With property prices back above Celtic Tiger prices, the “never again” has happened again. The great reflation, driven by low interest rates, has driven investment into every corner of the market without discrimination. In what would have felt like an impossible scenario just over a decade ago, all of these assets have been rising in price simultaneously for the last 13 years. As such, many people with assets have been left wondering- where can I find value in the markets? Stocks, bonds, property and almost every investable asset has been overvalued. 

Locally, Ireland has created a catastrophic recovery in housing; from the frying pan into the fire. Having gone from the worst real estate crash in any developed economy in living memory, Ireland now faces a situation of housing shortages where output simply cannot be, and is not being, realised quickly enough. Contrast this with a decade ago when Ireland was talking about bulldozing the excess of houses to control for oversupply, and it becomes painfully clear that Ireland lacks a long-term set of policies to stabilise the feast-or-famine housing economy. 

Michael Noonan’s declaration that there will be no more “boom-bust” a mere seven years ago is not standing true in the face of economic fact. 

However, not all is doom and gloom. Taking a step back, we can see that Ireland’s big picture- the macroeconomy- is astonishingly good. Our quality of life statistics consistently score comparatively high; Ireland is one of the safest countries in the world; standards in education and health remain high; our social cohesion, alongside our economic social safety net, has given Ireland a great score when it comes to general equality post government transfers. 

It would indeed be reasonable to think that this nation, which once had so many builders, could quickly pick up its tools again at times of today’s need. Curiously, however, this has not happened. Instead, housing output targets are still being missed every year in almost every sector of housing. Further, an exodus of small landlords from the market has created a dynamic where there isn’t a sufficient number of newly built houses for buyers or existing homes for renters. 

Finally, as recently announced, the wall of institutional investment that came in to finance Built to Rent (BTR) houses is reconsidering its position within the landscape of changing markets and macroeconomic outlooks. 

The Housing economy is the economy 

Apart from the real and devastating human impacts of such a situation, today’s crisis will shape Ireland’s future economy for generations to come. The risk that Ireland’s housing crisis poses to its global competitiveness is real and high. Without an immediate resolution to this crisis, it is likely that Ireland will undo decades of progress against its wider industrial policy which has enabled the Irish economy, and our hard-fought improvement to quality of life, to flourish. 

Consider further that housing is not merely one factor of a wider set of economic statistics, but that in fact, housing is the business cycle. When housing dysfunction results in rapid price appreciation, people need higher salaries to afford rents or to qualify for a mortgage. This creates detrimental upward pressure on the labour force. In other words, when we have to pay higher salaries, we have to charge more for goods and services. And so the inflationary spiral continues. 

The consequences of this dynamic creates decline, real or perceived, in our social contract- the fabric of our communities and wider nation. Unlike our neighbours to the west and east (the US and UK respectively), Ireland’s social contract is in strong health and should be protected at all costs. As we have seen, a weakened social contract creates divisions that ripple through and impact all social and economic areas.

Importantly, and related to Ireland’s social contract, are the implications on an inter-generational level that must be considered immediately. 

Consider that people today, in a stark break from previous generations, need higher levels of qualifications for entry-level jobs- often master’s or PhD degrees. Further, young people today face an extended working period due to raised retirement ages, except without the gold-plated pensions of the past to look forward to. Finally, the path to retirement is as long as it is precarious; today’s jobs come without traditional job security. 

The implications of this are multifaceted, but can again be seen in demographic data. The age of a woman having their first child is the highest it has ever been; the age of average first-time buyers is higher than ever; and when parents reach retirement they may still have a child dependent living in the family home.

Back to property

The complexity of the problems with Irish property don’t begin and end with Ireland; housing in any country is impacted by the wider global economy. For instance, we have already seen that COVID lockdowns in China heavily impacted building material costs in Ireland and further afield. Likewise, energy prices in Germany and the UK have impacted labour costs in Ireland. We are seeing today what was not predicted yesterday, that the global macro economy has unavoidable microeconomic impacts in Ireland.

To this effect, the cost of land in Ireland has drastically increased due to large amounts of capital looking for a home; labour shortages have led to increased labour and project costs; disruptions to supply chains and energy prices have caused havoc with materials sourcing and availability; the ratio of workers to output has increased, meaning that fewer houses are being built per worker. With disruptions across the entire property value chain, inefficiencies and higher costs creep in at every opportunity; something that will take years to reverse. 

Meanwhile, in the midst of this changing macroeconomic landscape, house-building policies being put forward today to levy new homes are based on the amount of concrete in them to pay for yesterday’s digressions. 

Outside of the property value chain, interest rate hikes are driving out investment from this sector. Today we find ourselves in the unbelievable situation of a person being able to borrow at 2 per cent while Ireland would pay more like 2.7 per cent if it went to the markets based on current 10 year yields.

Short of massive government spending, there are very few tools that the government has at its disposal to make housing affordable and accessible. In fact, based on the actions being taken by today’s government, we are seeing that spending is the only tool that they are willing to use in their toolbox. Whether or not a fiscal stimulus can reliably solve problems that are structural and regulatory in nature remains to be seen. We have already seen multiple budgets that promised investment to housing in the magnitude of billions of euros, without the much-needed increase in housing supply.

Additionally, those who cannot buy in a given market typically rent. However, the landscape for Ireland’s renters is equally dire. This is a landlord’s market, and the confluence of an extreme undersupply of rental properties with uncapped rental increases in many areas has created additional duress for those who are locked out of the property sector.

Ireland, property and the global macroeconomy

Ireland’s economy is a global economy. Ireland’s income, primarily driven by tax receipts from multinational corporations, has seen strong year-on-year growth. In fact, Ireland is one of the few developed countries whose CEO base is not forecasting an imminent recession. However, it is worth remembering that there are two economies in Ireland. While reflation and heavy growth in stock prices have favoured Ireland’s multinational economy, which has done extraordinarily well over the last five years, Ireland’s indigenous economy has not rebounded as well from covid and other macro and geopolitical impacts. 

As the strong performance over the last decade of multinational corporations (MNC) takes over headlines and balance sheets alike, we have seen that MNCs strongly influence the Irish economy. As the global GDP increased over the last two decades due to both globalisation and technology corporations becoming larger than individual economies, Ireland managed to reap the benefits of both. 

In a downturn, however, Ireland is equally exposed. Its earlier economic success, predicated on a single-pronged strategy, could be a double-edged sword. With a retreat from globalisation, a normalisation of global tax systems, increased regulatory oversight and a slowdown of technology valuations, Ireland’s economy is unduly exposed to the uncapped global downside.

Recessionary signs are evident in economic predictors. In the United States, forecasts for a recession within a year have hit 100 per cent. Further, the Minneapolis Federal Reserve Bank’s President recently remarked that we are “quite a ways away” from pausing rate hikes. The first casualties of these hikes have already started to emerge with large job layoffs in the United States: first, with small and short-term funded companies like startups; now with large corporations that need to cut labour costs to firm up their balance sheets. 

Of concern to Ireland is the fact that the first people MNCs tend to let go belong to their “back offices” (sales and marketing functions) instead of “front offices” (expensive engineers and designers). Many of these back office functions exist in Ireland. As such, we should expect that Ireland’s MNC economy is going to decline significantly in the coming 12 months. 

But what about our indigenous economy? Indeed, Europe is not the United States. However, it is looking increasingly like Europe may actually be worse off than the United States. 

The European project, and indeed its base currency the Euro, is predicated on three structural paradigms. Firstly- access to cheap energy provided by Russia for usage in the European internal market, subsidising European industries like auto manufacturers. Secondly- access to cheap goods provided by China. Being able to import goods at such low prices strengthened the Euro. It also allowed Europe to move up the value chain- away from manufacturing and towards higher value add services. As such, traditional goods manufacturing in Europe and its associated supply chains died. Lastly- Europe exists on the unequivocal security and protection offered by the United States against Russia, China and other adversaries which de facto gave Europe a seat at the global table that it did not deserve.

In essence, Europe outsourced its energy to Russia; its manufacturing economy to China and its national security to the United States. Energy, manufacturing and national security all happen to be the most important tenets of a geopolitically important economy. Without these core functions, what is Europe but a collection of slowly failing economic states?

Without energy, goods and (depending on who occupies the Oval Office) national security, Europe is at a crossroads. Energy disruption, supply chain disruption and trading and currency volatility are not going to disappear. In fact, it is likely that we haven’t even started to see the real impact of this new geopolitical shift.

What does this mean for Europe, and for Ireland? We are going to see a continuation of supply-side shocks in energy and goods, alongside increased disruption from Russia’s war on Ukraine. This will lead to increased and prolonged inflation caused by interwoven supply and demand sides. In effect, this will be incredibly hard for the European Central Bank to “fix” with interest rate hikes alone; however, without other suitable tools, interest rates will be its primary weapon of choice. 

Therefore, we should expect interest rates to continue to rise akin to the US, and to remain high for the next decade (the approximate length of time that it will take for Europe to generate its own supply of energy and goods). 

Back to Ireland and the discussion at hand- in a recession, what happens to the Irish property market? There are two dimensions which heavily impact housing prices to consider.

Dimension One: Macroeconomic liquidity

One of the factors that have heavily influenced Irish property prices is the wide availability of money looking for stable and low-risk allocations in land and real estate. Some of this capital has been endogenous, i.e. from within Ireland. Other forms of this capital, and indeed the majority of Irish property investment, has been exogenous, ie from outside of Ireland via large global funds such as pension funds.

The interaction of these funds with the Irish economic system is deemed controversial and its wider impacts are, at best, difficult to fully ascertain. However, we are about to find out what happens when the music stops and the foreign investment into Irish property comes to an abrupt halt. As these funds face liquidity challenges over the coming 12+ months, two scenarios are possible.

The first is that a brief economic slowdown requires these large funds to rebalance their portfolios, and therefore move their allocations from high-risk assets (such as venture capital and direct investments into high-return assets) into lower-risk, more stable-return assets such as property. After all, when in doubt, land and real estate is the go-to investment asset of choice to ride out an economic slowdown.

The second scenario is that we are facing not a brief slowdown but in fact a total restructuring of the global economy. In such an instance, liquidity across all funds and all portfolios would rapidly diminish. Instead of rebalancing portfolios, we would see portfolios collapsing with some likely contagion impacts.

So in scenario one, we could actually see the investment levels of foreign funds into Irish property increase, and prop up the housing market at its current levels- if not continue to push prices higher. In scenario two, we would see investment levels sharply decrease to the effect of the government stepping in to build where the market cannot. 

Given broad economic indicators, paired with the fact that we are already seeing some signs of scenario two, it is likely that foreign investment into Irish property is going to taper off significantly over the coming year. The impacts on the Irish property market will be significant and can be summarised as: those funds that are currently building in Ireland will stop. If there was an undersupply already, it’s about to get worse.

Dimension Two: Microeconomic supply and demand

The second dimension impacting Irish property prices is that of the local supply and demand market. Simply put: if the current situation of demand being higher than supply continues, prices will remain as they are today: high. However, it is likely that interest rates will change this dynamic in the short term. 

Given that rate hikes have already had a sizable impact on mortgage affordability, and that rate hikes are likely to continue, it is increasingly likely that a supply of housing will become available on the market. However, increased interest rates will also reduce demand as fewer buyers will be seeking new mortgages. 

In Ireland, the pent-up demand far exceeds the supply of property coming onto the market due to household liquidity and is unlikely to be significantly dampened due to rate hikes. The historically high demand for housing is such that new houses need to be built, regardless of how many properties come onto the market due to household liquidity issues and at scale. 

Demand in general is still a contested concept, the statements on the number of houses we need to be built each year vary (depending on the person, party or organisation making the statement) by as much as twenty thousand units a year. 

Putting it all together: What’s next? 

Ireland’s housing crisis, a crisis more than a decade in the making, will be heavily impacted by both the global macroeconomy as well as the local microeconomy.

As the world shifts from global trade to local production; from low interest rates to high inflation; from peacetime to Great Power competition, each of these have a multiplicity of impacts on the global and Irish economy.

While it is impossible to predict the future for Irish property, it is possible to understand the drivers impacting its pricing. Namely, the broader global macroeconomy with a looming recession, and the local microeconomy with massive pent-up demand and undersupply. Finally, macro and micro conditions are interconnected and impact each other in negative feedback cycles.

Dimension one, that of macroeconomic liquidity levels, tells us that it is unlikely that future houses will be built by large, global funds. As such we can expect a sudden decrease in supply of housing onto the market.

Dimension two, local supply-demand dynamics, tell us that interest rates driven by external macroeconomic pressures will continue to impact the affordability of mortgages. While this may increase the supply of housing on the market in the short term as homeowners in need of liquidity begin to sell, the housing crisis is such that the extreme demand requires scaling the supply in houses onto the market as soon as possible.

Despite the complexity of the analysis, the conclusion is simple. The interaction of macro and microeconomic dynamics is such that the Irish property market is facing, and will continue to face, a crisis of epic proportions, leading to humanitarian and social tragedy. The Irish government is faced with a market failure; the private markets, falling under duress, will be unable to solve this crisis on its behalf. The government needs to instate an active management policy that acts where the markets cannot, and is willing to take bold actions in doing so.