Housing Crisis in Ireland Exacerbated by Government Interventions: A Closer Look at the Affordability Gap
The housing crisis in Ireland has continued to worsen despite numerous government interventions and policies aimed at alleviating the problem. One cannot help but wonder if the situation would be even worse had the government not intervened in the property market over the past two decades, except for providing social housing.
Over the years, Ireland has implemented countless policies and strategies, all of which have contributed to the deepening affordability gap and declining rates of home ownership. Instead of addressing the root causes of the crisis, these interventions have only served to exacerbate the problem.
According to the Economic and Social Research Institute (ESRI), more than half of renting households in the Republic, accounting for almost 300,000 households, received some form of state support for housing costs in 2020. The main form of support was the Housing Assistance Payment (HAP).
Interestingly, as house price inflation has slowed down due to higher interest rates, it has become clearer that certain government schemes have actually fueled inflation. The Help to Buy tax rebate, the shared equity scheme, and the local authority Home Loan scheme have all contributed to an 11% year-on-year increase in the cost of new homes bought by first-time buyers in the second quarter. This level of inflation is significantly higher than that seen in the rest of the market, where existing dwellings experienced a mere 0.6% price increase over the same period.
Developers may argue that rising construction costs justify the price hikes, but the reality is that these price increases far outpace wage growth and material costs. This suggests that government interventions are fueling inflation in a market already characterized by unaffordability.
Warnings about the potential inflationary consequences of demand-side measures in a supply-constrained market have been disregarded by Irish governments since the 2000s. The government’s own Housing Agency cautioned in 2021 that a similar initiative in the UK, the shared equity scheme, led to a 6% increase in house prices in the Greater London area.
To bridge the affordability gap, governments can either lower house prices or boost wages. Irish governments have consistently chosen the latter, hoping that making it easier for people to afford higher prices would encourage builders to increase supply. However, this approach has resulted in an unsustainable cycle of rising prices, decreasing home ownership, and increasing pressure on rents. In fact, in Dublin, house prices now average 10-12 times the average income, making mortgages cheaper than rents in all but two local areas.
Moreover, government interventions such as the Help to Buy scheme and buy-to-let investors acquiring a significant portion of new homes exacerbate the impact of demand-side measures.
John McCartney, director and head of research with BNP Paribas Real Estate, pointed out that Ireland’s housing problem stems not from a supply shortage, but from high house prices and rent levels relative to incomes. He emphasized that the objective of government initiatives is to drive up prices, even though they claim to address the affordability crisis.
While there are other contributing factors to the housing crisis, Ireland has been grappling with this problem for over two decades, with government interventions that have failed to adequately address the issue and may have even worsened it.
In conclusion, the Irish housing crisis has been further exacerbated by government interventions in the property market. Despite numerous policies and strategies, the affordability gap continues to widen, home ownership rates decline, and more people increasingly rely on state support for housing. It is crucial for the government to reevaluate its approach and consider long-term solutions that tackle the root causes of the crisis rather than perpetuating the problem.
