We should have known: no sooner have house prices started to recover than talk turns to housing market bubbles.
It’s well known that human perceptions and interpretation of events are excessively influenced by recent past events, and here is a very good example. The facts, however, suggest something rather different.
At Least Three Housing Markets
For a start, there is not much point in talking about ‘the housing market’ in Ireland. We have at least three quite different markets.
The first is Dublin and we can include in that market the inner commuter areas such as parts of East Meath, North East Kildare and North Wicklow. Prices have started to rise strongly in this market.
The second market is the Dublin commuter market stretching to about 1 hour travel time into surrounding counties, along with Cork and Galway. Other urban areas such Limerick and Waterford may join this market in time. Prices have stabilised and started to rise in these areas, albeit at lower rates than in Dublin and from a much weaker level.
The third market is the remainder, not because it is a cohesive area, but because prices have not yet stabilised.
There is another characteristic of this categorisation that is worth noting.
The area in the Dublin market is generating recovery based on a critical mass of skills and infrastructure and Dublin’s position as an EU capital city. As it recovers, this recovery will spill over into the area of the commuter market along the lines envisaged in the National Spatial Strategy.
A different way of putting this is that supply side policies, in other words, those that emphasise and prioritise competitiveness, work in these areas.
This is not so in the third area and regional policy focussed on redistribution will be required. However, this is off the table at the moment and the ‘shortage of funds’ argument has validity.
A Failure of Policy
As always, we must create wealth before we go about spending it. But this does not excuse the failure to engage in any creative thinking about how we might formulate the required policies when the recovery gathers steam.
This failure in many areas of policy is one of the most symptomatic features of the crisis management mindset that still dominates even though it has been slowly morphing over recent months into a sort of ‘how to buy the next election’ policy.
Back to the housing market and there is a serious logical fallacy in much of the discussion.
It starts with looking at price performance and then quickly evolves into interpretation of what this means based solely on this performance.
The problem is that this ignores the fact that prices are the outcome of a process and understanding that process requires examination of the inherent fundamentals. In other words, start with looking at supply and demand.
We know that Ireland requires about 25,000 to 30,000 new residential units per annum. Based on demographics, these are needed with about an even split across the three markets described.
However, there is an over-supply in the third market and so we probably need about 20,000 new units to be built per year currently, rising to perhaps 25,000 annually as the recovery progresses. However, construction has been running at only about half this rate and of the number being constructed perhaps half are once-off houses that are built by people intending to live in them.
The important point is that such construction takes place even in areas where there is excess supply and where there is little economic recovery.
A Housing Market Bubble?
And so there is a shortage of supply to meet demand in Dublin. Prices rise as a result.
So, is there a bubble? The clear and simple answer is no, there is no bubble.
A bubble arises when unsustainable levels of demand push up prices because supply cannot respond adequately.
This definitely existed in 2003 to 2005 at which time supply began to grow strongly in response to very high demand. However, that level of demand was built on unrealistic expectations, not on fundamentals.
What’s happening now is that there is a fairly low level of demand due to the ongoing failure of the banks, but supply is far below the sustainable level of demand that might be expected given the demographic structure of Ireland.
The problem is one of inadequate supply, not unsustainable demand. And unlike unsustainable levels of demand which will eventually collapse, inadequate levels of supply cannot suddenly change.
So there is no bubble. Prices in Dublin have just returned, albeit rather suddenly, to their ‘normal’ level, as has been pointed out by the Central Bank.
The rate of change cannot be sustained and it is not unrealistic to expect that there could be a correction down the line if there was a slowdown, such is the level of background ‘fear’ about property.
But this is a very different scenario to a bubble bursting and is just normal market behaviour in response to underlying supply and demand.
This conclusion is based on proper quantitative and logical analysis of the facts rather than a desire to find headlines to sell newspapers or commentary to fill up media chat shows.
Attention should now turn to fixing the problems of supply in Dublin and regional performance elsewhere.