Ronan Lyons: When will the construction sector build enough homes?

The recent Budget brought in measures aimed at stimulating the supply of newly built homes put on the housing market. For much of the last ten years, the construction of new homes in Ireland has been dominated by one-off homes, which are often built on family-owned land and are not associated with a transaction or indeed a mortgage.

Throughout the period 2009-2012, for example, between 75% and 80% of all homes started were one-offs. Approximately 23,400 homes were started in those four years – a tiny figure given the annual requirement for between 30,000 and 35,000 new homes. But of these, just 5,000 were homes that came on the market.

Since then, the fraction of all commencements that is taken up by one-offs has, thankfully, fallen. Each year, roughly 3,000 one-offs are started – a figure that is largely unchanged now in 2016 compared to 2011 or 2012. However, “non-one-offs” have increased in the same period from just 932 started in 2011 to a projected 5,000 this year.

Clearly, this is still well below the 30,000 new homes that are required for the housing market. But it does represent an improvement. That improvement can also be seen in the number of transactions. The number of transactions involving newly built property has risen from 2,700 in 2011 to 6,000 in 2015.

The number of transactions of new properties is higher than the number of commencements of new builds for a peculiar reason: the country is still working its way through properties built in the bubble which were never occupied. It is also for this reason that new homes completed have consistently exceeded new homes started since the crash. Completions data actually track connections to the electricity grid – and it is easy to imagine properties that were built in 2007 or 2008 only finding an occupier, and thus electricity customer, in 2013 or 2014.

The most recent figures on building starts go to August 2016. The graph accompanying this article shows the cumulative number of commencements, each year from 2011 through to 2016. It allows a comparison of how much has been built up to a particular month across each of those six years. The first thing to note is the oddity in 2014. That was due to Local Authorities introducing a new system of Building Control in March of that year – and a pre-emptive rush in commencements as the move to a new system had caused confusion.

Cumulative completions nationally, by year

Due in particular to strong January-February and May-June periods, it is clear that building of new homes in 2016 has increased significantly compared to 2015. And all three years – 2014, 2015 and 2016 – represent a huge improvement on the previous three years, where fewer than 5,000 new homes were started.

Overall, it looks as though one third more new homes will be started in 2016 than in 2015. It is worth pointing out that this refers entirely to the period after the Central Bank rules were in force. One of the justifications for the recent first-time buyer assistance was that the developers complained of a lack of buyers due to the deposit requirement.

However, there is scant evidence of this in their own activities. For every 2 homes started in 2013, five new homes are being started now – and that upswing is down to homes for the market, not one-off self-builds.

It is to be hoped, therefore, that the Department of Housing set targets prior to the introduction of the new measures for how many new homes would be started and completed. This will allow a counterfactual or benchmark against which the actual figures can be compared.

Based on current trends, though, and assuming no big uplift in construction after the Budget, the country is on course to start 10,000 new homes in 2016. Thankfully, this is more than double the 2013 amount. But if it takes three years for the construction sector in its current state to double activity, it will take a further six years for the sector to reach a level close to the demand required.

This, of course, assumes that the mechanisms in place for building social housing at scale. The week’s homelessness figures show just how important proper mechanisms for social housing are. This is as important as addressing high construction costs in bringing about adequate housing supply and thus a healthy housing system.