Analysis: The role of private developers in the housing market is somewhat unusual compared to other European housing models
By Kieran McQuinn, ESRI
In new research the Economic and Social Research Institute has examined supply of housing across the Irish, Northern Irish, Welsh, Scottish, and English residential markets. Our approach focuses on substantive factors impacting the supply-side of the housing market including key costs of production, the regulatory environment and economic dynamics across the different markets. The aim is to see whether there are lessons which can be learned from evaluating the different markets.
The report suggests that across all housing markets, but particularly in the Irish case, the traditional financial sector does not appear to be able to provide the requisite amount of credit for the level of housing activity which has been deemed necessary to meet the underlying structural demand. With this in mind, increased Government investment in the form of expanding the level of social and affordable stock of housing available emerges as a key finding across all markets. The report highlights labour shortage in the construction sector as a key challenge for the expansion of housing supply across all housing markets discussed, with particular concern noted for the Northern Irish and overall UK markets due to Brexit related impacts. Overall the UK's decision to leave the EU will pose difficulties in terms of sourcing materials and labour for the construction sector.
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From RTÉ Radio 1's Morning Ireland, Prof Kieran McQuinn on his new research into housing supply in Ireland, Northern Ireland and the UK (clip begins at 1.53)
The report also examines the different planning systems across the markets and finds strong similarities across housing markets where Local Authorities formalise development plans, based on a housing strategy that is conceived at a national level. One issue which arises here is the efficiency of such a structure. There is a significant number of Local Authorities, particularly in Ireland, with each required individually to formalise their plans. Would a greater degree of aggregation be more practical in devising and implementing such development plans? This would appear to be particularly attractive in the case of the Irish and Northern Irish markets where there is a relatively large number of authorities given the population.
From the point of view of the Irish housing market, it would appear that the manner in which the UK authorities secure local buy-in to housing development plans has considerable merit. This seems to result in a greater sense of participation amongst the general public in the plan. It may also reduce the need for the Irish system to enable third party bodies to participate in the planning system in the manner in which they do. This does appear to be an outlier even across the broader European housing market.
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The report highlights that the role of private developers across Ireland, Northern Ireland, Wales, Scotland and England, and how they operate in the market for land, is somewhat idiosyncratic compared to other European housing models. The report suggests that greater regulation in the provision of land for housing could help to reduce the role played by speculation in land prices, and hence lower the cost of a key factor of production.
Use of modern methods of construction (MMC), a range of innovative construction processes such as off-site manufacturing, modular construction panels or light steel framing, structural insulated panels, or cross-laminated timber, will be increasingly important for construction sectors generally and particularly in the case of those in Ireland and the UK. This is because, as noted previously, Irish markets have been particularly scarred by the after-effects of the Global Financial Crisis, with supply especially adversely impacted.
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Measures which can improve productivity within the respective construction sectors will be increasingly important and especially measures which can facilitate the construction sector meeting targets set in the Climate Action plan. Some of these targets for 2030 include retrofitting 500,000 dwellings to BER B2 rating, putting heat pumps into 400,000 existing and 280,000 new dwellings, and decreasing embodied carbon in construction materials produced and used in Ireland by at least 30%. These are ambitious targets which will require much of the same resources as the construction of new residential units. This further highlights the importance of expanding labour supply and increasing productivity in the construction sector.
The report also contains a detailed empirical section which examines the relationship between house prices and supply over time. The results of this suggest differing relationships between the supply and demand of housing across the various markets. The results presented, for example, suggest that the higher the percentage increase of people employed in the construction sector, the more responsive the level of investment to a change in house prices. This suggests that a housing market with a greater increase in construction workers is less likely to face bottlenecks in different segments of the market in response to an increase in housing demand. This has interesting implications with regard to the construction industry’s capacity to meet the observed shortfall in supply, witnessed particularly in Ireland and Northern Ireland.
Kieran McQuinn is a Research Professor who works on the quarterly economic commentary (QEC), macroeconomic and housing related projects at ESRI. He is currently Adjunct Professor of Economics at Trinity College Dublin.
The views expressed here are those of the author and do not represent or reflect the views of RTÉ
