Thanks Darragh! You're right that he is probably referring land banking.
In a highly constrained land market--where supply is constrained both by a lack of infrastructure capacity and by planning policy, like the NPF--land banking makes sense for any developer. We would probably see fewer homes if the big firms were to purchase land at the beginning of each project, rather than have a pipeline ready to go. There is little good data on the extent of the practice. I have never heard Sirr or anyone make a compelling case that the practice is being done in a way that counterfactually reduces overall output, so I am unconvinced that it represents a constraint.
IMO Land costs in Ireland are too high, and are driven by artificial scarcity imposed by Govt (lack of zoning, infrastructure) but are such a low overall proportion of housing costs that they don’t really matter. Even if development land was free there wouldn’t be a significant drop in the cost of housing provision, the cost of which as you know is largely driven by having the most stringent building regulations in the world, and being located on an island where we import almost every component that goes into housing construction.
Mike Bird’s book points out how Singapore avoided the ‘relative’ cost of housing spiking by maintaining freehold ownership of land, but he doesn’t point out (rightly or wrongly) that the standard of the apartments the government mandate being built there is, to put it mildly, not good. So land as a proportion of cost is much higher and therefore more impactful.
Thanks Rick! As you say, constrained land supply is a big issue and one I have written about a lot. I probably should have taken the opportunity to make that point here as well!
I am incidentally reading Mike Bird's book now and enjoying it.
A lot of what gets framed as speculation reflects how development capital actually behaves in practice. Capital moves into delivery when risk, cost and returns line up, and pulls back quickly when they do not. When construction costs, finance and delivery risk move faster than the sales or income values achievable, schemes that previously stacked up can stall without any deliberate decision to wait. From the outside that can look like hoarding, but it is more often a breakdown in viability than an expression of speculative intent.
Great post! Was surprised that Land costs are ar most 25%. That should be very encouraging because it must be easier to lower construction costs than it is it lower land costs. I know that in some major cities land contributes to two thirds of the cost!
Question : if land is up to 1/4, construction is about 1/2, what constitutes the remaining 1/4?
Really interesting stuff Seán. I have a couple of questions:
1. In the discussion of vacancy I was a bit confused as you seem to be using housing vacancy as the basis for an analysis of land. I'm not sure if that makes sense?
2. The question of whether land costs are 'high' is a bit tricky. Usually a commodity is described as having a high price in the sense that the price unduly exceeds the cost of production, i.e. it is over an above what is needed to compensate the risks associated with production. However, land is not produced, and therefor there is no cost associated with producing it per se. You look at the percentage of house prices accounted for by land. How confident are you that this is a good way of thinking about whether land prices are 'high'?
This second question relates to the Henry George stuff. My interpretation of George is a bit different. The core of his argument is that private ownership of land is inherently a form of rentierism since pretty much all land became a private asset, at some point, through violence and conquest. Landowners extract income from capitalists and workers without necessarily performing any useful economic function. Landowners may or may not 'hoard' land depending on circumstances, but either way they are kind of holding everyone else to ransom (since almost all economic activity must take place on land).
On vacancy: You're of course right that residential vacancy is distinct from "vacant land." I didn't mean to imply "if housing units are not vacant, then land is not vacant". Rather, I was trying to say that if "hoarding" was widespread, you would expect to see it on lands with residences on them as well as greenfield. But since we have very little data on the latter, we can learn something by looking at the former.
Many commentators suggest vacancy is a) a large problem in cities and b) that it is due to "speculation" ie hoarding vacant residences. Another reading of what I was trying to say is that this distinct claim is not true.
On land costs: I was here mostly interested in the relative contribution of cost pressures. In absolute terms, I am not sure I can confidently insist that land prices are low or high. But I think we can learn from the relative contribution of land prices to overall development costs that "land prices are not the main driver of cost pressures." It is this marginal claim that I was trying to defend.
On George: You're probably correct as a reading of his central message. Indeed, as I understand it, he was also anti-urban! For this piece, I was trying to extract the specific relevant points from Progress and Poverty that were most relevant here, rather than offer a faithful exegesis of his worldview.
Excellent piece. I'm sure you saw that Professor Sirr, coincidentally, had a piece in the Irish Times yesterday where he stated plainly that "speculation is a large part of many countries' problems". I asked ChatGPT to summarise what he means by 'speculation' in this context and received the following reply: "he means the deliberate holding back of land or housing from use or construction in order to profit from rising values". As you point out, vacancy rates in Dublin are very low and so it would seem that he can only be referring to land banking. Perhaps he would be so kind as to use his platform to provide more information on his concerns. To be fair, he is good at providing figures so I'm sure he can back up his statement.
Thanks Darragh! You're right that he is probably referring land banking.
In a highly constrained land market--where supply is constrained both by a lack of infrastructure capacity and by planning policy, like the NPF--land banking makes sense for any developer. We would probably see fewer homes if the big firms were to purchase land at the beginning of each project, rather than have a pipeline ready to go. There is little good data on the extent of the practice. I have never heard Sirr or anyone make a compelling case that the practice is being done in a way that counterfactually reduces overall output, so I am unconvinced that it represents a constraint.
Great post Sean.
IMO Land costs in Ireland are too high, and are driven by artificial scarcity imposed by Govt (lack of zoning, infrastructure) but are such a low overall proportion of housing costs that they don’t really matter. Even if development land was free there wouldn’t be a significant drop in the cost of housing provision, the cost of which as you know is largely driven by having the most stringent building regulations in the world, and being located on an island where we import almost every component that goes into housing construction.
Mike Bird’s book points out how Singapore avoided the ‘relative’ cost of housing spiking by maintaining freehold ownership of land, but he doesn’t point out (rightly or wrongly) that the standard of the apartments the government mandate being built there is, to put it mildly, not good. So land as a proportion of cost is much higher and therefore more impactful.
Keep up the good work!
Thanks Rick! As you say, constrained land supply is a big issue and one I have written about a lot. I probably should have taken the opportunity to make that point here as well!
I am incidentally reading Mike Bird's book now and enjoying it.
It’s a great book though very troubling in some of its conclusions!
Seán, really interesting piece and discussion.
A lot of what gets framed as speculation reflects how development capital actually behaves in practice. Capital moves into delivery when risk, cost and returns line up, and pulls back quickly when they do not. When construction costs, finance and delivery risk move faster than the sales or income values achievable, schemes that previously stacked up can stall without any deliberate decision to wait. From the outside that can look like hoarding, but it is more often a breakdown in viability than an expression of speculative intent.
Great post! Was surprised that Land costs are ar most 25%. That should be very encouraging because it must be easier to lower construction costs than it is it lower land costs. I know that in some major cities land contributes to two thirds of the cost!
Question : if land is up to 1/4, construction is about 1/2, what constitutes the remaining 1/4?
Thanks, Omer!
The rest is what is sometimes referred to as "soft costs", that's everything from planning and legal fees to financing.
Really interesting stuff Seán. I have a couple of questions:
1. In the discussion of vacancy I was a bit confused as you seem to be using housing vacancy as the basis for an analysis of land. I'm not sure if that makes sense?
2. The question of whether land costs are 'high' is a bit tricky. Usually a commodity is described as having a high price in the sense that the price unduly exceeds the cost of production, i.e. it is over an above what is needed to compensate the risks associated with production. However, land is not produced, and therefor there is no cost associated with producing it per se. You look at the percentage of house prices accounted for by land. How confident are you that this is a good way of thinking about whether land prices are 'high'?
This second question relates to the Henry George stuff. My interpretation of George is a bit different. The core of his argument is that private ownership of land is inherently a form of rentierism since pretty much all land became a private asset, at some point, through violence and conquest. Landowners extract income from capitalists and workers without necessarily performing any useful economic function. Landowners may or may not 'hoard' land depending on circumstances, but either way they are kind of holding everyone else to ransom (since almost all economic activity must take place on land).
Thanks Micheal!
On vacancy: You're of course right that residential vacancy is distinct from "vacant land." I didn't mean to imply "if housing units are not vacant, then land is not vacant". Rather, I was trying to say that if "hoarding" was widespread, you would expect to see it on lands with residences on them as well as greenfield. But since we have very little data on the latter, we can learn something by looking at the former.
Many commentators suggest vacancy is a) a large problem in cities and b) that it is due to "speculation" ie hoarding vacant residences. Another reading of what I was trying to say is that this distinct claim is not true.
On land costs: I was here mostly interested in the relative contribution of cost pressures. In absolute terms, I am not sure I can confidently insist that land prices are low or high. But I think we can learn from the relative contribution of land prices to overall development costs that "land prices are not the main driver of cost pressures." It is this marginal claim that I was trying to defend.
On George: You're probably correct as a reading of his central message. Indeed, as I understand it, he was also anti-urban! For this piece, I was trying to extract the specific relevant points from Progress and Poverty that were most relevant here, rather than offer a faithful exegesis of his worldview.
Thanks for the clarifications Seán, that all makes sense
Excellent piece. I'm sure you saw that Professor Sirr, coincidentally, had a piece in the Irish Times yesterday where he stated plainly that "speculation is a large part of many countries' problems". I asked ChatGPT to summarise what he means by 'speculation' in this context and received the following reply: "he means the deliberate holding back of land or housing from use or construction in order to profit from rising values". As you point out, vacancy rates in Dublin are very low and so it would seem that he can only be referring to land banking. Perhaps he would be so kind as to use his platform to provide more information on his concerns. To be fair, he is good at providing figures so I'm sure he can back up his statement.