Why the housing crisis is going to continue for decades, not years.
This article first appeared on RTÉ BRAINSTORM @RTÉBrainstrom at this link
Thomas Friedman published a book called ‘The World is Flat’ in 2005. It has become one of the most quoted books of the 21st century. However, the idea that the world is flat is really only in certain economic areas such as where goods are standardised. The world is also simultaneously becoming spikey in areas where the knowledge to produce creative ideas and innovations is becoming more complex and detailed. In fact, even with advances in transport technologies and the internet, economists argue that the world is steeper and spikier, than it is flat. Standards of Living, firm productivity, patent activity and quality of life measures are very different between and within countries.
What has this got to do with housing you may ask? Well, the spikes in these measures are happening in urban areas. Cities of higher, more densely confined populations are driving prosperity. Even with better technologies in transport and computers, people require face to face interaction and this overwhelming fact is shaping how we live and where we want to live. The past century has seen a large migration of the human race from rural to urban areas. By 2050, Eurostat predicts about 80 per cent of the European population will be living in Urban areas. Despite this fact, Irish planning policies tend to fight against the move towards urbanism. The ESRI in a report in 2016 on ‘Housing Supply Issues’ noted that although housing completions have increased since 2013, 60 percent of new units completed since then have been in areas outside the major urban centres. The report further identified that in Dublin, an average of 600 new units per quarter, or less than 2500 per year have been completed. This is significantly less than the quantity required with an estimated 25, 000 extra units needed each year in Ireland, in the short to medium term, to meet demographic change. A comparison of the current levels of completions indicates constraints to supply in city areas, which may include a lack of development sites and higher development costs.
In Cork, our councillors are actively constraining advancement of the city with an ongoing city boundary dispute between the city and the county council. Protection of county interests appear to be driving the resistance to change. From 1971 to 2016, over 100,000 houses were completed in County Cork and less than 30,000 were completed in Cork city. For 50 years, largely, we have been building houses where people do not want or need them. And, in locations that are further from people’s places of work. We have constrained the supply of development land around our cities in favour of development towards more unsustainable locations in more rural commuting towns. And, further by constraining the supply of land, we have transferred the wealth created from younger families to landowners. Before the financial crisis, house prices rose to three times what they were in 1995, in real terms. This was the largest increase in the OECD. We transferred a high proportion of our increases in wealth into pieces of land. Collectively, it is sheer madness. We are turning land into gold. From this, you would think land is scarce. In the 2011 census, urban areas only represented 2.4% of the total land area in Ireland. We are not covering the countryside in concrete. In fact, most urban areas are made up of green spaces we enjoy such as gardens and parks.
With increasing population, we need to change the incentives towards land if the housing crisis is to ease. Currently, the housing completions per year are way off where we need to be. Investors are also hoarding land in the expectations that the price will continue to increase. The Irish further increasingly show a distaste for building up, so instead we will be forced to build out. As a result, we will need to substantially increase the areas of potential development availability around our urban centres. This signal will ensure that land investors do not sit on their investments for long periods as land prices will be more uncertain. This development land needs to be in the right places around our main cities where people actually want to live. In Cork for instance, the greenbelt needs to be unlocked. The millennials do not want to make the investment mistakes like those of previous generations. They will not be caught up in a bubble of buying three bed semi-detached houses in Kanturk or Ladysbridge. Further, we need a land value tax. There must be a cost to hoarding and land must be seen as a financial liability. This will encourage investors to use the land rather than hoard the land. Also, the value of land is high in urban areas due to the high population in that area, not because the land is any better, so there should be a benefit funded through taxes, to the general public. Finally, we need to build social housing. The private free market is a great way to allocate the resources in society, but it has limitations. The cost of housing is currently only manageable for above average and high income families. We need public housing to address shortages in housing for lower income groups.
However, these remedies will involve political leadership. I do not expect that in the short or even medium term. There is an election on the horizon and there is no way our political parties are going to take on the vested interests associated with land ownership. They are vast, from developers to ordinary householders. Most of us have a stake in in the value of land. In all, without the will for change, our housing crisis is going to continue indefinitely into the foreseeable future.