Bursting a Bubble Myth
Ireland’s housing bubble and bust has become emblematic of what not to do in housing debates around the world. The only problem is nobody agrees what actually went wrong.
Capital Thinking • Issue #1095 • View online
Ireland had arguably the world’s largest housing bubble and crash in the 2000s, with prices quadrupling in the decade to 2007, even while supply soared, before crashing by more than half between 2007 and 2012.
Unsurprisingly, this extreme experience has been the subject of much research.
Why Ireland’s housing bubble burst
Housing has become a critical economic, social and political issue in many cities across the high-income world. At its worst, it even threatens the very concept of living standards in high-income countries, gobbling up a third or even half of the disposable incomes of individuals and households in some locations.
But it wasn’t always like this.
Adjusting for inflation, the price of housing in high-income countries underwent ups and downs in the century to the 1960s but the trend was largely stable. Though the timing varies by country, it has only been in the last half-century or so that the price of housing has shot up like a hockey stick.
As the world’s largest economy, the United States has been the highest-profile market to make this transition, along with a number of other countries that have followed the same patterns.
Ireland is at the extreme end. Like a Rorschach test, people look at Ireland and see whatever suits them most in making arguments about housing and economic policy.
But many of these arguments rely on simplistic myths about what happened.
Contrary to many of these claims, Ireland was not a story of overbuilding caused by laissez-faire policy, or an experience that defied standard economics. Ireland built very few ghost towns – housing excesses, where they occurred, were a product of government tax policy, rather than irrational markets.
And supply and demand perform very well in explaining the trends. Failing to understand these basics will mean we are susceptible to making the same mistakes all over again.
I have spent much of the last fifteen years studying the Irish housing system, following it from the heights of the Celtic Tiger bubble to the following crash and the subsequent decade of rising prices.
There are, to my mind, three myths that have emerged about the Irish housing market that muddy the waters in our understanding of housing markets not just there but everywhere.
Myth #1: Ireland built too many homes
One myth I meet again and again – even in Ireland – is that Ireland built too many homes, creating ghost towns of thousands of empty homes.
But this is based on a misunderstanding of the data. To understand why, we first need to understand what Ireland’s ghost estates were – and were not.
Over the last decade, journalists I have spoken to, from many different countries, have invariably asked about the ghost estates they heard about. Often, particularly in the earlier years, they would ask if they could go visit one within a short distance from Dublin.
Unfortunately, I had to let them all down.
Don’t get me wrong. As of 2011, Ireland had nearly 3,000 developments classed by policymakers as ‘Unfinished’. They were enough to hold 180,000 dwellings. In a country that had 1.7 million occupied dwellings in the 2011 Census, that is certainly a large number.
But while the number 180,000 conjures up images of streets of pristine homes slowly disintegrating for a want of people, the truth is quite a bit different.
As figures based on comprehensive surveys show, nearly half of those homes – just under 86,000 – were not only complete but already occupied. Irish policymakers called them ‘unfinished’ rather than ‘ghost’ estates for reasons other than marketing.
From the off, Ireland’s ‘ghost estate’ problem was much more about some people living in developments that were partially complete than no one living in fully complete ones.
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.
In Dublin, if you were looking for large developments of empty houses or apartments, in 2011 you would find two developments with more than 200 empty apartments – Clancy Quay near central Dublin and Tallaght West in the south-west of the metro area.
The largest number of empty houses in the city was Stocking Wood, which had fifty-three empty houses as well as eighty-six occupied ones. In a city of 1.5 million residents, these are hardly shocking numbers.
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.
So with just a bit more understanding of the information available, ‘ghost estates’ shrink from 10% of Ireland’s housing to just 1% – or maybe 2% if you count the units that could be completed for relatively low cost.
Given that most countries would look to add something like 1% to their housing stock each year, it is clear that the myth of Ireland as the poster child of ghost estates is way wide of the mark.
Myth #2: Ireland’s bubble was a case study in laissez-faire
Michael Dnes