Housing policy blunders and how to fix them

Cut construction costs, free up land, and speed up planning

Housing policy blunders, and how to fix them

Today Progress Ireland has launched “The Blueprint: 25 ideas to deliver 300,000 homes.” You can read the full report here. Also: a reminder 

that Progress Ireland will be hosting our monthly meet-up at The Duke on Wednesday the 30th of July from 17:30 to 19:30.

The housing shortage wasn’t caused by one big decision. It was caused by an accumulation of thousands of decisions, over decades. Together, these decisions have conspired against the delivery of new homes. But why?

One reason these policy decisions have worked against housing delivery was because they were not focussed on building more homes.

They weren’t focussed on building more homes because the decisions were not focussed on any one thing at all.

The story of recent housing policy has been one of adding conditions: you can have a new home but not there. You can have an apartment, but only if it is the biggest, brightest, and expensive. Young people want a home of their own but only if it contributes to net-zero goals, boosts biodiversity, and makes an architectural contribution. We need more homes but…

To be sure, the government has the unenviable task of being responsible for genuinely competing and important problems. For every condition placed on housing, there is usually a valuable goal. But in government as in ordinary life, in trying to do everything, you achieve nothing. And housing policy is a particular instructive case. Construction costs are high, in part, because regulations are imposed without enough concern for their impact on affordability. Land availability is low, in part, because the government has been too focussed on a false theory of how to achieve regional balance. Planning is slow and contentious, in part, because the government has focussed too much on giving planners flexibility rather than accelerating housing supply.

In each case, the government’s eye was not on the ball. Rather, they were focussed on a mesh of other and often competing concerns. Let’s take each one of these in turn.

1. Cut construction costs

Construction costs matter a lot. As they rise, housing supply falls. The reverse is also true. In Ireland a 10 per cent drop in costs brings with it a 19 per cent increase in supply in the long run.

One way to think about this is like a gate. If the cost of building a flat is greater than the cost people can afford, that flat won’t get built. If the cost is too high, the gate closes. No one will have a reason to build it. The government might do it but if costs are too high, there is a limit to how many the government can underwrite.

To open the gate, either the government has to spend more or the cost of construction needs to come down. The former doesn’t make a lot of sense since Ireland’s housing expenditure is one of the highest in Europe. And high spending can’t continue forever. Why is it so expensive?

A big part of the answer is the overregulation of apartment delivery. At present, it is illegal to build an apartment that is affordable to most people. By illegal, I mean the legally empowered planning authorities will not permit the building of apartments that fall within the budget of most households.

If you ask the Department of Housing why costs are so high they will point out external shocks and interest rates. These are obviously important. A lot of short term variation in costs have been down to these kinds of external factors. However, the data suggests there is more to the story in the long term.

Inputs costs have been going up for a long time. Inputs into construction include labour and material costs. Naturally, if it costs more to higher a bricklayer and bricks cost more, then construction costs will go up.

However, the overall cost of construction has risen a lot more than input costs. Construction costs have increased 45x while labour and material costs have only increased 29 fold. That is what this graph shows. The line labelled ‘hedonic cost index’ tracks the change in the overall cost of construction. It excludes land costs, finance costs, and taxes. It shows a steep change in the cost of construction.

Why has this happened? There are many reasons. One is low productivity growth (which I have written about here). Another is, as the Department says, external shocks. But a very important reason is overregulation.

Why do I think this? There are three main reasons.

The first is just basic common sense. If homes are much nicer than they were in the past, they will be more expensive. This is not a criticism in the slightest. As the country gets richer, it is good that the quality of our homes keep pace. In the early 70s only 79 per cent of homes had piped water and 71 per cent has a flushable toilet. Now, those figures are well over 99 and 97 per cent. Irish homes are now more energy efficient. In 1971, most homes had little insulation and were built using cavity blocks. In 2024, all new dwellings are to have a minimum energy BER rating of A2. Naturally, these things have a cost. But it is a cost that most are happy to accept.

There are two different sets of regulations that are often conflated. One set are the building regulations which govern the safety of buildings. They cover structural requirements, fire safety, accessibility, among other things. Things like piped water, flushable toilets, and energy ratings are all part of the building regulations. The other set are planning regulations. They set out how nice homes should be, such as their size, whether they have a balcony, and whether they come with extra communal space to mingle with your neighbours.

All of these things are good to have. No one could doubt that it is better to have a bigger and warmer and brighter flat. But when you pile on too many different conditions, it is quite unsurprising when costs spiral out of control.

The second reason is that we have direct evidence of the relationship between regulatory changes and costs. Ireland has flirted with allowing councils to set different minimum standards. When they did, regulatory standards diverged, and so did costs.

In 2007, central government introduced apartment standards. However, these standards were advisory. They asked that each local authorities adapt the standards to suit their preferences.

The result was that relative to national standards, apartments in Dublin and Cork were made about €30,000 more expensive to build at the stroke of a pen. This was purely the result of regulatory changes to size, dual aspect, balcony, and floor to ceiling height changes.

The third reason is from international comparisons. A departmental study showed that the typical Dublin two bed apartment is €60-70,000 more expensive to construct than the typical Berlin two bed apartment. When building like for like, costs were roughly comparable. But when the study looked at differing regulatory regimes and market preferences, the cost differences rose to around 30 per cent.

The lesson of these three points is clear. When you increase the regulatory burden on apartments, you increase the cost of construction.

I, for one, would like a small apartment in the city. But the kind of an apartment that I could afford is simply illegal to build. One major reason for this is regulatory in nature.

Increases to quality are a good thing. But if policy prioritises increasing the minimum standard of apartments over the delivery of new homes, it shouldn’t surprise anyone that there are very few new homes being built.

To get costs down, the regulatory standards are going to have to change. Last week, the government announced some modest changes which I welcome. But there is more to do if costs are going to enable the level of housing we need.

2. Free up more land

Low availability of land relative to demand results in fewer homes being built. In fact, it may be the most important determinate of housing supply.

The first reason for this is straightforward. Land is an essential ingredient in new homes. If the amount of available land is low, then the number of new homes will be low.

The second reason is less straightforward but just as important. Tight land supply makes it difficult to do big projects. Where there is only land capacity to deliver small projects, only small projects happen. And when there are only small projects, there can be only small firms. But why would this matter?

Small firms are less productive than big firms. This because small firms do not have the capital to reinvest in innovation. Nor are their projects large enough to achieve economies of scale.

If land supply is low, there will not be enough room in the market for larger firms to emerge. Large firms need a pipeline of land, they need confidence that their raw materials (eg land, planning permissions, workers) will be there. But without these, small firms cannot grow. So we are stuck with small and unproductive firms.

Despite its importance, successive governments have severely limited the amount of available land. Some of this has been due to mistakes. Such as the miscalculation of unmet demand (read our full paper for more). But some have been the direct result of government policy.

As I have argued here and here, and as pointed out by the Housing Commission, OECD, and Irish Cities Group, the National Planning Framework caps the development of Dublin. The NPF is where the government sets out its planning goals up until 2040. It was recently updated to align with the latest census and ESRI figures. But the NPF limits the amount of land available for new homes in the capital. But why does it do this?

The reason is because planners hope that people will chose to live in other parts of the country. Their means of achieving this is to suppress the supply of new homes in Dublin. The metaphor behind their theory is that growth is like a balloon. You squeeze one end and the air is diverted to the other.

The first thing to say about this is that the squeezing part of the NPF works: it successfully suppresses the supply of new homes in the capital and its immediate area. Between the last two development plans, the NPF managed to remove capacity for about 100,000 new homes.

But the diverting part has not worked at all. Growth has not been diverted away from Dublin. Rather, growth has stubbornly focussed on Dublin and its catchment area. You can see in this graph, that rather than rebalancing growth, the cap on Dublin has just ballooned the size of Dublin’s commuter belt.

Not only has this policy failed on its own terms, it has been harmful. Squeezing Dublin means fewer people have access to new jobs. Those that still work or study in Dublin are faced with crammed houseshares, long commutes, and high prices, and few options.

All of this is, in part, the result of focussing less on enabling the delivery of housing and more on goals such as regional balance. But how can policy become an enabler and accelerator of housing rather than a blocker?

The first thing to say is that I do not believe the NPF needs to be changed in order to remove this negative side effect.

The way the NPF downzones Dublin is by how it is interpreted by local authorities in their Housing Supply Targets. When setting targets, local authorities use a methodology given to them by the department. It is that methodology which causes an undersupply of land in places like Dublin.

To do this, I believe, the Housing Supply Target (HST) Methodology must be slightly modified, instructing councils to always pick the higher of the population targets available to them.

Importantly, changing how HSTs are calculated in this way will retain the good features of the NPF while removing the bad. It will increase the amount of land available in, for example, the West but it will stop the restriction on Dublin.

3. Speed up planning

An uncertain planning system has costs.

Where planning rules are unclear, it is up to individual teams of planning officers to figure out, on a case by case basis, what can be built and where. On receipt of a planning application, planners are given the unenviable task of interpreting the dozens of objectives and goals of their development plan.

The biggest cost of this flexibility is time. This process is inherently unclear. Rules are left intentionally opaque. But opaque rules slow things down a lot.

You can see the cost of delays in this graph. According to the Department of Finance, a six month delay can reduce the return on a project by 20 per cent.

But the good news is that the government can speed up planning without upending the entire system.

When Ireland makes planning clearer and more predictable, we get better results. Strategic Development Zones permissions get built out far quicker than normal planning permissions.

Following recommendations from the Irish Cities Group, the government can make development plans operate similar to SDZs. Certainty could become the norm, not the exception.

To build 300,000 new homes, Ireland needs to focus on delivering more homes. This doesn’t mean nothing else matters nor does it mean we set ourselves up for failure later. But it does mean getting out of our own way. To build the homes Ireland needs, Ireland needs to cut costs, free up land, and speed up planning. Progress Ireland’s latest paper sets out the blueprint for how to do that.