than a quarter of the national total, with apartments accounting for 0.5k of completions in the capital.

In our previous Blog ( ‘Irish Mortgage Regulations impacting the housing market’) we concluded that the new LTV limits were affecting mortgage lending and housing transactions but were not having a dramatic impact on prices. There is also evidence that the pace of rental growth is accelerating and the implication is that only a sustained  and substantial increase in supply will bring the housing market into broad balance. The latest completions data suggests that will take some time.

Irish House Building picking up, but still well short of demand

Contrary to perception, the evidence over the past 20 years is that the supply of Irish housing is responsive to demand. The geographical distribution of that supply  may be far from optimal at times but the national figures suggest that house building does indeed respond to price signals; completions amounted to 30k in 1995 and by 2005 had risen to 86k before falling away precipitously as prices tumbled, declining to a cycle low of 8.3k in 2013. The latter added 0.4% to the housing stock which is well below  the depreciation rate , a far cry from the peak of the cycle when the housing stock was growing by over 5% per annum.

National residential prices  have risen by 26% over the past  two years, and one might expect  this should prompt a significant supply response. That is certainly the case in percentage terms, although the absolute numbers are still very low by historical standards; completions rose by 33% in 2014 but still amounted to  just over 11k,  again well below the depreciation rate, which is probably around 0.7% or 14k given the current stock of housing.

A number of recent studies put the annual increase in demand for housing in Ireland at some 25k, although this is sensitive to assumptions about migration flows. The figure for Dublin (city and county) is around one-third of that total and supply is  clearly well below that, both nationally and in the capital. The Department of the Environment (DoE)  has just published completions for the first quarter of 2015, with a national figure of  2.6k. Again this represents a substantial percentage gain on the same period a year earlier (26%) but if replicated over the rest of the year would still leave annual completions in 2015 at under 14k.

The pace of completions may change, of course, but the traditional lead indicators have proven a less reliable guide in recent years. New home registrations have picked up but amounted to only 2.5k in 2014, with the discrepancy between that total and the completions figure partly reflecting the decline in the share of building accounted for by multiple developments (well below 50% in recent years) and the fact that the DoE data defines completions as housing connected to the electricity grid. The latter point may also be a significant factor in the dichotomy between commencement notices  and completions (7.7k of the former in 2014 versus over 11k of the latter). The relationship between completions and planning permissions is also not close, at least in the short term, and although permissions have picked up they are also running at very low levels ;  7.4k last year, up from 7.2k in 2013.

The latest  house building data also provides little comfort for those looking for a substantial rise in supply in the capital. Total completions in  Dublin city and county amounted to just 652 in Q1,  204 apartments and the rest houses. This is less than 25% of the national total, suggesting that supply in the capital is not only lagging demand but also not keeping pace with the increase in supply nationally.

The conclusion has to be that supply is indeed responding to the recent price appreciation but that the absolute numbers  completed are still very low and certainly still well short of what is generally felt to be the annual demand. Absent a demand shock, the housing market is likely to remain unbalanced for some time, particularly in Dublin.