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Increasing housing supply won’t reduce prices

Government in thrall to vested interests and risks return to boom and bust

The Construction Industry have said for years that “increasing supply (housing) will reduce prices”. The government have accepted this as fact and current policy is driven by it.

The graph below is compiled from Central Statistics Office (CSO ) data for 1975-2015 and includes monthly new home completions and monthly average new house prices in that 40-year period. The information has been directly imported from the CSO website and has not been weighted or adjusted. House prices are for new homes only and 1975 is the reference starting point for both curves.

Ireland: House Completions vs New Home Prices 1975 – 2015

It calls into question that the perceived wisdom of current government policy.

The relationship of price to supply appears inelastic; in other words, increasing supply does not reduce cost and in fact the opposite appears to happen (similar to luxury goods). 40 years of CSO data suggests that increasing house prices leads to increasing completions (lead and lag noted). To an architect or builder this makes sense as developments are sales-sensitive and will only proceed if there is enough of a margin to get developers up in the morning. Similarly, phases are delayed if there is any drop in prices.

The incorrect assumption, that increasing supply will reduce prices, underpins Government policy aimed at the speculative residential sector: inappropriate pro-cyclical measures (First Time Buyers grant), the reduced apartment-size standards introduced in 2015, the elimination of the local authority role in adjudicating planning applications for over 100 housing units etc.

These initiatives are like a landowner’s wish list and disproportionately enhance site values, minimise public input and erode our two-tier planning system.

This casts doubt over the competence of Department of Housing officials who advise the Minister and explains the disproportionate influence of vested interests on policy.

The net result of current government measures will be to inflate asset prices and consequently increase supply (mid and high end)- not necessarily a bad thing. However, in the absence of any balancing measures aimed at lower-income households, affordability will remain a major problem. Longer commutes to affordable areas outside the capital may become the norm with infrastructural pressures and issues of sustainability as a result. This is happening in the rental sector already.

Notable measures that have not been considered for affordable housing include government interventions such as: co-housing, state direct procurement, state financed home-ownership etc. Cost-benefit analyses of such measures are sorely absent from the discourse. Correlation does not mean causation. There are other drivers of demand not shown such as net migration, obsolescence, household formation, interest rates etc. However the graph illustrates that an increase in house supply has not been accompanied by a reduction in prices in 40 years.

Unfortunately recent policies conduce to the boom-bust cycle we are supposed to abhor.

Maoilíosa Reynolds is a Registered Architect and Certified Passive House Designer.