Quarterly Bulletin 2024:3 – Around 52,000 new homes could reasonably be needed per year

18 September 2024 Press Release

Central Bank of Ireland

  • Higher estimates from Central Bank staff are due to pent-up demand for housing and an increased housing need for our growing population over the coming decades
  • Planning issues, availability of supporting infrastructure and serviced land, and productivity of the construction sector must be addressed, enabling greater access to finance so as the housing sector can produce the number of units required.
  • Elsewhere, the Quarterly Bulletin forecast paints a picture of a resilient domestic economy poised to grow between 2 and 3 per cent annually out to 2026.

Today as part of the Quarterly Bulletin, the Central Bank of Ireland published an article titled “Economic policy issues in the Irish housing market (PDF 1.09MB)”.  Commenting on the article Director of Economic and Statistics Robert Kelly said: “The Irish housing market has been subject to a decade of under-supply, during which house price and rental growth have outstripped income growth and stretched affordability. While these challenges are part of a pattern we are seeing globally, housing output as a share of national income in Ireland has been significantly below the euro area average for quite some time. Housing supply is unable to meet our country’s needs which is limiting the sustainable growth of living standards.”

The underlying challenge is the housing market’s capability to produce enough viable housing projects at the scale required. It has to be viable to produce housing units at costs that are within reach of Irish household incomes. Sustainably bridging the gap between affordability of housing and viability for the construction sector to deliver sufficient housing is a priority for public policy, with increasing economic implications both now and into the future if this is not achieved.

Government policy has already responded to this challenge, with the State increasing spending on the housing market from €1bn to €6.5bn per year over the past decade. Irish government housing expenditure is now the second highest proportionately in the EU, and close to its 2007 peak. However, increasing housing output cannot solely rely on the State. The Central Bank of Ireland’s analysis points to the need to consider how the State uses its financial resources, and wider policy tools, to enable higher housing supply.  

Housing supply has increased, and current levels of housing completions are now broadly in-line with previous estimates of underlying demand. However, up to 2021 completion levels remained below the underlying demographic demand, which has meant that pent-up demand now exists.

The pent-up demand exists alongside an increased housing need from higher population estimates over the coming decades. Taking all these factors into account, updated estimates by Central Bank staff indicate that around 52,000 new homes could be needed per year out to the middle of the century, or a 20,000 unit increase over 2023 supply. 

The report discusses three overlapping dimensions that will have a bearing on construction viability and the ability of the market to deliver additional housing supply of circa 20,000 units per annum:

  • Planning, building regulation and serviced land: A complex and protracted planning environment adds to the costs of delivering housing and enabling infrastructure in areas where demand is highest.
  • Capacity and productivity of the construction sector: The financial crisis has left long-lasting scars on the construction sector. Its productivity is low, both by historical and international standards. This relates to an over-reliance on small enterprises, unable to benefit from economies of scale and suffering from over a decade of relative under-investment in machinery, equipment and widespread adoption of modern technologies. This leads to comparatively lower output per worker and will pose challenges in scaling towards higher delivery requirements.  It also means that the sector is less well placed to absorb higher costs of labour and the more globally determined raw material inputs needed to produce housing.
  • Access to development finance: Funding delivery of circa 52,000 units per annum would require sustainably accessing debt and equity financing of sufficient scale.  The Central Bank’s analysis suggests that an estimated €6.5bn to €7bn additional development finance over and above existing levels would be required to fund the additional 20,000 units per annum. This additional finance need comprises debt and equity funding, across State, banks, and non-bank financial intermediaries. Our analysis suggests that while key financing sources may have the potential capacity to extend the required financing, the capacity of the construction sector to access this financing in light of the two dimensions outlined above may be more challenging. This is particularly relevant in the context of the ability of the construction sector to attract external equity capital.

The article highlights the importance of policy interventions that aim to close the gap between affordability and viability, through reducing of the cost of delivering housing instead of enabling higher prices, which are ultimately borne by new households. Addressing the viability of housing delivery should focus more on enabling measures that will -

  • Address the challenges and provide policy certainty in the planning and building regulation process;
  • Focus public capital investment on infrastructure and funding the direct provision of more serviced land in areas of high demand;
  • Incentivising greater scale and productivity in the construction sector through initiatives that lead to enhanced adoption of modern construction methods, standardisation of designs, and other innovations within the procurement process;
  • Use the State balance sheet to incentivise private investment, in particular equity investment, into the construction sector.

Robert Kelly continued “Our analysis points to the clear need for policy change to address challenges in forward planning and the sector’s infrastructure, which in turn will also enable more sustainable access to development finance.   We have calculated the significant economic costs of policy inaction prolonging the imbalance between housing demand and supply.  These will result in a higher cost of living, and in turn, a higher cost of doing business in Ireland, ultimately damaging our global competitiveness and the sustainable growth in living standards for the people of Ireland in the medium-term. However, building an additional 20,000 units of housing also comes with risks to the economy, and public finances need to be carefully managed. It presents trade-offs which policymakers need to actively consider as the costs and risks of poorly managing a rise in housing output are similar to those posed by  inaction.”

The third Quarterly Bulletin of 2024 (PDF 3.03MB) finds that the Irish economy continues to grow at a strong pace supported by the buoyancy of domestic economic activity. Against a backdrop of global growth and inflation rates easing broadly in line with expectations, the Irish economy continues to perform well. Unemployment is expected to remain low, supporting a rise in wage rates and broader household incomes.  Headline inflation has eased considerably to below 2 per cent, and is expected to remain between 1.5 and 2 per cent out to 2026. The resulting positive momentum for household’s purchasing power underpins the expected rise in consumer spending and investment envisaged.  

However, challenges to maintaining such performance are becoming more evident. Stronger than expected growth, over and above the economy’s potential rate, has brought into sharp focus domestic supply and infrastructure constraints.  These, in turn, present a situation where globally-determined inflation in Ireland is declining substantially, while more domestically-driven inflation, as reflected in services price inflation, remains significant at above 4 per cent.

While the central outlook for economic growth and employment is favourable, risks are tilted to the downside. The economy faces a somewhat complex array of risks that could alter the outlook compared to the central forecasts. Further fiscal stimulus above that assumed in the central forecasts would result in the economy growing faster than projected in the short term. With the labour market already at full employment, this would come at the cost of higher and more persistent inflation with a negative effect on Ireland’s relative competitiveness. On the external side, Ireland’s export base remains highly concentrated among a small number of large multinational enterprises (MNEs). Pharma exports have rebounded in 2024 following a decline in 2023 but there is uncertainty about the prospects for ICT manufacturing. A downturn in that sector or in wider MNE-dominated activity (for example, if global economic growth weakens) would reduce net exports, domestic investment, tax revenue and economic activity relative to the central forecasts.

Risks to the headline inflation outlook are judged to be broadly balanced. Risks to the near-term inflation outlook are mostly to the downside and relate to the possibility of a more substantial slow-down in the global economy, dampening externally-driven inflation. In contrast, risks to the outlook over the whole horizon are mostly to the upside, driven by the possibility of a more persistent imbalance between domestic demand and supply. An escalation of geopolitical tensions or renewed stress in global supply conditions could put upward pressure on prices for energy and other key commodities such as food, relative to current assumptions. However, a sharper than expected global economic slowdown may have a negative impact on external demand for Irish goods and services as well as damping global commodity prices, feeding into weaker than expected global and domestic price dynamics. Domestically, with the economy at full employment, containing price and wage inflation will be conditional on expected productivity growth being realised and an excessively expansionary fiscal stance being avoided. Delays in addressing existing capacity constraints in housing and in other infrastructure would risk raising price and wage inflation above central projections.

Addressing structural vulnerabilities in the economy and the public finances, maintaining an appropriate fiscal stance and sustainably delivering on the necessary rise in public and private capital investment in the coming years requires considered action and is necessary to safeguard Ireland's economic future and deliver long-term prosperity for all.