The price Ireland pays for its strict housing regulations

A recent study from the Department of Housing hints at why so few apartments get built.

Ireland has some of the highest quality new homes in the world. 99 per cent of new homes have an A BER (energy) rating. New Irish houses and apartments are bigger than are typically found in Europe and in the UK. 

The upside of high standards are clear. They make our homes safer, bigger, and brighter. They fight climate change by forcing greater energy efficiency.

But high minimum standards aren’t a free lunch. They make homes more expensive to build, which means fewer people can afford to buy them, which means fewer of them end up getting built. The result is shortages and high prices. There is a balance to be struck. 

There is a sweet spot of minimum standard that Ireland has surpassed. Many categories of Irish homes – especially apartments – are now so nice that they can’t be built at a price an ordinary person can afford. 

In Ireland, building is expensive

Ireland is short of about 230,000 homes. Year on year demand ranges from 50,000-85,000 depending on your assumptions about, for instance, household sizes and obsolescence rates. While Ireland has done a good job at ramping up its response, there remain major constraints. 

Among the barriers are an uncertain planning process, low availability of zoned and serviced land, rent controls, and poor water infrastructure. But one of the most important constraints is that of the high cost of construction. 

Dublin is now the second most expensive city in Europe to build apartments. It costs about €600,000 to deliver a two-bed apartment in Dublin and €461,437 to deliver a three-bed house. the following chart shows costs per square metre in a range of European cities.

Source: SCSI and Trinity College Dublin

High construction costs matter because they drive up rents and home prices. 

This they do by increasing the breakeven costs for developers. The more it costs to build a home, the more the developer will need to charge, the fewer homes will be built, and the higher rents and house prices will be.

A recent paper by Lyons and Günnewig‐Mönert showed the relationship between high costs and housing supply. According to their analysis, a 1 per cent increase in construction costs leads to a 1.9 per cent decrease in new housing supply in the long run.

Construction costs have risen fastest for mid and high-rise apartments. These apartments now cost more to build than buyers can afford to pay. The result is that few of them are built. 

During last year’s National Economic Dialogue, viability was “accepted as the most significant impediment to an increased housing supply.” “Developers, and possibly more importantly investors, simply do not believe they can build a buy-to-sell apartment at a price that will cover the cost,” the report added. 

Costs are high partly because our homes are nicer

High costs are not new. Construction costs have been outpacing the Consumer Price Index since the 1990s. By 2016, input costs had grown 25 per cent above the CPI rate, and this differential further widened to an estimated 38 per cent by 2021. 

Source: Department of Finance

The chart above shows the rise in construction costs in Ireland over time. It shows the increase in labour and unit material costs. What it does not show is changes in the quality of homes. 

A 2023 study, however, did account for quality. It found that Irish houses are higher spec than in European peer cities. The study was conducted for the DHLGH by Mitchell McDermott, found that across five European cities. It found like-for-like costs were comparable but the scope, specification, and quality of homes in Dublin set them apart. 

The cities reviewed were Dublin, Birmingham, Copenhagen, Utrecht, and Berlin. They used a “traveling box” to compare the costs of delivering the same unit in each city. For apartments, that meant a 91 square metre two-bedroom; and for houses, that meant, comparing 123 square metre three-bedroom ‘scheme house.’ 

The study found that, for a two-bed apartment, there was a cost range of only five per cent between the most and least expensive of the five cities. For a three-bed house, the range was 6-10 per cent. This isn’t much. When building like-for-like (or close to it), costs between these cities are comparable. Why, then, does Dublin stand out?  

The cost difference comes down to quality differences between the cities. When size, quality, and specifications are included, Dublin’s apartments are significantly more expensive than Copenhagen, Utrecht, and Berlin. For suburban apartments, Dublin was 30 per cent more expensive than these cities; for urban apartments, Dublin was 33 per cent more expensive. 

Irish houses are typically bigger than in other countries. With size comes internal complexity. And internal complexity increases costs. One reason why Birmingham is cheaper is because their houses are typically smaller. Smaller homes typically mean simpler homes. In Birmingham a 93 square metre home will not have an ensuite. In Dublin, new homes are typically larger (typically around 110 square metres) fitted with ensuites. As a consequence, homes in Dublin are 15 per cent more expensive to deliver than in Birmingham. 

When we turn to apartments, the quality differences–and cost differences–are even bigger. Irish apartments stand out as high quality in comparison to European countries. Dublin’s apartments typically have unusually high scope. In Copenhagen, Berlin, and Utrecht, apartments are commonly sold or rented without finishes such as kitchens, appliances, and fitted wardrobes. In Dublin, new apartments are typically ‘turnkey’, meaning they are ready to be lived-in straight from the developer. Irish apartments also have more bathrooms.

To be sure, either way, the cost of these finishes are paid for by the consumer. In the European cities the home buyer buys their own wardrobe and microwave. In Ireland, the developer pays for these, and then passes their cost on to buyers.

Irish apartments are also built to higher specifications than the other cities in the study. For instance, windows considered to be a “premium product” in Berlin are considered standard in Ireland. In Berlin, uPVC windows are common whereas more expensive aluclad windows are the norm for new apartments in Dublin. 

Germany is not known for its drafty windows. Asked what feelings Germany awakes in her, Angela Merkel once said “I think of well-sealed windows! No other country can make such well-sealed and nice windows.” 

Irish homes have stricter energy ratings than they once did. From 1983 to 1993, over half of new builds had a BER rating of D or lower. Since 2015, 95 per cent of new homes have been A rated; since 2020, that figure has been 99 per cent.

Source: CSO

Higher energy ratings come at a cost. They mean thicker walls, more glazing on windows, and more insulation. Energy ratings are partly the product of what are called ‘U-values.’ A U-value is the rate at which heat gets through a barrier, like a wall or window. The more heat that gets through, the higher the U-value. The higher the U-value, the lower the energy rating.

Low U-values are expensive to achieve. For instance, to meet modern standards, barrier walls must now contain about 40 per cent more material than in the 1980s. As we saw from the HCCI, the unit cost of material has been rising. So, each wall contains both more and more expensive material than ever before. 

Source: Dublin Economic Workshop

Apartments are better insulated and also much bigger than before. Minimum floor area standards set the minimum internal size of a dwelling. In 1995, DHLGH (then the Department of the Environment) advised sizes no smaller than 38 square metres for a one bedroom homes. The 1995 guidelines were not national but covered development within Urban Renewal Tax Designated Areas. Equivalent guidelines today mandate a minimum of 45 square metres or more at the national level. 

Source: DHLGH

The walls are thicker, the material in the walls is more expensive, and the apartments are bigger. How much, exactly, do these new minimum standards cost? 

 The cost of higher minimum standards

As an example of how costly changes to minimum standards can be, let’s focus on the change in minimum standards of 2007. In September of 2007, the Department of Environment (now DHLGH) brought in a new set of apartment design guidelines. At the time, local authorities were encouraged to “improve” on these minimum standards.

Local authorities took up the Department’s invitation and set about increasing standards. The divergence in standards between local authorities at that time gives us the opportunity to examine how standards fed through to real-life construction costs.

Take minimum apartment sizes. Local authorities decided to improve on the Department’s advice and significantly increased the minimum size of apartments. A presentation by Mitchell McDermott delivered to the Irish Planning Institute in 2020 showed the increases in minimum standards by the council. Here are the increases in minimum apartment sizes relative to the Department’s advice:  

Source: Mitchell McDermott

The Mitchell McDermott presentation showed the costs of these relative increases in apartment standards. The increased standards they looked at were: minimum apartment size, minimum balcony size, dual aspect requirements, and floor to ceiling heights. 

Their analysis took a notational scheme of 100 units and broke down the cost of delivering the scheme in each council jurisdiction. The national guidelines was taken as the baseline, indicated to the left of the table below in grey. Each column to the right shows the additional marginal cost caused by the increases in minimum standards in each local authority area.  

Source: Mitchell McDermott

By how much did higher standards increase costs? In the local authority that introduced the most stringent standards, Dublin City Council, construction costs for one bed apartments increased by €32,000 relative to the minimum standards; two beds cost €38,000 extra to build, and three beds cost €34,000 extra. This is relative to a national minimum standard that, itself, marked a significant rise in standards (before 2007, there were no national minimum apartment standards guidelines).

Consider a one bed apartment in Dublin City Council’s area. A one-bed apartment cost €32,000 more to build in Dublin city than in other places that didn’t increase standards. That increase in construction cost also feeds through to soft costs such as margin and finance cost.  So the per unit total increase in cost – which is paid by the buyers – would be expected to be €40,000 or so. In the context of a one-bedroom apartment, €40,000 is a big increase. 

The sweet spot 

Bright, spacious and well insulated homes are good. But unaffordable homes are bad. How should we think of this balance? 

Let’s take a step back and ask: what are minimum standards for? Fire standards are there to save lives. Structural requirements are there to prevent buildings falling down. These standards not only protect the inhabitants but also neighbours. They make perfect sense.

Another good reason for regulation is to protect consumers from being exploited when it’s hard for them to know what they’re buying. This is why medicines are tightly regulated. But apartments are not like medicines. The buyer of an apartment is fully aware of the size and spec of apartment they’re buying.  

What about rules for minimum floor space or minimum balcony standards? Other things being equal, it is nice to have a balcony. And it is better to have more space than not. But other things are not equal. The aspiration of high minimum floor standards is to give people more private space. But in practice, what we see is that they push people into living with multiple friends or strangers, often with little private space. Ireland has a higher proportion of people in ‘crammer’ houses – with unrelated people sharing a household – than European peers. The following chart shows the ratio of crammer households to one person households.

High housing costs also force people into living with their parents late into their lives. Between 2011 and 2022, the number of adults living with their parents rose by 19 per cent. That’s a change of over 83,000. Irish people between the ages of 25 and 34 are over 3 times more likely to live with their parents than Germans of similar ages. Like in crammer houses, those living in their parents’ “box room” often have less private space than in the smallest apartments in Europe.

One reason why governments may regulate for minimum standards is, like with fire and structural requirements, to protect human life both of inhabitants and neighbours. But this covers our building regulations and not the minimum standards of apartments. These standards are produced in different sections of the DHLGH. Building regulations are dealt with by technical experts in construction, familiar with fire and structural engineering. While the minimum apartment standards are produced by planners. The standards discussed here are not related to safety. 

Not everyone has lost their choice. Those who can afford Ireland’s expensive apartments still can choose whether they want to live in a large apartment or a big house. But high standards take away the choice of those who cannot afford them. This is just one way in which the consequences of high minimum standards are inequitably distributed: they hurt the worst-off the most.  

This is one reason why the current Minister for Housing in New Zealand has abolished minimum apartment sizes and balconies. Minister Bishop has argued that given the choice between living with their parents and living in, say, an apartment with no balcony, many young people may choose to forego a balcony. The New Zealand view is that those who want a balcony can choose to buy one.

In a cold country, like Ireland, many balconies go unused. Walking around Dublin, you might see them as nothing more than unofficial smoking areas. But minimum private open space rules mandate their presence.

Source: Sapphire Balconies 

Take a look at SeLoger, Paris’s equivalent of Daft. A single person with a budget of €600/month has lots of choice. You will find 549 furnished studio apartments. On Daft, you will find zero.

To be sure, there are many ways construction costs might be lowered. Interest rates, VAT, professional fees, margins and development levies all play their part. I'm focusing on minimum standards because, per the 2023 study, Irish housing doesn't cost much more to build than peer countries provided it's on a like-for-like basis. It's only when the higher specification of Irish housing is taken into account that Irish construction costs rise out of line with peers.

Irish policymakers should ask themselves: on balance, what kind of a country does Ireland feel like at the moment? On balance, does it feel like a place where the most pressing problem is new homes that are too dark, too small, and without access to fresh air? Or does it feel like the most pressing problem is high housing costs, housing shortages and long commutes?