Friday, April 5, 2024

On the Price and Quantity of Housing

Housing problems are complex but usually can be distilled back to a shortage of housing relative to demand. For those looking, it can be difficult to find somewhere to live, particularly for renters.  More housing makes it easier to find somewhere to live, though sometimes this is in dispute. 

Earlier in the week we had a opinion piece that focused on prospective homeowners with a broad focus on price and a limited view on supply.

On Price

The piece sets out findings of research undertaken by the Bank of England:

For every 1 per cent increase in lending rates, the researchers of Threadneedle Street found a commensurate 3 per cent decrease in house prices, and vice versa.


Another significant determiner of house prices is population growth. For every 1 per cent increase in the natural growth of households since 1990, the UK researchers found a 2 per cent increase in house prices. The same 1-to-2 per cent ratio also applies to immigration – people coming to work here.


And the third factor: wages. Each 1 per cent rise in incomes results in a 2 per cent rise in house prices.


Finally, housing supply itself. A 1 per cent increase in stock (some 20,000 houses) should theoretically reduce prices by 2 per cent.

The precise source isn’t provided but we will just taken them as given in the piece.  We will use the most recent intercensal period, 2016 to 2022, to do a crude approximation of the impact of these estimates if applied to Ireland.

Central Bank data shows that the interest rates on new business mortgages averaged 3.50 per cent in 2016. For 2022, this has declined to 2.68 per cent.  This gives a decline of 0.82 percentage points (which seems more relevant than the 30 per cent reduction)

The population data from the Census shows an 8.1 per cent increase over the same period.  The annual data from the Employment Costs Survey shows the yearly earnings of a full-time employee rising from €45,640 in 2016 to €54,189 in 2022, an increase of 18.7 per cent.

And again using the Census, the housing stock increased from 2,003,645 in 2016 to 2,112,121 in 2022, an increase of 5.4 per cent.

Applying the Bank of England’s estimates gives the following impacts on prices:

  • Mortgage Rates: –0.8 x 3 = +2.4
  • Population: +8.1 x 2 = +16.2
  • Annual Earnings: +18.7 x 2 = +37.4
  • Housing Stock: +5.4 x –2 = –10.8

It is all very crude but the sum of those impacts is +50.6 per cent.  The CSO’s residential property price index went from 107.5 in 2016 to 164.0 in 2022, a rise of 52.6 per cent.  I don’t know, it’s like this supply and demand stuff works, or something.

However, the negative impact on prices of the increase in the housing stock is dismissed in the piece because prices haven’t fallen as the housing stock has increased and “are at their highest level since the Celtic Tiger.” 

But the price effect of the increase in the housing stock is there! And, as done here, can be shown using the estimates provided in the piece.  Using those shows that house prices in 2022 would have been 10-11 per cent higher if there had been no increase in the housing stock since 2016.

The increase in the housing stock reduced house prices relative to what they would have been if that increase hadn’t occurred.  This is how supply and demand models work: relative prices, ceteris paribus etc.

The piece is right that interest rates have been a key driver of house prices in recent decades.  We examined that here which showed that even though price to income ratios have increased in Ireland, indicative initial mortgage payment to income ratios are actually lower than they were in the 1970s and 1980s.  This is the final chart from that post:

As was pointed out in the previous post it is with the deposit required that the most significant increases have been seen.  Higher nominal house prices (due to lower interest rates) have seen the amount required for a 10 per cent deposit rise from around a quarter of the average annual household income in the 1970s and 1980s to almost a half of household income now.

Ireland does not stand out as having unusually high mortgage payment burden. Here is OECD data on the median mortgage burden as a share of disposable income for owners with mortgages (with data for all bar five OECD member countries).

For newer and possibly larger mortgage burdens we can look at the housing cost overburden rate.  This is the share of households where housing costs consume more than 40 per cent of disposable income.  In this instance OECD data for both owners with mortgages and private tenants are provided.

Ireland is hard to locate in Panel A because Ireland has one of the lowest housing cost overburden rates for owners with mortgages in the OECD.  In Panel B it can be seen that Ireland has one of the highest housing cost overburden rates for private tenants in the OECD.  Whose plight is in need of easing?

On Quantity

The piece takes a very limited view of quantity: it’s new houses for first-time buyers or nothing, and is best represented by this paragraph.

In Dublin city last year, 94 per cent of all new housing was apartments, 98 per cent of which were for rent. First-time buyers there bought just 75 new houses. In Cork city just 3.5 per cent of all new housing was sold with first-time buyers buying 17 new houses. In 2017, over 80 per cent of all new scheme houses (what the CSO calls housing estates) was sold on the market, and last year that was 52 per cent. Individual buyers have been sidelined and forgotten by successive governments.

The figures for the Dublin City local authority area are correct but they are limited.  Per the CSO, there were stamp duty filings for 1,975 first-time buyer transactions in Dublin City Council’s (DCC) area in 2023. That’s a long way from 75.

The difference, of course, is explained by the most frequent type of property that is transacted: existing ones. Dublin City has a housing stock of around 250,000 units.  That most of the supply for first-time buyers comes from this should not be a surprise.

We can get insight into the composition of the housing stock in DCC’s jurisdiction from the Census.

The area has 150,000 houses – 60 per cent of the stock.  If 50,000 apartments are added, houses would still make up 50 per cent of the stock.  3,200 apartments were completed in the DCC area last year.

We can start to see if “individual buyers have been sidelined and forgotten” by looking at the national tenure status figures from the Census.

From Census 2016 to Census there was an increase of almost 140,000 in the number of households in Ireland.  Of this increase, 63,400 were owner-occupier households.

Somewhat unusually the next largest increase was for the “not stated” category.  Then comes the increase for tenants of local authorities and approved housing bodies which increased by just over 23,000.  The fourth largest increase was for households renting from a private household which made up 15 per cent of the total increase in households over the period.

The supplementary data to the CSO’s residential property price index gives details of the number of transactions. Between Census 2016 and Census 2022, stamp duty filings were made for 80,000 FTB transactions.  The figures show that there were 17,500 FTB transactions in 2023.

The breakdown shows that there were 5,000 FTB purchases of new properties and 12,500 FTB purchases of existing properties.  For the whole of Dublin, i.e. County Dublin, there were 5,000 FTB transactions last year.

On top of purchases, there will also be first-time owners due to single or one-off houses that are built for the occupier and will not have a stamp duty transaction to record.  5,500 single houses were completed in 2023.

On Homeownership Rates

Homeownership rates are used to highlight the plight of prospective buyers.

As the proportion of new housing for sale plummets, despite increasing overall supply, our home-ownership rates follow suit, and are now below the European average at just 66 per cent. Thirty years ago, 81 per cent of households owned their own home. That is a staggering drop in a short space of time, but the Government is remarkably silent on (or oblivious to) the issue.

Ireland’s homeownership rate has declined since 1991 but the Ireland of 2022 is very different to the Ireland of 1991.

In the 1991 Census, 98.4 per cent of the population of 3.5 million was born on the islands of Ireland and Great Britain.  The equivalent figures for the 2022 Census were 85.4 per cent of a population of 5.1 million.  The number of people living here who were not born in Ireland or Britain went from 55,000 in 1991 to 730,000 in 2022.

It is true that the overall homeownership rate declined from 80 per cent in 1991 to 69 per cent in 2022 (when households with a tenure status of ‘not stated’ are excluded).  However, what the various census results show is that this decline occurred from 20o2 to 2011, during which the rate declined from 80 per cent to 71 per cent.  The homeownership rate for All Households has been relatively stable since 2011.

The above chart also shows some outturns for homeownership by nationality – specifically the homeownership rate for all households and for those  headed by an Irish or UK national. 

As discussed, this was essentially the entire population in 1991, when the homeownership rate was 80 per cent.  The first time a breakdown of homeownership by nationality was provided was with the 2006 Census. 

Thus far, no results for homeownership by nationality have been published by CSO for Census 2022.  Going back to Census 2016, the homeownership rate for households headed by an Irish or UK national was 75 per cent.

Going from 80 per cent in 1991 to 75 per cent in 2016 is a decline, but not a staggering one.  The significant change in Ireland has been in the proportion of the population who were born somewhere else. 

In line with the experience elsewhere, immigrants have lower homeownership rates. Of the 150,000 households in Census 2016 not headed by an Irish or UK national, just 22,800 were owner-occupiers, giving a home-ownership rate for this cohort of 16 per cent.  Nearly three-quarters of such households are private tenants.

Finally, on homeownership rates, it should be noted that they are based on households that actually exist.  If there is not enough housing people may stay in owner-occupied households longer than they want to.  We previously noted that in the recent Census, Ireland was short around 70,000 households headed by under 35s.

Between 2011 and 2022 the number of people aged between 20 and 34 declined by 11 per cent.  However, the number of households headed by an under 35 declined by 30 per cent.  Many of these people are living in owner-occupier households but they are not the owners; they are living with their parents.

There has not been enough analysis of the impact of current policies. Some 68 per cent of Irish 25-29 year-olds live with their parents; in Finland this is 5.7 per cent.  We should be discussing that, or how a policy obsession with urban hyper-density housing and homes unsuitable for families has created unsustainable commuter sprawl under a Green Minister for Transport.

There is no doubt that there are more people living with their parents for longer, but a figure of 68 per cent is outlandish.  For a start, around a quarter of the population aged 25 to 29 are non-Irish citizens (69,000 out of 296,000 in the latest Census). It seems unlikely that a large share of those are living with their parents.

The figure comes from the SILC, and the CSO have set out the differences in figures for young adults living at home in this useful note.  In the 2022 Census, 33 per cent of young adults aged 25 to 29 were enumerated at their parent’s house on Census night.  This is still a high figure.  It is much higher than it was in 2011 (24 per cent) and far, far higher than it is in Finland.

If the share of 18 to 35 year olds living with their parents had stayed at the level it was in 2011, then almost 100,000 more young adults would have left the family home.  We might ask how does Finland do it.

They are not doing it through homeownership. Recent figures from Statistics Finland show that “eighty-one per cent of household-dwelling units of persons aged under 30 lived in rented dwellings.”  A household-dwelling unit is formed by all persons living permanently at the same address.  Separate figures show that they also tend to live alone.

Here are the population distributions for Ireland and Finland by type of household.

Over 20 per cent of Ireland’s population lives in households of three or more adults. These are the households of young adults living with their parents or young renters sharing a semi-d. In Finland less than four per cent of the population live in households with three or more adults. 

On the other hand, in Finland, nearly 16 per cent of the population are people younger than 65 living alone.  In Ireland, this group is six per cent of the population. 

Ireland has lots of dwellings that are suitable for families.  Over 85 per cent of our housing stock are houses, with 1.8 million houses in a total stock of 2.1 million dwellings.  What we don’t have, if we are emulate Finland,  are sufficient dwellings for households of one or two people, especially renters.

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