Why Ireland’s housing bubble burst

From the blog post:

Myth #1: Ireland built too many homes

And of the nearly 95,000 homes that weren’t occupied by 2011, nearly two thirds simply didn’t exist – they were homes for which planning permission had been granted but no work had ever started, while a further 9,000 were in the early stages of construction when work halted. Just one in ten of the units said to be in ghost estates – 18,600 – were complete and sitting empty in 2011. Roughly the same number were neither fully complete nor abandoned in the early stages of construction – around half were classed as ‘near completion’ and the other half earlier in the build process.

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By the mid-2010s, these developments and the others in the survey were all almost entirely fully occupied, and the strength of demand for Irish housing meant that the annual survey of unfinished developments was wound down.

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Myth #2: Ireland’s bubble was a case study in laissez-faire

[Tax policy] created a bizarre situation where the optimal tax strategy was to build homes in designated areas such as Ireland’s Upper Shannon region, but it didn’t really matter if you found tenants or not – the important thing was to spend the money on building, in order to reduce your tax bill on other rental income.

Unsurprisingly, given this distorted playing field, the sector responded with gusto, building tens of thousands of homes in places designated by politicians as ‘in need of renewal’ (read: votes) as they didn’t need to worry about long-term need. As can often happen with heavily planned systems, the construction of new homes followed the preferences of planners and politicians, rather than the emerging needs of households.

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Myth #3: Ireland’s experience refutes the laws of supply and demand

Between the late 1990s and 2007, regulators did nothing as credit conditions relaxed dangerously. First-time buyers went from typically being offered a loan of three times their savings (in other words needing a deposit of 25%) to being offered a loan of nineteen times their savings (a 5% deposit) or more.

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Unsurprisingly, tapping into all this extra leverage meant that the regular battle between supply and household income faded into the background. Of the 7.9% average annual increase in real housing prices 2001–2007, my research estimated that almost all of that increase each year (7.5 percentage points) was due to looser credit conditions – as captured by the ratio of credit to deposits.

I don't quite get this, but I think he's saying that they didn't need a lot more houses, but people were bidding them up due to relaxed credit. (Isn't relaxed credit a form of demand?)

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Put another way, nobody worried about the cost of building a home rising from €125,000 to €225,000 when credit had pushed prices up from €150,000 to €350,000. But when prices crashed back down to €175,000, the system had a real problem on its hands – one that policymakers have been loath to touch. Put simply, the case of Ireland shows that where housing becomes unviable to produce, due to higher costs, then we as a society are missing out on the benefit that additional housing would bring.

The argument here seems to be that increased wages and other costs during a boom time don't go back down later. It seems to be true of other industries, too?

The OPR’s job is to review the Development Plans of each of Ireland’s thirty-one local authorities and ensure that they comply with national policy. To do this, though, they are upending the system used in other countries. England’s Housing Delivery Test, for example, is a housing floor, which penalises councils which don’t meet certain supply targets over a set period of time. Ireland’s OPR, however, has interpreted the numbers as a ceiling for local authorities.

(This is decidedly not an argument for a free market; it's an argument for government officials to encourage more housing rather than holding it back.)

Note: I don't actually know anything about Ireland, so it might be interesting to find other views on this.