Ireland: Housing supply more responsive to costs than prices
Ireland: Housing supply more responsive to costs than prices
A paper (Housing prices, costs, and policy: The housing supply equation in Ireland since 1970 from Maximilian Günnewig-Mönert and Ronan C. Lyons) examines the determinants of new housing supply in Ireland from 1970 to 2022. Using various methods and data series, they find that supply is more responsive to changes in construction costs than housing prices.
Why it matters: Understanding what drives housing construction is crucial for policymakers looking to address housing shortages and affordability issues. The study sheds light on the complex dynamics in the Irish market and provides evidence to inform housing policy decisions.
By the numbers:
In the baseline model using planning permits from the 1970s, a 1% increase in housing prices leads to a 0.9% boost in supply
But a 1% rise in construction costs causes a 1.9% drop in permits
When using housing completions to measure supply, price, and cost elasticities are +0.65 and -2.4
For housing investment, the elasticities are +1.4 for prices and -1.2 for costs
The big picture: The Irish housing market has been on a roller coaster ride:
Real prices were largely stable until the Celtic Tiger boom years of the late 90s/early 2000s when they soared
Prices then plunged by over 50% during the 2008-2012 global financial crisis
Since 2012, inflation-adjusted prices have rebounded by almost 75% while completions remain low
The responsiveness of supply to prices (the price elasticity) has varied substantially over time:
It rose between the 1980s and 90s, peaking around +3 for permits and +2 for completions in the late 1990s
Then, it fell sharply in the 2000s to around +0.5 for permits and +1 for completions by 2010
But has risen again recently, exceeding +3 for both permits and completions by the late 2010s
Methodology: The researchers used several sophisticated statistical techniques and data series to ensure robust results:
Error-correction models (ECMs) to estimate long-run relationships and short-run dynamics
Instrumental variable (IV) regressions to address potential endogeneity issues
Analysis of different supply measures: planning permits, housing investment, completions
Examination of quarterly data back to 1970s for Ireland overall and Dublin and a county-level panel from 2001
Yes, but: Major tax breaks on construction costs from 1998 to 2008 muddied the waters. Gross costs shot up during this period as builders' net costs fell dramatically (up to 60%). This had both short-term and long-term impacts, temporarily boosting viability and supply but leading to a sharp rise in gross costs.
Supply responsiveness also varies within Ireland. Elasticities are lower in the capital, Dublin (with tight regulations), and the rural northwest compared to the rest of the country. The authors estimate price and cost elasticities for each of the 26 counties using the panel data from 2001.
Limitations: The study relies on macro time-series methods to reveal supply determinants. Future work could use more granular microdata. Data on build costs may also be imprecise.
Bottomline: Driving down construction costs may be even more powerful than rising prices alone for boosting housing supply in Ireland. As the country faces continued shortages, policymakers should prioritize improving the efficiency and productivity of the building sector, which could facilitate supply growth of 50% if costs fall by 19%. Reforming restrictive regulations, especially in Dublin, could also help.