Ireland’sHousing Need & Policy Options: An Overview

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Ireland’s Housing Need & Policy Options:An Overview Ronan Lyons, Identify Consulting For: Irish Institutional Property August 2020

Structure Medium-term Need Current Context Policy Options

There are four principal sources of housing demand in any economy –some of which are more responsive to external conditions than others Four principal sources of housing demand1. Natural increase: changes in the native-born population, in particular in household-formingcohorts – best measured by comparing the 25-34 year-old female cohort with an oldercounterpart (e.g. 65-74 or 75-84 year-olds) – largely exogenous to economic conditions2. Net migration: movement of people into the economy – in Ireland, hugely endogenous toeconomic conditions3. Change in household size: determines the number of dwellings given a population – long-runtrends largely exogenous but short-run trends hugely depending on housing supply4. Replacement of obsolescent stock: each year, a small fraction of existing housing falls out ofuse – this will be higher in economies with greater internal migration (e.g. urbanisation) These cover all tenure types – owner-occupied, private rental and social The spread of housing demand within the Irish economy depends on preferences (e.g. urbanisation)but also public policy

The first two sources of demand – natural increase and net migration –currently translate into at least 30,000 homes needed per yearEstimated housing demand, by source(population increase only, 000s) 30,000 homes a year are needed to meet likelypopulation changes alone60 Natural increase peaked in 2010 and will level off 17,000 per year by 2020s50403020100-10Natural increaseNet 2012201120102000s1990s1980s-20TotalSource: CSO. Notes: Net natural increase is calculated by the difference between 25-34 and 75-84 femalecohorts; net migration is converted from persons into 2-person households; projections for 2020s and2030s based on CSO population projections (including average of M1/M2 scenarios for migration) Offsetting this is increasingly positive trends inmigration Emigration fell 2010-2014 and each yearsince 2015 has seen larger numbers of netmigrants into Ireland Official migration projections are relativelysimplistic, with a baseline case of 30,000 peryear (vs. 34,000 in 2018)

The natural increase in the population in Ireland is by far the largestin EuropeNatural Change, as percentage of 2017 adult erlandsBelgiumSlovakiaAustriaCzech ulgariaIreland-1.0%Source: Eurostat

Net migration has been positive and growing since 2015 – everyextra 10,000 migrants require on average 4,000 new dwellings,principally in the cities150100500-50Irish (I)UK (I)EU15 (I)NEU (I)Other (I)Irish (E)UK (E)EU15 (E)NEU (E)Other (E)Net 008-1002007 Every additional 10,000 migrants require onaverage 4,000 dwellings Non-Irish households have a lowernumber of people per HH than theaverage: 2.52 vs. 2.73 in Census 2011Immigration (I) and emigration (E), byyear and nationality (000s), 2006-20182006 Annual gross migration to Ireland between2010 and 2018 more than doubled from42,000 to 90,000 Emigration fell from 80,000 to 56,000 inthe same period, resulting in a swingfrom net emigration of 27,000 in 2010 tonet immigration of 34,000 in 2018 The fall in emigration is driven by fewerIrish leaving minus the rise inimmigration by more non-EU nationalscoming to IrelandSource: Census, CSO; “NEU” refers to new (post-2003) EU Member States

Ireland has Western Europe’s largest average household size –but it has been falling steadily over the last five decadesAverage household size in Ireland,by yearAverage household size, by talySpainGreecePortugalIreland0.00.50.01966 1971 1979 1981 1986 1991 1996 2002 2006 2011Source: Hypostat 2016; Census of ireland (various issues)

Two thirds of the growth in Irish households since 1996 has been 1-2person households, who now form the majority of households in Ireland The number of Irish households grew by50% between the 1996 and 2016 Censuses –from 1.1m to 1.7m Of the 580,000 new households, two thirds(390,000) were one or two personhouseholds This represented 80% growth, from0.5m to 0.9m households 1-2 person households have increasedfrom 44% to 52% of all households inIreland A further 40,000 new households were‘crammer’ householdsNumber of households (000s),by size and Census 00200499019961-2 persons20163-5 persons6 personsSource: Census of Ireland (various editions)

Average household size rose between the 2011 and 2016 Censuses – butthis was driven by scarcity rather than demographics In the 2016 Census, the average householdsize in Ireland was 2.75, up from 2.73 in 2011 This was not driven by a baby boom Households with children made up 63%of the population in 2011 but just 48%of the population growth 2011-2016 ‘Crammers’ (households with unrelatedparties) made up 15% of the 2011population, but 35% of the 2011-2016growth In order to fall to 2.6 – in line with recenttrends – Ireland would have required anextra 120,000 dwellingsIrish households, by type, 2011-2016100%90%80%70%60%"Crammers"50%With othersWith children40%No children30%20%10%0%2011 population2011-2016 growthSource: Census of Ireland (various editions)

Household growth 2011-2016 was driven by three groups: olderno-children households in rural locations, families in towns, and‘crammers’ in DublinChange in number of households, by broad type and size, sNo kids5,0000-5,000DublinOther CitiesTownsRuralSource: Census of Ireland (various editions)

‘Crammer’ households keep household size high – demographicsimply a true household size in 2016 closer to 2.4, requiring anadditional 217,000 householdsHousehold size, actual and calculated from demographics, by region(and implied housing need), ,0000.000DublinOther CitiesTownsRuralAverage household size,implied by demographicsActual average householdsize (2016 Census)Estimated dwellingsrequired to achievedemographic householdsize (RHS)StateSource: Calculations, based on Census of Ireland (various editions)

If Ireland’s average household size converges to the European average, itwill create major demand, especially for homes for smaller householdsNumber of extra dwellings required (000s) for apopulation of 4.8m, for different average householdsizes (relative to 2.3 Even with a fixed population, arise in the fraction of 1-2 personhouseholds creates demand fora significant number of newdwellings Relative to a 2.7 averagehousehold size, a population of4.8m with an average householdsize of 2.5 requires 142,000 extradwellings This is the equivalent of 11years construction output at2015 rates Convergence to EU averageof 2.3 would require anadditional 300,000 dwellings-150Source: Author calculations

On demographics, the overall picture is clear: Dublin has a relativelyhomogenous housing stock that is ill-suited to meeting the diverseneeds of its 582322333-5 persons/5-9 rooms1-2 persons/1-4 roomsHouseholdsDwellings0GDAOther674422Households Within multifamily, there is a need at all lifecyclestages – from student accommodation toassisted living The largest gap likely relates to housingworkers, including those moving to Irelandfrom overseas, both long- and short-stayHouseholds by number of persons and relateddwelling stock (000s), 2016Dwellings In total, Dublin is missing roughly 125,000multifamily apartment dwellings The Greater Dublin Area is home to 360khouseholds of 1-2 persons but has just 230k dwellings of for 1-2 personhouseholds In contrast, it has a surplus of 100k familyhomes, given its population structure The mismatch is even larger outside GDA:between 250k and 300k unitsEx-GDASource: Calculations, based on Census of Ireland

Ireland is a laggard in urbanisation – but as it continues to urbanise,this will concentrate housing demand in and around its largest cities1960-2016 change1001960 al Since 1960, the fraction of people in high-incomecountries living in cities has risen from 60% to 80% Ireland is only now at 64%, having been at 46%in 1960 Over the coming half-century, this is likely toincrease to at least 80%, creating significantdemand for urban housingUrbanisation rates, 1960-2016 bycountryIreland Urbanisation is at the heart of economic growth Cities allow specialisation (more productivelabour) and agglomeration (more productivecapital and land) Density also allows cheaper utilities and awider variety of public/private servicesSource: World urbanisation Prospects, 2016

Ireland’s labour market is as urbanised as other high-incomecountries – meaning its under-urbanisation reflects inadequatehousing close to citiesInequality curves of place of residence and work, Ireland(2016)100%90%Cumulative total ofpopulationTop 20% of Census districts account for: 83% of work – in line withurbanisation rates elsewhere in thehigh-income world 65% of residents – Ireland’s lowurbanisation ool10%0%0%10%20%30%40%50%60%70%80%Cumulative total of census districtsHow to read this chart:On the horizontal axis, going from 0% up gives the totalfraction of workers or residents in the bottom x% of Censusdistricts. For example, going to 40% on the horizontal axis, thebottom 40% of Census districts account for less than 5% ofworkers – but almost 10% of residents.90%100%Most densely populated 20% ofCensus districts (i.e. Irish cities)Source: Calculations, based on Census of Ireland POWSCAR 2016

Related to urbanisation, obsolescence also creates housing need –with Ireland’s dwellings skewed to older/rural stock, over 10,000homes are needed each year to keep stock constant Almost two thirds of Ireland’s stock ofdwellings is in rural locations Ireland is experiencing delayedurbanisation – one that is being spatiallyskewed by land-use restrictions 150,000 households (9%) live in dwellingsthat are 100 years old 6.3% of Ireland’s dwellings are buildings100 years old in rural locations If 5% of old urban stock and 10% of old ruralstock falls obsolete annually, 13,000 to“stand still”Ireland’s Dwelling Stock, by 01-20052006 NSSource: Census; “NS” Not Stated

For 2020-2025, demand for housing nationwide is likely to be47,000 per year – compared to a target of 25,000 per year inIreland ,5005,000Natural Increase18,5007,400Net Migration8,0003,200Total47,00018,100Rounded estimates of new units required in Ireland andin Greater Dublin area, per year, 2020-2025Assumptions: 0.4% obsolescence, a fall in household size to 2.5 by 2035, andnatural increase (as defined by 25/34-75/84 cohort difference) of 18,000 and netmigration averaging 20,000 per year (in 2.5 person households due to dwellingmix) Available evidence suggests underlyinghousing demand of 47,000 homes per year This covers all elements of demand,including owner-occupied, rental andsocial housing While 25% social is common in manycountries, it seems unlikely that more than10% of new construction will be social Major policy reforms, e.g. implementingcost-rental, could change this Of the remainder, current trends suggestthat 60% (28,000) are needed for owneroccupancy, with the other 30% (14,000) forrental

Structure Medium-term Need Current Context Policy Options

After roughly six years of strong inflation, sale prices in Ireland have nowstabilised, having risen by 50% but remaining 30% below 2007 peak levelsNational sale price inflationAverage sale price, by market8% 500,00020%Quarterly 450,0006%15%Annual 400,000-20%NationalDublinOther 2-15% 02006q1 2008q1 2010q1 2012q1 2014q1 2016q1 2018q1 2020q12018q2-6% 50,0002017q2-10%2016q2-4%2015q2 100,0002014q2-5%2013q2-2%2012q2 150,0002011q20% 200,0002010q20% 250,0002009q25%2008q22% 300,0002007q210%2006q24% 350,000Source: Analysis of Daft.ie Report

The ending of sale price inflation comes as the stock and flow ofproperties available has increased significantly in recent quartersFlow of sale listings during quarter,by market, since 2007Stock available to sell, by ,00020202019201820172020Other (RHS)2019Dublin 0020,00020146000Dublin201314000Rest of Leinster2012600030,000201116000Rest of rce: Analysis of Daft.ie Report

Rent inflation has slowed in 2019, but rents have risen for 29 consecutivequarters, nearly doubling in total and 35% higher than the previous peakAverage monthly rental price, bymarket 2,500National rental price inflation8%20%Quarterly6% 2,00015%Annual-20%DublinOther nal2019q2-15%2018q2-6% 02006q1 2008q1 2010q1 2012q1 2014q1 2016q1 2018q1 2020q12017q2-10%2016q2-4% 5002015q2-5%2014q2-2%2013q20%2012q20%2011q2 1,0002010q25%2009q22%2008q2 1,5002007q210%2006q24%Source: Analysis of Daft.ie Report

In the private rental market, availability remains at extremelylow levelsFlow of rental listings during quarter,by market, since 2007Stock available to rent, by 142013201202011202020192018201715,0002010Leinster (RHS)20,0002009OtherDublin (RHS)Dublin2008Conn-URest of 92008020070Rest of CountrySource: Analysis of Daft.ie Report

The overwhelming evidence from both sale and rental marketsin Dublin is that availability is the key determinant of subsequentprice changes: supply mattersR² 76%10%8%6%4%2%0%-2%-4%-6%-8%1500Scatterplot of Dublin rental listingsand quarterly changes in rents,2006-2019y -0%x 7%Quarterly change in Dublin rentsQuarterly change in Dublin sale pricesScatterplot of Dublin sale listingsand quarterly changes in saleprices, 2006-2019 y -0%x 11%300045006000Stock on Dublin sale market, 1st day of quarter750010%R² 59%8%6%4%2%0%-2%-4%-6%-8%15003000450060007500Stock on Dublin rental market, 1st day of quarterSource: Analysis of Daft.ie Report

But since the crash, supply (of all forms) has been inadequate – and recentimprovements still fall short of underlying demand (47,000 per year)New dwellings commenced, by local authority and 500200020001500150010001000500500Ex-GDAGDADemand (40k)Demand ource: Analysis of Census, CSO and Department of Housing figures

Ireland’s housing is out of line not only with its own demographics, butalso compared to all other European countries, where typically 50% ofdwellings are apartmentsFraction of dwellings in BelgiumNetherlandsIreland0%10%20%30%40%50%60%70%

Significantly higher gross yields on homes for smaller householdshighlight the concentration of future demand in 1 or 2 bedroom homesAverage gross yield for residential real estate, mid-2019, by property size and lway CoTipperaryOffalyLaoisLimerick d CityWaterford CoCork CoLouthLimerick CityMeathKildareGalway CityCork CityDublin 17WicklowDublin 22Dublin 10Dublin 24West DubDublin 11North DubDublin 15Dublin 12Dublin 20Dublin 5Dublin 9Dublin 13Dublin 7Dublin 8Dublin 16Dublin 1Dublin 18Dublin 3Dublin 14Dublin 6WDublin 2South DubDublin 6Dublin 40%Source: Analysis of Daft.ie Report; Markets are sorted from left to right by the 2019Q2 price of a 3-bed semi-detached propertyNote: gross yield calculated as the annual rent divided by the capital value, for particular property type-location combinations

Little evidence that Dublin’s population share is too big –smaller populations mean bigger share in largest cityShare of population in largest city, European countries (n 42)y -144%ln(x) 423%R² 60%100%Malta80%NorwayIreland (Rep)Luxembourg60%DenmarkFinlandIreland (Island)40%Germany,Turkey20%0%121313 0.4m141516Population in logs1718192019 178mSource: Author calculations, based on jakubmarian.com, Wikipedia/CIA World Factbook

In fact, Dublin has gone from largest importer to largest exporterof people within Ireland – with consequences for commuting andquality of lifeFraction of commuters with a ‘longcommute’ by distance/timeNet difference between population by countyof birth and county of residence 5%-15010%1996-200Dublin2002Kildare, Meath& Wicklow2006Rest ofLeinster2011Munster2016ConnachtUlster% travelling16km or more% travelling 30minutes ormore5%0%1981 1986 1991 1996 2002 2006 2011 2016Source: Author calculations, based on various issues of the Irish census

The location of new housing supply has been inadequate, with theemergence of a 100% Dublin housing price premium in recent decadesDublin/Rural Ireland housing price 01320142015201620172018201920200%Unweighted averageNew to 2nd handListings (adjusted)Rents (adjusted)Source: Author calculations, based on Department of Housing statistics (1970-2005) and Daft.ie Report (2006-2019)

And the mix of new housing supply has been inadequate, with the newhomes built increasingly out of sync with Ireland’s household structureNumber of households (000s),by size and Census 86801257411,000600New dwellings completed inIreland, 1996-2015 (thousands)886215237117153675k smallerhomes needed,175k deliveredvs.175k largerhomes needed,675k delivered499019961-2 persons20163-5 persons2016*6 personsUrban/GDA aptsUrban/GDA housesRural aptsRural one-offsOther ruralSource: Author calculations, based on CSO Census and Dept of Environment/Housing statistics

In recent years, affordability has deteriorated, with rent and sale pricesrising faster than incomes.Average rent to average incomeAverage FTB house price to average 0Q1Double-room in Dublin, one income1999Q10%1998Q13-bedroom house in West Dublin, 42019Q310%Source: Analysis of CSO, OECD, PTSB and Daft.ie figures

However, supply is determined by viability, not affordability – andviability is extremely challenging for apartments in Ireland For apartments in Dublin, construction costs are 225,000 per unit excluding site costs and land Costs rise to over 300,000 when legal, planningand finance costs are included (details are shownon the graphic) The addition of land, VAT, levies and equity sees thefinal cost rise to over 460,000Source: Dublin Residential Cost Benchmark (2020) by Linesight construction consultants for IIP32

One of the main reasons supply of new apartments has been so weak isthat total construction costs in Ireland are high by internationalstandardsListed cost, per m2 of internal space, of building mid-rise, medium-specapartments, by city and year 3,000 2,500 2,000 1,500 1,000 500 arsawMadrid2020eBelfast2021fEdinburghSource: Analysis of Turner & Townsend International Construction Market Survey, various issues

Build costs for suburban homes (excluding land, government tax anddeveloper’s profit) are between 2,100 and 3,000 approx. per squaremetre. Apartments are more expensive to build than houses.Build cost per m2 of suburban housing, by type in 2020 Q1ConstructionSales and marketingSuburban apartmentPlanning, professional fees,complianceDevelopment staff, legaland administrationContingencyPart V costsSuburban townhouseFinance and bankingIrish Water and utilityconnections 0 500 1,000 1,500 2,000 2,500 3,000 3,500Source and notes: Figures based on analysis provided by Linesight to IIP for dwellings with 100m2 gross floor area (83m2 nett floor area for apartment dwelling types).Figures exclude site acquisition costs, cost of equity capital/profit, and tax, as well as costs relating to any abnormal ground conditions or contamination.For City Centre / Complex Build cost may be up to 20-40% higher depending on site conditions, height, specification and the like. Other assumptions available on request.

Looking ahead, permissions data suggest that new estate houses willcontinue to come on to the market in 2020 and 2021 and, from 2021,apartments too. But level of supply far behind projected demand.Dwellings completed and units grantedpermission (lagged), by quarter and type of5,000housingPipeline of new apartments (as 12015Q12014Q12013Q12012Q12011Q104,0002,0000Dublin CitySouth DublinNorth DublinCompletions - one-offCompletions - estateCompletions - apartmentsPlanning - one-off ( 2Q)Under constructionPlanning consentedPlanning - estate ( 6Q)Planning - apartments (10-12Q)Planning submittedPre-planningLevel of supply far behind projected demandCorkSource: Analysis of CSO and Department of Housing figures; LIV Consulting

Structure Medium-term Need Current Context Policy Options

Ireland has a persistent underlying medium-term need for significantadditional housing – 47,000 units per year, concentrated in smallerurban homes To recap, there are four main sources of housing demand Two relate to a growing population - natural increase and net migration The other two are household size and obsolescence The four sources combine to create a new for 47,000 new housing units per year The bulk of new homes needed are:(1) for smaller households and(2) are concentrated in and near the main cities There are three main segments in the housing system: owner-occupied, private rental and socialhousing The owner-occupied sector looks largely in balance, with a significant increase in construction since2015 meaning that supply appears to be meeting demand The other sectors, however, still look chronically under-supplied and account for the majority of the 25,000-unit shortfall between completions and underlying need

Higher up-front costs for smaller homes in or near cities mean thereis a tension between viability (sale/rental prices exceeding costs) andaffordability (prices being in line with incomes) Construction costs in Ireland are very high, compared both to average local incomes and to costs inother jurisdictions The latest evidence is that, for a 2-bed apartment in Dublin’s outer city / suburbs, all-in buildcosts are approximately 300,000 for a 83m2 home If it is a city centre / complex build, the same 2-bed apartment could cost up to 20-40% higherdepending on site conditions, height, specification and the like Without public subsidy, these costs are borne by the ultimate occupants in the sale or rental price In other words, high construction costs present a challenge between viability and affordability The higher costs are, the less affordable new homes will be The higher costs are, the higher the break-even rent denoting viability Very high construction costs require urgent addressing by policymakers – but, even with politicalwill, it is unlikely to be fixed within 3-5 years ‘Soft costs’ of construction – including taxes – may be easier to change quickly than ‘hard costs’,such as labour and materials

The importance of financial and environmental sustainability placessignificant constraints on government policies to boost housing supply The Celtic Tiger bubble/crash episode provides a stark warning about the potential consequences ofgetting around high construction costs through increasing leverage The typical deposit paid by a first-time buyer fell from 25% in 2000 to less than 5% by 2006 –with a dramatic increase in the ratio of mortgage credit to household income The subsequent dramatic rise and fall in property prices has led to the adoption of Central Bankrules that limit the leverage individual households can take on for property purchase At the same time, the move towards energy self-sufficiency to address the climate challenge affectsthe potential to reduce build costs Nearly Zero Energy Building (NZEB) standards impose up-front costs for significant futurebenefits This creates a capital market policy puzzle: if the amount of debt an individual household cantaken on is capped, how will investment take place in assets with high social returns, such asNZEB?

In the context of high costs, rent controls would have serious negativeconsequences for new supply – a cost-rental approach isrecommended instead for alleviating this burden Ireland’s housing context over coming decades will be defined by the climate challenge, demographicchange, and the drive towards greener, denser living Private rental and social rental will be central modes of tenure in meeting Ireland’s substantial housingneeds over coming decades Those housing needs will also be increasingly differentiated over the life-cycle, from purpose-builtstudent and co-living accommodation for younger households to independent and assisted livingcomplexes for older households Given high costs, controls on rent levels for newly built homes will significantly exacerbate the shortageof non-owner-occupier housing Policy should instead focus on cost-rental schemes. (Cost rental is a mechanism whereby rent coversthe cost of construction and long-term maintenance only. Building on state land can further reduce thecost). If home ownership remains a policy priority, then Shared Equity and Shared Ownership housingschemes are also open to policymakers

Where home-ownership is a policy priority, two further policy optionsare Shared Equity Housing and Shared Ownership Housing

Ireland’s Housing Need & Policy Options: Conclusion This report has examined Ireland’s housing need and the policy options available to meet that need The composition of housing need in the medium-term will likely be driven by three factors:(i) falling household size (ii) urbanisation and (iii) environment sustainability All three factors imply a need for much greater diversity of housing options, especially for smallerhouseholds in and close to Ireland’s major cities The current context is one of strong demand and, with the exception of owner-occupied housing forlarger households, continuing weak supply The lack of responsiveness of new supply is ultimately a product of high construction costs, withviability (the price-cost ratio) well above normal levels of affordability (the price-income ratio) for mosthouseholds and areas In addition to reducing costs, policy options include cost-rental, shared ownership and shared equityschemes

Two thirds of the growth in Irish households since 1996 has been 1 -2 person households, who now form the majority of households in Ireland The number of Irish households grew by 50% between the 1996 and 2016 Censuses – from 1.1m to 1.7m Of the 580,000 new households, two thirds (39

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