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An American Chamber of Commerce Ireland Report with Ronan Lyons, Trinity College Dublin

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Growing Great Teams in Ireland: The Role of the Residential Rental Sector

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About the American Chamber

The American Chamber of Commerce Ireland is the leadership voice of US business in Ireland. The mission of the American Chamber is to keep Ireland the global location of choice for US companies. American Chamber membership includes US companies operating from Ireland, their strategic partners, and organisations with strong bilateral trade links between Ireland and the United States.

Context

This report explores the link between housing and international competitiveness in the Irish economy with a specific focus on the provision of urban rental accommodation in Dublin. The responsiveness of housing supply to new demand is perhaps the single most important measure of the extent to which the housing system is functioning. The aim of this report is to convey the views of American Chamber member companies on the challenges facing the rental market and to formulate recommendations and a constructive approach to addressing some of the pressure points.

The American Chamber is strongly of the view that to attract US companies to Ireland and the talent that they require, Ireland must maintain its position as a highly competitive location for inward investment. Current global developments which impact the Irish economy, such as the UK’s intention to withdraw from the European Union, puts greater emphasis on Irish competitiveness to retain and grow employment. The American Chamber welcomed the launch of the Government’s strategy ‘Rebuilding Ireland’ in 2016 and its commitment to deliver a rental sector-specific strategy. In its submission to the National Planning Framework, the American Chamber stressed its aim to have Ireland recognised within the world’s top decile as a place to work and live. The submission highlighted that investment in housing is a crucial factor in achieving this aim.

The American Chamber looks forward to engaging with policy stakeholders on this report’s recommendations.

Acknowledgement

The American Chamber was delighted to have the research leadership, expert knowledge and facilitation support of Ronan Lyons on this project. Ronan Lyons is an Assistant Professor of Economics at Trinity College Dublin, where his research focuses on housing markets. He is a frequent contributor to national and international media on matters pertaining to the Irish housing market and the broader economy.

Contents

About the American Chamber .................................................................................................................................. 3

Context ......................................................................................................................................................................................................... 3

Acknowledgement .................................................................................................................................................................... 3

Executive Summary ................................................................................................................................................................. 4

1. Housing & Competitiveness ............................................................................................................................... 6

2. Ireland’s Housing Challenge, 2017-2022 ...................................................................................... 7

2.1 Housing Demand ........................................................................................................................................................ 7

2.2 Housing Supply ............................................................................................................................................................. 9

3. Research Findings ............................................................................................................................................................ 13

4. Analysis ............................................................................................................................................................................................. 15

5. Policy Recommendations .................................................................................................................................... 18

Ireland has to be recognised within the world’s top decile as a place to work and live

Growing Great Teams in Ireland:

The Role of the Residential Rental Sector

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Executive Summary

Controlling costs, clarifying the role of regulation, and managing the existing stock of land and dwellings will be key to ensuring that accommodation availability contributes positively to employment growth and Ireland’s emergence as a global hub for business activity. Given the role of housing in competitiveness, and the related need for substantially higher levels of availability in the private rented sector, a change in focus is needed.

In an era where much of Ireland’s Foreign Direct Investment (FDI) is based on access to skilled labour, there are two clear implications for housing. Firstly, companies locate where skilled labour wants to locate and skilled labour seeks locations that offer a greater variety of amenities, i.e. larger cities. Secondly, wages make up three quarters of the cost base of the typical FDI service-based operation currently and, with housing comprising one third of the typical household’s disposable income, this means that housing is roughly one quarter of Ireland’s competitiveness. Further, this paper estimates that in the Greater Dublin Area alone, taking into account the various sources of demand during the period 2017-2022, as well as trends in tenure, over 30,000 new rental dwellings for one- and two-person households will be needed in the city by 2022, largely in or close to central urban locations

Due to the significant role housing plays in the costs faced by employers and their employees, rising costs and limited availability of suitable accommodation pose a challenge for policymakers. This report outlines four potential Government policy actions to address this challenge. These include:

• Controlling the Cost Base: Commission and publish an independent audit of construction costs against international peer locations, to provide an agreed evidence base to establish targeted actions to reduce the cost of construction.

• Understanding the Regulatory Impact: Conduct and publish a regulatory impact report to consider the increased costs associated with regulations, the benefits derived from these regulations and their impact on the viability of development projects.

• Managing Existing Stock: Establish a comprehensive database of ownership and residency, with the objective of targeted promotion leading to greater take-up of existing supply side taxation and incentives.

• Increasing Land Use for Development: To act as a catalyst to boosting supply, an appropriate land value tax on all commercial and publicly owned land should be considered to increase the supply and lower the cost of development land. In addition, reform of height restrictions in urban centres should improve housing provision and availability/density in areas with good physical and digital connectivity, schools and amenities.

Current trends of sharply rising sale and rental prices for Irish housing are, therefore, very concerning for policymakers. These prices reflect strong demand but very weak supply. Ultimately, the responsiveness of supply to new demand is the single most important measure of the health of a housing system.

Member companies of the American Chamber of Commerce Ireland, interviewed as part of this report’s research, confirmed that housing is one of the most critical pressure points when looking at recruitment for expansion. They also emphasised that the situation in Ireland requires more attention than in many other comparator locations.

This report is structured as follows: Section 1 outlines the relationship between housing and competitiveness, while Section 2 describes the housing challenge that Ireland faces over the coming five years. Section 3 presents the findings of a series of in-depth interviews with member companies of the American Chamber on the impact of housing on their ability to attract and retain talent. Section 4 analyses these findings, while the final section outlines some key high-level policy recommendations, based on research findings.

Ultimately, the responsiveness of supply to new demand is the single most important measure of the health of a housing system.

RESEARCH FINDINGS

RECOMMENDATIONS

Average income

Obsolescence of older properties

Average houshold size

Natural increase in the population

Net migration

Drivers of Housing Demand

Benchmark Construction

Costs against Peer International Locations

Report on the Cost and Benefits of Regulations on

Construction Viability

Establish Database of Ownership and

Residency to Support Targeting of Policy

Measures

Increase Densification and Appropriate Land

Value Taxation to Boost Supply

New rental dwellings(1-2 bedroom) needed by 2022

+30.000+30.000

Controlling Costs

Regulatory Impact

Managing Stock

Improve Land Use

The availability of quality and affordable accommodation has a direct impact on the hiring of talent

Talent increasingly seeks accommodation that has excellent access to public services and facilities

Employers are deploying a wide range of novel measures to manage accommodation challenges

The provision of short-term accommodation is impacting the responsiveness of business operations

7Growing Great Teams in Ireland:


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1. Housing & Competitiveness

Housing is a key ingredient of competitiveness. Analysis by the economist Ronan Lyons suggests that housing is a critical component of Ireland’s ability to retain and attract investment.1 Regular reports by Ireland’s National Competitiveness Council on the cost of doing business indicate that labour costs comprise roughly three quarters of the typical FDI service-based operation currently in Ireland.2 For workers, housing is the single most important item of expenditure, with a widely accepted rule of thumb that one third of disposable income is the largest sustainable fraction that a household should spend on accommodation. Combining those two ratios – three quarters and one third – this analysis implies that housing alone constitutes roughly one quarter of the international competitiveness of Ireland’s cities. 3

The National Competitiveness Council have repeatedly highlighted the current challenges in this area for Irish locations. Their bulletin on The Impact of House Price & Rent Affordability on Competitiveness summarises the relationship between accommodation costs (both sale and rental) and competitiveness.4 This analysis shows the challenges facing Dublin when it comes to its housing sector: of 12 international cities analysed in their study, Dublin ranked the third least affordable for mortgages and the fourth least affordable for rents.

These findings reflect the increase in sale prices for housing in Ireland’s cities since 2012 as the economy expanded, while rental prices have risen by an even greater fraction. Increases by urban market are shown in Figure 1, which compares average sale and rental prices in early 2017 with the lowest point since 2007 (typically 2011 for rents and 2012 for prices). The increases reflect imbalances in the supply of and demand for residential housing, particularly in Dublin, where monthly rents have risen by 65% in just over five years.5 Such imbalances could have a significant effect on the competitiveness of Ireland’s cities as economic regions competing in a global economy.

1 Lyons, R. 2017. ‘Housing and Ireland’s competitiveness jigsaw’. RonanLyons.com; available on: www.ronanlyons.com/2017/03/06/housing-and-irelands-competitiveness-jigsaw/

2 National Competitiveness Council, ‘Costs of Doing Business in Ireland 2017’; available on: www.competitiveness.ie/Publications/2017/NCC-Costs-of-Doing-Business-2017-Report.pdf

3 The costs faced by business are gross, including all taxes and social insurance contributions, and the income received by households is net of such taxes, the link between the two remains.

4 NationalCompetitivenessCouncil,‘ImpactofHousePrice&RentAffordabilityonCompetitiveness,CompetitivenessBulletin16-6’;availableon: www.competitiveness.ie/Bulletins/Housing-affordability-bulletin.pdf

5 Daft.ie, ‘The Daft.ie Rental Price Report: 2017 Q1’; available on: https://www.daft.ie/report/ronan-lyons-2017q1-rental

Figure 1

Percentage increase in housing costs, Q1 2017 compared to lowest point since 2007, by segment and market

Source: Analysis of Daft.ie Reports

2. Ireland’s Housing Challenge, 2017-2022

Both sale and rental prices for Irish housing have risen sharply in recent years. This is particularly acute in Dublin, where sale prices have increased by 55% and rental prices by 65% in the last five years. This reflects strong demand but very weak supply. In relation to demand, as outlined below, the country requires at least 40,000 new homes each year, to accommodate obsolescence, falling household size, a natural increase in the population and likely migration pressures. The bulk of these new homes will be in urban areas and are needed for one- and two-person households.

At the same time, supply is extraordinarily weak, as Section 2.2 discusses. Focusing on the Greater Dublin Area (GDA), roughly 1,200 new homes are needed each month – but the average number of new homes started each month during 2011-2016 was just one quarter of that. The picture is similar, if less acute, across the country as a whole. Ultimately, the responsiveness of supply to new demand is the single most important measure of the health of a housing system.

While there are a variety of factors that affect housing market outcomes, they can ultimately be viewed as factors affecting either demand or supply. This section reviews the outlook for both demand and supply of accommodation in Ireland’s cities over the period 2017-2022. Particular attention is paid to Dublin; both as Ireland’s capital city and as the location where the supply-demand imbalance has been most acute in recent years.

2.1 Housing Demand

There are five key drivers of housing demand in Ireland’s cities over the coming years:

Average incomes

The first factor mentioned is household income, which in turn reflects the broader economy and labour market conditions. Ireland has been the European Union’s fastest growing economy each year since 2014. Unemployment in Ireland has fallen rapidly from over 15% in early 2012 to just 6.3% by June 2017, well below the Euro area average of 9.3%. In Dublin, the unemployment rate is slightly lower again, at just 6% by late 2016, according to the CSO’s Quarterly National Household Survey.6 Falling unemployment reflects job creation, with total employment in Dublin rising by 17% between 2012 and 2016, from 540,000 in employment to 630,000. This is in line with longer-term evidence, as Ireland has one of the EU’s fastest growing labour markets: more jobs were created (in percentage terms) in Ireland over the period 2000-2015 than any other European economy apart from Austria.7

Job creation means greater demand for accommodation by boosting household incomes, as well as by attracting new households to the area where new jobs are created. Trends from the period 1980-2012 indicate that, once credit and housing supply are controlled, an extra 10% in real incomes translates into an 8% increase in housing prices. Research on the period 2007-2013 that exploits rich data on the location of employment in foreign-owned IDA-supported companies in Ireland finds that 1-2 years after 1,000 extra jobs have been created, monthly rents in nearby properties will be between

6 CentralStatisticsOffice,‘QuarterlyNationalHouseholdSurveyQuarter42016’;availableat:http://www.cso.ie/en/qnhs/

7 Eurostat, ‘EU Labour Force Survey 2016’; available at: http://ec.europa.eu/eurostat/web/main/home

• Average incomes

• Obsolescence of older properties

• Average household size

• Natural increase in the population

• Net migration

Job creation means greater demand for accommodation by boosting household incomes, as well as by attracting new households to the area where new jobs are created.



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0.5% and 1% higher, with an even larger effect on sale prices.8

Ireland has enjoyed extraordinary success in attracting FDI over the last three decades. It consistently ranks in the top five economies globally for FDI jobs created per million inhabitants in the annual IBM Global Location Trends report.9 This points to a sustained competitive advantage, reflecting internal strengths and access to EU markets, which is likely to persist in the coming years. Clearly, headwinds are possible: the full impact of the UK’s intended departure from the EU remains unpredictable, while the appetite for further trade liberalisation globally may have diminished, at least in the OECD. Nonetheless, it would be imprudent for policymakers to assume that these factors will sufficiently hamper Ireland’s cities’ ability to create new jobs over the period 2017-2022.

In addition, four further factors affect the total number of new homes needed each year in Ireland:

Obsolescence of older properties

Ireland’s stock of dwellings is disproportionately older and rural. Each year, as in all countries, real estate depreciates, with a small fraction becoming obsolete. A rate of depreciation of 0.5% per year implies 10,000 units are needed each year nationally (2,500 in Dublin) just to keep the housing stock constant. A higher rate of 0.8% per year (as assumed by the CSO in the National Accounts) implies 16,000 units nationally – and 4,000 in Dublin.10 This means that, in order to offset obsolescence, the country needs at least 10,000 new homes built each year to keep the housing stock constant. Some of this will stem from urbanisation, as Irish households move into cities, similar to their European peers in previous decades.

Average household size

Ireland has Western Europe’s largest average household size (2.7) – but it has been declining steadily since the 1960s.11 As it converges to the European average (2.3),12 this will create significant amounts of new housing demand. Even with a fixed population, a rise in the fraction of 1-2 person households creates demand for a significant number of new dwellings. Relative to a 2.7 average household size, a population of 4.8m with an average household size of 2.5 requires 142,000 extra dwellings, the equivalent of 10 years of construction output at 2016 rates. Convergence to European average of 2.3 would require an additional 300,000 dwellings over the current stock of dwellings.

Natural increase in the population

Underlying positive demographics also point to significant demand for housing. Ireland’s rate of natural population growth is by far the fastest in Europe. Demographics mean that the size of the family-forming age cohort will fall in the period to 2025 – before rising significantly until 2040: there are roughly 60,000 Irish-born turning 30 this year and excluding any net migration, this will fall to 50,000 in 2026 before rising to 75,000 by roughly 2040.13 Dublin’s population is weighted more towards renting cohorts (25-39 year-olds compared to 40-54 year-olds) than most European cities. By 2031, the underlying natural increase, coupled with likely migration pressures, will increase the population of the Greater Dublin Area (GDA) from 1.8 million to about 2.1 million.14

8 Agnew, K. & Lyons, R. Trinity Economic Papers #tep0417 ‘The Impact of Employment on Housing Prices: Detailed Evidence from FDI in Ireland’; available at: https://www.tcd.ie/Economics/research/papers/. This study covers a period of inelastic supply: in a healthier housing system,theeffectwouldbeacombinationofpricesandquantities,i.e.someofthehighersaleorrentalpricewouldbeoffsetbyadditionalnew homes built in response to the new jobs.

9 IBM Plant Location International, ‘IBM Global Location Trends 2016: 2016 Annual Report’; available at: https://www.ibm.com/services/us/gbs/thoughtleadership/gltr2016/

10 CentralStatisticsOffice,‘NationalAccounts:Annual’;availableat:http://www.cso.ie/en/statistics/nationalaccounts/

11 Source:variousissuesoftheCensusofPopulationofIreland,CentralStatisticsOffice.

12 Eurostat, ‘Average household size - EU-SILC survey’; available at: http://appsso.eurostat.ec.europa.eu/nui/show.do?dataset=ilc_lvph01&lang=en

13 Source:CentralStatisticsOffice,Vital Statistics.

14 CentralStatisticsOffice,‘PopulationandLabourForceProjections2011–2041’;availableat:http://www.cso.ie/en/statistics/population/populationandlabourforceprojections2011-2041/

Net migration

Lastly, there is net migration. Following a number of years of net emigration after the Financial Crisis, net migration turned positive in 2016 as the economy expanded. This reflects a steady fall in emigrants since 2012 and a steady rise in immigrants, including returnees to Ireland as opportunities to work at home become increasingly available. Every additional 10,000 migrants and returnees require 4,000 new dwellings, principally in the cities.15 In total, adding up the different sources of demand, the underlying demand for new dwellings nationwide is likely to be at least 40,000 and closer to 50,000 per year.

2.2 Housing Supply

Census figures indicate that the Greater Dublin Area (GDA) added over 100,000 people between 2011 and 2016, or roughly 650 new households per month.16 However, between Census 2011 and Census 2016, there was no month where 650 or more new homes were completed in the GDA. In total, over that five-year period, fewer than 20,000 homes were completed in the GDA, less than half of new household formations. It is likely that these figures overstate supply, as completions are measured by connections to the electricity grid and a substantial number of “completions” reflected dwellings built during the Celtic Tiger i.e. from the mid-1990s to the mid-2000s, but only connected to the grid in the 2011-2016 period. Commencements offer a truer picture of construction activity: just 15,300 new homes were started in the GDA between 2011 and 2016.

Taking into account the various other sources of demand outlined in Section 2.1, it is estimated that the true monthly demand for housing in the GDA is closer to 1,200. Figure 2 outlines the volume of building activity by local authority in the GDA, relative to this level of demand. While it shows some improvement in 2015 and 2016 compared to earlier in the period, just 15,000 new homes were started, about one fifth the level of real demand.

15 This is based on the average size of non-Irish born households in the 2011 Census.

16 Source:analysisof2011and2016CensusesofPopulationofIreland,CentralStatisticsOffice.

Figure 2

New homes started in the Greater Dublin Area, by local authority and month, relative to estimated demand

Source: Analysis by Ronan Lyons (including of CSO and Dept of Housing reports)



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Census figures also indicate relatively high vacancy rates for residential property in Ireland, compared to other OECD countries. In the area covered by Dublin City Council, for example, the vacancy rate in the 2016 Census was 9% – similar to the rate in Cork City and roughly twice the rate of vacancy in healthy housing systems. The determinants of vacancy in Ireland remain poorly understood, in part due to the lack of registers of title/ownership and of occupancy.17 The compilation of such registers would enable local authorities to understand the reasons for vacancy, which could include inefficient probate and conveyancing systems and the effective incentive to leave property vacant provided by the Fair Deal nursing home scheme, which taxes rental income at a rate of 80%.18 By understanding the relative importance of these and other factors, it would be possible for local authorities, particularly in urban areas, to target a halving of vacancy, in order to bring vacancy rates closer to those observed in other cities in the OECD. Such a reduction in vacancy would be the equivalent of 100,000 new dwellings (or seven years supply, at 2016 rates). Further gains could be made with ‘over the shop’ conversions.

In addition to a small available housing stock, there is also a clear imbalance in the stock that does exist. Remaining with Dublin, in the 2011 Census, the city was home to 467,000 households, of which more than half (256,000) comprised just one or two persons. However, only 170,000 dwellings in Dublin contain four or fewer principal rooms. Early reports from the 2016 Census point to the pressure in the housing market. After decades of falling household size, it rose slightly between 2011 and 2016. This increase does not reflect a baby boom or even a growth in couples without children. Four broad categories of household exist: families with children; families without children (including people living on their own); family households that include unrelated persons; and “non-family” households. Over 40% of Ireland’s population growth between 2011 and 2016 came from two traditionally small sources: families who have non-family members living with them, and non-family households.

The lack of apartments has meant that households are forced to rearrange to fit the existing housing stock, comprising typically of three- and four- bedroom houses, despite the preference of some for apartment living. This imbalance is noticeable in an international comparison. According to the Eurostat Housing Census, roughly 12% of households in Ireland live in apartments.19 This is very low compared to almost all other European regions. Eurostat also highlighted that just 14% of households in the region that includes Dublin and Cork live in apartments. This is very low compared to other European city-regions that are equivalent in terms of population: almost half of Liverpool’s housing stock is apartments, two-thirds in Copenhagen and over three-quarters in Lisbon.

17 Minister Eoghan Murphy’s announcement of key actions underway on vacant homes is welcome in this regard: http://rebuildingireland.ie/news/minister-murphy-announces-actions-underway-on-vacant-homes/

18 Citizens Information, ‘Nursing Homes Support Scheme’; available at: http://www.citizensinformation.ie/en/health/health_services/health_services_for_older_people/nursing_homes_support_scheme_1.html

19 Eurostat, ‘2011 Census Hub’; available at: http://ec.europa.eu/eurostat/web/population-and-housing-census/census-data/2011-census

14% of households in the region that includes Dublin and Cork live in apartments. This is very low compared to other European city-regions that are equivalent in terms of population: almost half of Liverpool’s housing stock is apartments, two-thirds in Copenhagen and over three-quarters in Lisbon.

Given the obvious need for a greater stock of multifamily units (apartment buildings), and other forms of housing, the lack of construction of such homes is a particular challenge for Ireland’s cities. The rental sector has professionalised considerably in recent years, with the rise of institutional landlords and the first signs of a build-to-rent sector. Nonetheless, those involved in construction highlight the very high “hard costs” of construction (i.e. costs associated with the physical construction, such as materials and labour) both including or excluding government taxes such as VAT.20 For example, it is estimated that it is roughly 50% more expensive to build one square metre of an apartment block in Dublin than in Amsterdam.21 Member companies of the American Chamber, that are involved in the property market, have also made reference to total development costs in Dublin versus comparator UK cities such as Manchester and Belfast and noted that rented residential construction in the UK incurs no VAT.

The up-front minimum cost of €325,000 for a two-bedroom apartment in Ireland translates into a monthly rent of at least €1,600. Market rents for such properties in early 2017 were well below this in large parts of the country. The average two-bedroom apartment had a monthly rent of €950 in Cork City, €825 in Galway and €725 in Limerick. Only in the most expensive markets of Dublin were average rents for two-bedroom apartments above €1,600. Without detailed and transparent audits of construction costs in Ireland’s cities, compared to their peers, it will not be possible to identify the correct policy solutions needed to lower costs, improve viability and increase supply.

Online listings confirm the supply pressures outlined above. There were just 1,500 homes available to rent in Dublin on 1st January 2017, compared to an average of almost 3,500 on the same date for the previous ten-year period 2007-2016.22 A similar pattern emerges for the sale segment, with just 2,800 homes for sale in the capital at the turn of the year, a little more than half the ten-year average. The shortage of property actively on the market converts directly into greater pressure on sale and rental prices. As shown in Figure 3 below, the Dublin rental market requires roughly 13,500 listings per quarter – less than this (as has been the case consistently since 2012) means rents increase.

20 Member companies of the American Chamber, that are involved in the property market, made reference to total development costs in Dublin versus comparator UK cities such as Manchester and Belfast and noted that rented residential construction in the UK incurs no VAT.

21 Source: Hines presentation, Dublin Economic Workshop Annual Conference, September 2016.

22 The source for statistics in this paragraph and in Figure 3 is the property listings website, daft.ie.

Figure 3

Number of homes listed for rent in Dublin and subsequent change in rents, by quarter (2006-2016)

Source: Analysis of Daft.ie Reports



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A similar pattern of strong demand and very inadequate new supply exists in Ireland’s other major cities, albeit less extreme. In Cork, average monthly rents have risen by 53% from their lowest point, while in Galway, they have risen by 48%. In both cities, rents have risen in all except two of the last twenty quarters.23

A summary of the required pipeline of new supply is given in the table below. This includes the four main sources of demand: obsolescence, demographics (changing household size), a natural increase in the population and an allowance for net migration. In particular, it assumes 0.5% obsolescence annually, a fall in household size to 2.5 by 2030, an average natural increase of 40,000 per year and net migration averaging 20,000 per year (with both the natural increase and net migration in 2.5-person households on average). The proportion of new homes in the rental sector is determined by using the fraction of which was rental among newly formed households over the last ten years, while Dublin’s requirement is calculated on the basis of its share in population and economic activity. The construction of new homes has been consistently less than 15,000 since 2010 and, once allowances are made for connections to the electricity grid which are not related to the construction of new homes it is likely that fewer than 5,000 new homes have been built annually over the last decade.

Table 1. Rounded estimates of total new units required, in Ireland and Greater Dublin Area, 2017-2022.

Source National Greater Dublin Area

Obsolescence 50,000 17,500

Demographics 62,500 22,000

Natural Increase 80,000 28,000

Net Migration 40,000 14,000

Total 232,500 81,500

of which Rental 82,500 32,500

23 Daft.ie, ‘The Daft.ie Rental Price Report: 2017 Q1’; available on: https://www.daft.ie/report/ronan-lyons-2017q1-rental.

3. Research Findings

As research for this report, member companies of the American Chamber were interviewed, in both one-to-one-interviews and a group roundtables.

The companies which were interviewed represented a range of sectors: financial services, medical devices, pharmaceutical, ICT and other sectors. The research encompassed Dublin, Cork, Galway and Limerick based companies and ranged from high growth companies to those that are steady in size.

Research evidence highlights that housing is one of the most critical challenges facing member companies of the American Chamber. Recent performance of IDA clients suggests that new investments to Ireland in International Services, Technology and Financial Services have all shown significant employment increases in the past five years.24 Internationally, such firms tend to cluster in city-regions in search of their talent pool – a similar practice has also been adopted for their operations in Ireland. Residential planning and development needs to match this pattern of industrial investment- such as housing, schools, transport and utilities.

Hiring New Recruits

Within the FDI base, the pressures in the accommodation sector are most acutely evident within high growth sectors as companies are rapidly scaling-up new operations in urban locations around the country. There is clear evidence from the research process that both expanding and newly arrived companies find it particularly difficult to house their employees – including those based in Ireland and those arriving from overseas.

24 IDA, ‘2016 Performance Statement’; available at: http://www.idaireland.com/newsroom/fdi-employment-hits-new-l/



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Particular challenges arise where there are specific skills gaps in Ireland or particular language capabilities are required by a company. New recruits therefore move to Ireland’s city centres from overseas. The majority of these employees desire to locate themselves close to workplaces – avoiding long commutes in unfamiliar surroundings. The experience of recruiters within the FDI sector suggest that demand exists for accommodation which is suitable for such employees who are often young and single. In many cases they have expectations of living in a centrally based studio apartment, and are thus surprised when they arrive in a situation where they are sharing a suburban semi-detached house. The often-poor standard of rental properties is also a surprise for new recruits.

For new-hires moving to or arriving back to Ireland other problems arise when they are unable to find accommodation. Without a fixed address, there are difficulties in opening a bank account – thus receiving wages – and in setting up utilities. Employers work with new-hires through these ‘orientation’ hurdles but clearly a reduction in the period of time it takes to find accommodation would have a positive knock-on impact to attract and retain talent. It would result in less stress during the crucial settling-in period and would foster a more pleasant experience, for the new recruit and accompanying family members.

Ireland shares aspects of these challenges, such as the demand for accommodation, with many of its competitor locations globally. However, when asked to compare London and Dublin, member companies responded that while cost was an issue in London, availability was not. It is clear that addressing these pressures in the housing sector will boost Ireland’s competitiveness to retain and attract investment and jobs.

Ancillary facilities

Research evidence clearly indicates that ancillary facilities – such as schools, childcare, roads and car parking – are viewed as key enablers of employment growth, in addition to challenges relating directly to accommodation provision. For some companies, it is possible to establish operations in satellite locations with higher accommodation availability. Interviews with member companies which have operations in towns in the South-West, showcased how they had relieved pressure on operations in Cork city using such a model. Good broadband access is often a key prerequisite for such a proposition. However, it must be noted that for many companies, this will not be an option, as they must locate where skilled labour is willing to live – and the trend globally is for skilled labour to value amenities offered by larger cities.25

Managing the Challenge

Evidence from the research process confirms that a collective effort has been made by companies to ensure Ireland’s attractiveness is not impeded by challenges in the housing market. Measures taken by companies include: reviews of global relocation packages; advanced property viewings conducted by HR teams and allowing greater leeway for new starters leaving their place of work to view potential homes. This discretionary effort can only be sustained for so long, as supply hopefully responds to demand and new policy changes stimulate provision of supply.

There are opportunity costs to perceived limits in the availability of accommodation – mainly risks that investment projects may not flow as easily to the Irish operations if there is a possibility that the onboarding process could be constrained by accommodation challenges. This research suggests that companies are currently managing the challenge, but they are reaching a tipping point.

25 On the relationship between skill, wages and city size, see for example Costa, D.L. and Kahn, M.E., ‘Power couples: changes in the locational choiceofthecollegeeducated,1940–1990’(TheQuarterlyJournalofEconomics2000)andDelaRoca,J.andPuga,D.»Learningbyworkinginbigcities”(TheReviewofEconomicStudies2017).

Ancillaryfacilities–suchasaccessto schools, childcare, roads and car parking–arealsoviewedaskeyenablers of employment growth.

Short-term accommodation

Consultation with member companies highlighted that there is a clear gap in the provision of short-term and entry-level rental accommodation, in addition to rental accommodation for senior leadership and mid-career talent, as mentioned previously. During the research process, it was noted that the availability of housing for specialised and leadership talent is very much a pinch point: it is not just a matter of cost, but also of sheer availability. Evidence shows that companies are now renting short-term accommodation before employees have been hired. Companies have adopted this hedging strategy to ensure they can support enterprise growth and business continuity.

It is evident that a lack of short-term accommodation has an impact on a company’s ability to secure accommodation for internship programme participants during summer months. This is due to the influx of tourists who also rent short-term accommodation. Evidence from member companies highlighted that the construction of purpose-built student accommodation would help alleviate this problem – as would the construction of apart-hotels and general hotel space.

4. Analysis

The responsiveness of housing supply to new demand is perhaps the single most important measure of the extent to which a city’s housing system is functioning. Academic research on housing has found that the average price of housing, even in the largest cities, need not be higher than the cost of a new build, provided geographic and policy barriers do not exist.26 The cost of housing in Ireland’s cities – particularly in Dublin – has risen steadily since the 1980’s, reflecting an inability of supply to keep up with new demand. As in other countries, land use restrictions are responsible for much of the increase in housing costs in urban areas.

Nonetheless, the inability of supply to meet demand has been particularly acute since the end of the recession in 2011. However, property industry figures point to a significant bounce back in the construction of new office space, hotels and purpose-built student accommodation since 2015. In the office space segment, roughly 250,000m2 of new office space is currently being built in Dublin in 2017, with similar amounts of new capacity scheduled to be added in 2018 and 2019.27 This is roughly two thirds higher than the level of development during the period 2006-2010 and directly follows a period from

26 Saiz,A.(2010).Thegeographicdeterminantsofhousingsupply.TheQuarterlyJournalofEconomics,125(3),1253-1296.

27 ThefiguresinthisparagrapharetakenfromCBRE’sanalysisoftheDublinofficesegment:CBRE,‘DublinOfficeMarketViewQ22017’;available at: http://www.cbre.ie/ie_en/research



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2011 to 2015 where zero new stock was built. This shows supply of office space responding to trends in rents, which fell from €675 per square metre in 2007 to just €300 in 2012 and subsequently rose back to 2007 levels. It also shows that access to finance and overall capacity of the sector are second-order issues, after supply, demand and viability. Similar trends have recently emerged in the hotel sector and in purpose-built student accommodation.

Member companies of the American Chamber believe that there is an opportunity to “join the dots” in policymaking: the lack of apartments in central locations has meant far greater pressure in the three- and four-bedroom family home segment. A number of professionals sharing a dwelling means that this home is not available for families. As outlined above, a significant volume of purpose-built student accommodation is required in all Ireland’s cities in the coming years. This will not only help free up family housing but it will also enable companies to avail of this accommodation for short-stay programmes, such as internships, during non-term times.

With Dublin requiring approximately 35,000 student units in the period 2017-2022, proposals for student accommodation should be looked on favourably.28 This is true because they help house students but also because they help competitiveness directly, by providing accommodation for interns. This is even more important given that the existing shortage means that students currently live predominantly in family homes, which has a wide knock-on effect. The provision of specific targets at local authority level could assist in meeting the demand for student accommodation.

Part of the challenge relates to regulatory specifications. These include requirements for underground car-parking and lifts per floor. Such specifications, in addition to size and orientation restrictions, are out of line with other comparator cities, such as London and Amsterdam. Both lifts and basement car parking spaces incur significant costs and the latter also effectively limits heights. This, and limits on heights, also increase the per-unit cost of lifts.29 Whereas many European locations provide accommodation for single workers, including studio apartments, this is largely proscribed by Irish minimum standards.

In general, Ireland’s urban centres lack the density of many of its comparator city-locations in the OECD for inward investment. Planning restrictions on height (even in special development zones) have a significant impact on both the viability of multi residential developments and the capacity of urban neighbourhoods to absorb demand for accommodation. There has been a broad coalition of social and economic stakeholders in favour of reform of building heights and density restrictions in Dublin. New thinking is required to position Ireland’s urban centres for enterprise growth and new waves of inward investment which will drive the demand for greater accommodation.

If local authorities had annual quantitative targets relating to specific housing segments, the planning risks outlined above may be minimised. This suggests the establishment of categories of principal dwelling types at national level, together with the estimation of likely annual demand for each type at local authority level.30 Inclusion of these annual requirements, by type, in local authority plans, and a requirement to refer to these requirements when making planning decisions on substantial applications, for example of more than 100 units, would connect individual decisions made by local authorities to the high-level need.

28 This number is based on an analysis of trends in student numbers, including demographics, enrolment and international students, and allowing for 35% of students living at home with their parents, with half of the remainder living in purpose-built student accommodation and the other half living in the wider rental sector.

29 Lyons,R.C.(2014).HousingsupplyinIrelandsince1990:theroleofcostsandregulation. JournaloftheStatistical&SocialInquirySocietyofIreland, 44.

30 TheCensustaxonomy,across17differenthouseholdtypes,isunlikelytobefullyfitforpurposeinthisregardbecauseitprimarilyfocusseson marital status.

Requirements for underground car-parking andliftsperfloor,sizeandorientation restrictions, are out of line with other comparator cities.

Compared to peer regions, Ireland has an extremely low fraction of its housing in apartments. The weak level of new supply in recent years, given very strong demand, reflects poor cost competitiveness, particularly for the construction of apartments. As mentioned in Section 2.2, it is estimated that per-square-metre construction costs for apartments in Dublin are close to €2,000, excluding VAT. This is roughly 50% higher than costs for similar projects in the Netherlands and Canada.

According to figures provided by Hines at the Dublin Economics Workshop Annual Conference in 2016, costs in Dublin are considered high across all standard headings of construction used by professionals (e.g. structures, façades, fit-out, services, site works and preliminaries).31 Related to this is a much higher level of regulation pertaining to apartments compared to houses, as explained in Section 4. As a result, viability for apartments is reached only in the highest-income areas of Dublin, e.g. the Docklands or Dublin 2/4 postal districts.

To address the high cost of construction in Ireland, of all accommodation types, there must be an agreed evidence base, at least among those involved in shaping and deciding policy. To identify the steps needed, a transparent and independent audit of the individual elements adding to break-even costs of delivery is required, one that compares Dublin and other cities in Ireland with international peer locations. Previous assessments take the per-square-metre costs of constructions as given, but as this is where the bulk of the cost differential appears to be, a detailed examination of the components of this cost by policymakers is required. This will identify not only the extent to which costs are in line, if this is indeed the case, but also the specific areas that contribute most to cost differentials. An obvious template for such an exercise is the World Bank Doing Business report, where the various stages of running a business are broken down and the costs (in money, time and procedures) are fully visible – and can be updated if incorrect by readers. 32

The outlook over the short, medium and longer-term horizons is that there will continue to be strong demand for housing in Ireland’s largest cities. In the Greater Dublin Area (GDA) alone, taking into account the various sources of demand during the period 2017-2022, as well as trends in tenure, over 30,000 new rental dwellings for one- and two-person households will be needed in the city, largely in or close to central urban locations.33

31 Source: Hines presentation, Dublin Economic Workshop Annual Conference, September 2016.

32 World Bank, ‘Doing Business 2017: Ireland’; available at: http://www.doingbusiness.org/reports/global-reports/~/media/WBG/DoingBusiness/documents/profiles/country/IRL.pdf

33 ThefiguresinthisparagrapharebasedonthefoursourcesofdemandoutlinedinSection2.1,allocatedtoDublinonthebasisofitsshareofthe population and economic activity.

Over 30,000 new rental dwellings for one- and two-person households will be needed in the city, largely in or close to central urban locations.

+30.000DWELLINGS



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5. Policy Recommendations

In summarising the policy priorities to address the housing needs of the FDI sector, three clear themes emerge. The first is the importance of cost control: central government and all local authorities should know the break-even cost (in up-front and monthly terms) of key dwelling types and how this compares to affordability given the earnings profile of residents. Any assessment of costs should be done in a transparent way, where figures can be validated and iteratively improved by external experts.

The second key theme is incorporating opportunity cost into the planning and regulatory system. This follows on from the first theme described above: it is imperative that policymakers know if a new regulation reduces viability to such an extent that the cost outweighs the benefit. Distinctions may also need to be made between targets and minimums. Annual goals relating to particular property types, reflecting the strong demand for accommodation across Ireland, will help keep underlying demand salient when local authorities review decisions.

Related to this, the existing stock of buildings is also used sub-optimally. Within the existing stock of residential dwellings, vacancy rates are high. As explained before, this reflects a lack of comprehensive registers of ownership and occupancy, and a range of other factors. In addition, it is estimated that there is substantial latent supply of dwellings in Ireland’s non-residential stock. This is evidenced in the empty space on the top floors of retail streets. Such an issue could be addressed by encouraging a far greater take-up of the existing taxation and incentives.34

There is a challenge around managing the existing stock of both buildings and land. The wedge that has arisen between the average cost of housing and the build cost since the 1980s reflects the largely passive nature of land use policy, particularly in relation to brownfield sites. Consideration should be given to the role of a reformed land value taxation system to boost supply and lower the cost of development land. Reform should be revenue-neutral e.g. replace existing commercial rates, while also enhancing investment competitiveness.

Such a land value tax on all commercial and publicly owned land would dramatically increase the supply and lower the cost of development land. This is particularly relevant in the context of a reform of height restrictions, given the demand for density in Ireland’s cities. Such a reform would improve housing provision and availability/density in areas with good physical and digital connectivity, schools and amenities. As mentioned before, sub-optimal use and high vacancy rates may reflect incentives to hold property/sites as a long-term asset over development. This reflects a low property tax, the lack of comprehensive registers of ownership and occupancy, and a range of other factors. In addition, it is estimated that there is substantial latent supply of dwellings in Ireland’s non-residential stock.

34 Increased information and promotion of these measures is required. Data released from the Department of Finance on Budget Day in 2016 indicated that take-up of the Living City Initiative had been lower than anticipated: http://www.budget.gov.ie/Budgets/2017/Documents/Tax_Expenditures_Report%202016_final.pdf

Controlling costs, clarifying the role of regulation, and managing the existing stock of land and dwellings will be key to ensuring that housing no longer acts as a barrier to employment growth and Ireland’s emergence as a global hub for business activity. These are policy priorities that will mark a departure in Irish housing policy.

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August 2017