How did housing become one of the most controversial issues on the planet?

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How was housing, a basic social good, allowed to become one of the most divisive issues on the planet? There may not be a single answer to this, but there are several partial explanations.

Somewhere along the line, housing has become a highly financialized asset, a vehicle of wealth and investment rather than a social good. According to data from Real Capital Analytics, institutional investment in the European residential market reached an all-time high in 2020, accounting for almost 30% of total acquisition activity, compared to just 10% in 2015. Foreign funds bought a quarter of all new homes built in that state last year, most were apartments for the prime rental market.

Another piece of the pie centers around interest rates. We’ve had four decades of low rates, most of us have known little. Several studies, including a seminal work by the Bank of England, suggest that increasingly cheaper credit combined with more aggressive lending practices have encouraged people to borrow more and spurred this bullish price cycle. From an investor’s perspective, low interest rates increase the value of future income streams.

Social housing

Governments here and elsewhere have also stopped building social housing to the same extent as in the past, while selling large shares of the existing stock to private tenants. This, combined with the shift to providing rental supports instead of actual housing, has fueled price and supply pressures, particularly in rental markets. The Irish government spent nearly €900m on rent subsidies last year, including €542m on its main subsidy programme, the Housing Assistance Payment (HAP). Spending on PAHs has increased by more than 80% since 2018.

These problems are not unique to Ireland; the British government spends even more on rent subsidies. The chronic misalignment between supply and demand is however particularly acute here, significantly worse than in other countries. We effectively stopped building public and private housing in the wake of the crash of 2008 – as if housing need had somehow been neutralized by the financial crisis – only to find 10 years later that we did not have the necessary stock to accommodate a growing population.

According to property website Daft, there were just 712 properties available to rent in Dublin at the start of February this year. In a wealthy city of 1.4 million people, this has to be considered one of the most startling statistics.

When the pandemic finally subsides, housing will once again become the defining issue, a dividing line between young and old, between parents and children, between those with appreciating assets and those who feel the game is rigged. against them.

House prices

A new round of data from the Central Statistics Office last week suggests that annual house price inflation now stands at 14.4%, a level not seen since mid-2015, while the the average price of a house in Dublin is now over €500,000. Abstaining from the current price spike can mean having to pay more than €50,000 more for a house in a year, while jumping into the country requires household income, in the case of first-time buyers in Dublin, more of €130,000. These are prohibitive measures for young people.

Even the most progressive and stable of real estate markets – Germany – seems to have been infected with these problems. Inflation in Germany’s ‘big seven’ cities – Berlin, Hamburg, Düsseldorf, Cologne, Munich, Frankfurt and Stuttgart – averaged 123.7% between 2009 and 2019, according to Deutsche Bank, eclipsing price appreciation observed in New York and London during the same period. period. Berlin was once the place to go in Europe for cheap accommodation. Today, citizens are protesting against rising rents and construction programs to bring in foreign funds.

Germany’s housing crisis may explain why the traditionally macro-focused august European Central Bank (ECB) is now talking house prices.

ECB executive board member and German economist Isabel Schnabel told the Financial Times last week that Frankfurt had to take into account the “unprecedented” rise in property prices when assessing inflation in the euro area and how quickly to tighten monetary policy.

Schnabel’s “hawkish” comments come ahead of next month’s rate meeting, when the ECB will decide how best to combat runaway price growth across the bloc. “If this [rise in the costs of home ownership] were included, it would have a substantial effect on measured inflation, especially on core inflation, where the weight of owner-occupied housing is greater. It has to be part of our general considerations,” she said.

The Central Bank expects around 25,000 new homes to be built this year, followed by 30,000 and 35,000 units in 2023 and 2024 respectively. This figure of 35,000 is roughly the estimated level of demand in the market, although some say it is higher. The government is relying on the traditional laws of supply and demand to solve the affordability problem.

But this is a debatable assumption, especially given the government’s growing footprint in the market through the purchase of turnkey properties and additional rent support spending, both of which underline the parameters of current pricing. The cost of construction is also accelerating at twice the rate before the pandemic, putting further upward pressure on prices.

What is increasingly clear is that while there is no single reason for our housing problems, there is also no simple solution.

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