Ireland’s housing problem is a microcosm of a global one

In the face of runaway house prices, German authorities in 2014 set up a construction cost reduction commission. The objective was to identify the key drivers of construction costs, which had spiralled.
Germany used to be one of the go-to destinations in Europe for cheap accommodation. In the 1970s and 1980s you could rent big apartments in Berlin at very modest rates. The city became a magnet for bohemian types looking to circumvent the rat race.
When prices in Ireland began to surge in the 2000s, we looked to the German housing market as a more stable, affordable exemplar, one we should aspire to have here. Not any more. Germany’s housing idyll has been washed away by a global housing crisis.
Between 2009 to 2019, house prices for existing homes in Germany’s big seven cities – Berlin, Hamburg, Düsseldorf, Cologne, Munich, Frankfurt and Stuttgart – rocketed by 123.7 per cent on average, according to Deutsche Bank. This exceeded the appreciation seen in London or New York.
One of key problems identified was the acceleration in construction costs which brings us back to Germany’s cost reduction commission. It identified 71 recommendations for federal and local governments to consider. Standardisation of work, uniformity of state building codes (there were 16 federal states in Germany each with differing codes) and redensification were among the recommendations.
Some 16 of the 71 recommendations were accepted and adopted. Construction costs went up anyway, Paul Mitchell from construction consultancy firm Mitchell McDermott told The Irish Times Inside Business podcast last week.
Mitchell, who is also a member of the Housing Commission, has published several reports on development costs in Ireland as well as one that compared development costs here to those in other jurisdictions.
It found that Ireland had “comparable” construction costs (hard construction costs) with Britain, Germany and France and was “not out of step” with countries that have comparable climatic conditions – for example, heating and ventilation requirements – and similar economic characteristics and construction labour costs.
As part of that research, Mitchell said he spoke to an economist on Germany’s cost reduction commission. “In the discussion with the German economist, I could have exchanged the word Germany for Ireland throughout the whole conversation,” he said. “We spoke to a lot of people and they all had the same issue … costs, viability, affordability.”
It’s of little consolation to know that we’re not the only state with a nagging housing problem and not the only one with major resources at its disposal that cannot seem to resolve the problem.
Under the headline “the house price supercycle is just getting going”, the Economist magazine last month pondered the bleak notion that house prices could persistently rise faster than incomes, leaving us in a perennial struggle with affordability.
The article linked the seemingly persistent rise in property values to three global megatrends: demography, urban economics and infrastructure.
Population is a key driver of housing demand and, in Ireland and elsewhere, it has been rising at a faster-than-expected rate. The Economist cited recent research, for Spain, which suggested that a 1 per cent rise in immigration boosted property prices by 3 per cent.
Despite the backlash against immigration, rich countries with ageing populations need young migrant workers, suggesting mass migration (and the pressure on housing) will continue.
The second factor relates to urbanisation and the increasing amount of the economy (businesses and workers) that seek to locate themselves in a city which the uptick in remote working has failed to halt. “All this raises competition for living space in compact urban centres, where the supply of housing is already constrained,” the article said.
The third trend relates to infrastructure, more precisely the dearth of transport infrastructure, which limits how far people can live from their job. It concludes that these trends are driving a global “house price supercycle” that has yet to fully play out and may be with us for decades.
Central banks have also egged on house prices by flushing the global financial system with money since 2008. But even when that monetary policy was reversed more recently to counteract inflation, the impact on house prices was surprisingly mute.
As a rule of thumb, when interest rates go up house prices go down or at least the housing market slows. But property markets globally have shrugged off the impact of higher borrowing costs and many are now back in boom mode. The muted impact of higher interest rates of course relates to the increasing number of borrowers on fixed-rate mortgage contracts, which has insulated them from interest rate variability.
From the European Central Bank’s perspective, the higher percentage of people on these contracts, the more limited the impact of monetary policy. That’s why Europe and Ireland experienced only minor technical recessions last year on the back of Frankfurt’s aggressive monetary tightening.
Either way, predictions of a prolonged property market slump on the back of higher interest rates proved wide of the mark.