The new housing target is 50,000 per year. All are agreed. What goes into building 50,000 homes?

It’s easy to zone out when it comes to these kinds of numbers. As I’ve written many times, 50,000 units are roughly the size of Cork City. At that rate, we would have to build one new house for every two existing houses by the year 2043.

What are the ingredients of a house? You can boil it down to land, workers and money.

I wrote about land the other week. Land is hard because it’s a political problem. A lot of people don’t want houses built down the road. The planning system wants to limit housing on green fields and in the east. And they’re not keen on tall buildings in the cities.

What about labour, is it a meaningful bottleneck? Right now, the answer is yes. The unemployment rate is very low, at 3.8 per cent. The government asked, in 2020, how many additional construction workers would be needed to boost output from 20,000 homes to 33,000. It found an extra 26,000 workers would be needed. Now we need to push on to 50,000 homes per year. So an extra 30-35,000 construction workers will be needed.

This sounds like a hard problem but my instinct is that it’ll resolve itself. Labour is surprisingly mobile. Last year, Ireland produced 32,000 units, so the additional 26,000 workers must have turned up. What’s more, Ireland built 90,000 homes per year in 2006. In the year 2000, nobody thought Ireland could build that many homes.

The following chart is an index of total construction produced by the CSO. It’s derived from a survey of 1,500 builders and measures the volume of buildings being produced. The index is rebased to 2015.

The first thing you will notice is how much more was being built in the late 2000s than today. This index measures quantities rather than prices, so it's not distorted by the Celtic Tiger-era bubble in house prices.

The chart suggests that workers will be found. The experience of the last three years suggests workers will be found. More generally, the ability of markets to adapt quickly to shocks — as demonstrated by PPE markets during Covid-19 and in European energy markets last year — suggests workers will be found.

From savings to investment

The last raw material needed to build homes, after land and labour, is money.

The problem is that Ireland is a small and fast-growing country. It needs to invest a lot to build enough infrastructure for its growing population. But its population is still small.

Investments are funded by saving. And Ireland's pool of national savings has been too small to fund all the investments the country needs.

In the last three years, corporation tax windfalls have changed the story somewhat. But those are being treated by the Government as temporary.

In any case, Irish people don't need to save a euro for every euro invested in houses or roads. There's another way to do it. Like a growing company, Ireland can use funding from outside investors to fuel its growth.

Membership of the euro works well in this respect. Ireland is young, growing quickly and hungry for investment capital. Europe is old and growing slowly and needs places to deploy its savings.

That's been the deal for the last 30 years. Europe sends money, Ireland builds things and Europe gets interest or dividends.

It used to be that Europe funded Irish banks, who then lent to property developers. That came to an end with the crash.

The model that has emerged after the crash has been a bit different. The Irish banks have largely stayed away from property development, at the ECB's insistence.

Foreign savings have instead been deployed in Ireland by large investment funds. Instead of Europeans investing in Irish banks and Irish banks investing in property, we have Europeans and Americans investing directly in Irish property. They have done it directly and through vehicles like REITs. They have done it by funding the development of new homes and by buying existing ones. They have done it with equity — in which they take on the risk of a project failing — and with debt.

That was how it worked for the last 10 years or so. But things are changing. The rise in interest rates made foreign investors less willing to fund Irish property projects. The Irish public has turned on foreign investors. And the Government has pledged to take a much bigger role in the system.

Whatever the rights or wrongs of foreign investment in Irish property, how will the system work in the future, with the Government taking over the role from foreign investors?

Recall that Irish banks aren't allowed to fund property development in a big way. So housing will have to be funded by one of three groups: Irish institutional investors, foreign institutional investors, or the State. As the investor class backs off, the State is taking on a greater and greater role. It's buying newly built homes from developers, it's forward-funding new schemes through the Land Development Agency and it's building homes through approved housing bodies.

The Government as a whole, meanwhile, spends about €100 billion per year, all in.

If we need 50,000 homes per year, and they cost about €400,000 each, that's about €20 billion per year that'll be needed to fund the homes. That's not far off the size of the Department of Health's budget of €21 billion.

You hear the view that institutional investors should play no part in the Irish system. But we should be clear-eyed about what that would mean. If investors were not to play a part, and we wanted 50,000 homes per year, the overall tax take would have to go up 20 per cent or so.