interesting article on planning and house price boom

ronbyrne2005

Excerpt from Bigger Better Faster More – Why some countries plan better than others by Alan W. Evans and Oliver Marc Hartwich (Policy Exchange, London, 2005). For the full publication, please contact .

Ireland has experienced a long economic boom over the past two decades, which has had a profound impact on its demographics. But while Ireland attracted people and businesses from all over the world, it realised too late that these people also needed houses to live in. Rising demand pressures were eventually dealt with by building large numbers of standardised, small, poor-quality homes. This has had the paradoxical effect of providing unpopular housing at fast-rising prices


THE IRISH ECONOMIC MIRACLE
Much has been said and written about Ireland, the “Celtic Tiger”, Europe’s most impressive economic success story of the past two decades. Ireland has successfully managed to transform itself from a poor exporter of people into a vibrant and truly globalized economy.With the exception of an economic growth of ‘only’ 2.2 per cent in 2003 (at a time when European heavyweights like Germany, Italy and France hardly grew at all), the country has seen annual growth rates between 6 and 10 per cent since the early 1990s – that is, three to four times the European average. There are plenty of indicators for Ireland’s amazing economic performance: • The country’s per capita GDP at purchasing power parity is over $40,000. That is more than the UK’s ($30,309), Switzerland’s ($33,168) or Australia’s ($31,020). [1]• Ireland’s purchasing power per capita is currently about 80 per cent higher than the EU average. • General government gross financial liabilities as a percentage of GDP have fallen from 111.7 per cent in 1987 to only 29.9 per cent in 2005.[2] Whereas between 1974 and 1986 the budget deficit was more than 10 per cent of GDP in all but two years, deficits have turned into surpluses in a number of recent years.[3]• Unemployment rates have fallen from 15.8 per cent in 1993 to 4.4 per cent in 2004.[4]

Asking what is driving this Irish boom, the answer one often hears is that the EU subsidies from the Cohesion Fund boosted the economy. It is true that since its introduction in 1993 Ireland has been one of the main recipients of payments out of this fund. These subsidies undoubtedly helped to improve Ireland’s transport infrastructure in particular. However, it would be wrong to reduce Ireland’s rags-to-riches story to this inflow of money from Brussels. On the contrary, Ireland’s success is also – if not mainly – due to good economic policy.

To put the Irish economic ‘miracle’ into a historic perspective, it has to be stated that Ireland’s economy was a shambles for the first decades after independence in 1921. First it was the civil war that hampered economic development; afterwards it was the completely misguided policies of protectionism and import substitution of the de Valera government from 1932 on. This period of “closed door economics” crippled the economy and lasted until the late 1950s, when attempts were made to open up the Irish economy, especially to foreign investors. Taxes for them were slashed to zero. Opening up the economy created the first economic boom with growth rates around 4 per cent – not spectacular growth, but much more than the country had experienced before.

The oil crisis of the early 1970s abruptly ended the Irish recovery, and governments tried to cure the economy through increased spending, thus incurring huge budget deficits. However, these policies turned out to be disastrous. They led to an enormous increase in the public debt, higher taxes, high interest rates, growing government spending, spiralling wages, and in the end even a contracting economy. It was apparent that Keynesian deficit, tax and spend policies were leading Ireland to a dead end.[5]

It was in this dire economic situation that Ireland laid the foundation for what was to become the “Celtic Tiger”. Taxes were cut, government spending was slashed, an agreement with the trade unions helped to curb wage rises. All of this went along with a decidedly open trade policy. To sum up, Ireland’s supply side economics outshone the UK’s Thatcherism and US Reagonomics. The Fraser Institute’s Economic Freedom Index — published in Ireland by the Open Republic Institute — has a scale from 0 to 10, 10 being complete economic freedom. For Ireland, the index improved from a meagre 6.7 in 1990 to 8.2 in 1995, making Ireland the fifth most liberal economy in the world (five years earlier it was ranking only as the world’s number 20).[6]

Ireland’s economic recovery was not, in other words, an economic miracle. We are not talking about an irrational exuberance of markets or an EU-subsidized economic upswing, but about the results of fundamentally sound political and economic decisions.

Irish housing and land-use planning policies cannot be analysed outside this context. The consequences of such outstanding economic growth are at least twofold when it comes to building and construction. On the one hand, construction benefits from the supply side policies like the rest of the economy. Fiscal stability and predictability, low taxes and interest rates improve business conditions for all sectors. On the other hand, the economic boom increases incomes and purchasing power, which leads to increased demand for housing. In Ireland, the effect was even greater, because the boom reversed traditional net emigration, further boosting numbers in need of new dwellings. Last but not least, the Irish economy’s rapid transformation affected household formation, i.e. the process of declining average household sizes observable in developed countries around the world. Indeed, since Ireland’s economic turnaround is still a rather recent phenomenon, one can expect this drop in household size to happen even faster there than elsewhere.

What would an economist expect to happen in a situation characterized by Ireland’s economic performance? He would probably predict housing supply to respond to increased demand, but also forecast some rise in the price of housing. These two things did actually happen over the past one and a half decades, as we can see by looking at some key figures from the Irish housing market:

• Housing supply has indeed gone up since the early 1990s. Whereas in 1992 only 22,464 dwellings were completed in Ireland, only eleven years later, in 2003, completions totalled 68,819 dwellings according to the Central Statistics Office Ireland.[7] For 2004, the Construction Industry Federation estimates the number of completions at around 76,000.[8]

• The largest part of this increase was due to privatesector building. Although social housing also went up – from 1,482 units in 1992 to 6,133 units in 2003 – the private sector managed to increase its output by 41,704 dwellings according to CSO figures.

• Irish house prices have skyrocketed. According to the Permanent TSB house price index the average Irish house sold for a mere 84,800 Euro in March 1997, but by March 2005 that had risen to 256,700 Euro. If we look only at the Greater Dublin area – which is not

only the nation’s capital but also its social and economic centre, with about a third of the population residing and an even greater share of GDP created there – we see an even greater rise in average house prices, from 92,342 Euro in 1996 to 334,822 Euro in 2004. Looking at all other Irish regions, not a single one has experienced an increase in prices of less than 5 per cent annually. Last year’s growth rates ranged from 5 per cent in Longford to 16 per cent in Donegal and Cork.[9]

Apart from prices and quantities, some other data are also interesting to look at:

Although Irish houses are rather small compared to other Western European countries, they are still larger than houses in the UK. The average newly built dwelling has a floor area of [88].4 m2 whereas the figure for the UK is only 76.0.[10]
In 2002, 45.6 per cent of all Irish dwellings were built after 1980. This is more than twice the share of UK dwellings built after 1980 (in 2001 the share was 18.5 per cent).[11]
Ireland has a very low dwelling stock per capita: There are only 341 dwellings per 1,000 inhabitants, compared to 430 in the UK. Part of that phenomenon can be explained through Ireland’s extraordinarily high average household sizes: 2.9 persons per household, compared to 2.3 in the UK.[12] This can probably be traced back to the fact that Catholic belief had a formative influence on Irish family structures for decades – an influence that is now strongly declining. The figure also reflects larger households in rural parts of the country.
However, Ireland is catching up with the number of dwellings per 1,000 inhabitants: In 2002, 14.7 new dwellings were completed per 1,000 inhabitants (3.1 in the UK).[13]
The share of owner-occupied dwellings (78 per cent) is even higher than in the UK (69 per cent).[14]
What all these figures suggest is that the Irish economy, far from entering a steady-state growth path, is still in a period of economic upheaval that will continue to challenge and change the planning system and building industry. Rapid economic growth had to be accommodated for in the housing sector, and planning had to support this process if it did not want to be the bottleneck of the building process and risk even further increases in prices. Later we will try to answer the question whether planning was successful in achieving these goals, but before we do this we need to have a look at the basic structures of the planning system in Ireland.