Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Housing Supply in Ireland since 1990: The Role of Costs and Regulation

Academic journal article Journal of the Statistical and Social Inquiry Society of Ireland

Housing Supply in Ireland since 1990: The Role of Costs and Regulation

Article excerpt

1. INTRODUCTION

The Global Financial Crisis has highlighted the importance of understanding macroeconomic fluctuations. The housing market is now understood to be central to those fluctuations, with housing the most important consumption good in developed economies. Its unique role in the economy stems from its dual role as a good (shelter) and an asset (real estate). As macroeconomics looks to develop models that incorporate a realistic financial sector, therefore, understanding what determines house prices remains an important challenge.

House prices are determined by demand, which reflects factors such as income, demographics and user cost, and two forms of supply: credit and housing. A growing literature--led by John Muellbauer at Oxford--has examined the impact of an outward shift in credit supply on house prices (see, for example, Fernandez Corugedo & Muellbauer 2006 and Duca, Muellbauer & Murphy 2011). Such shifts are now believed to be responsible for much of house price growth in economies such as the US, the UK and Ireland in the decade to 2007. Since 2012, dramatic house price growth in selected markets in the same economies has focused the attention of policymakers on the importance of housing supply and obstacles to new construction. This is particularly pertinent in Ireland, where roughly 50,000 new households were formed in Dublin 2010-2015, while fewer than 10,000 new dwellings were built in the same period.

There has been a growing interest internationally in the determinants of housing supply. Some studies have used geographic characteristics of different parts of the US to examine how prices respond to supply (for example, Saiz 2010). There is reason to think, however, that even controlling for costs and revenues, supply of new homes might shift with the market cycle, reflecting among other things changes in planning and regulatory conditions.

This paper examines how conditions in the planning system in Ireland varied with the extreme housing market cycle in Ireland since the mid-1990s. Section 2 outlines evidence from other economies on the relationship between land use regulation and housing market outcomes, as well as briefly reviewing literature on the Irish housing market. Section 3 describes the data used in the analysis, which come from planning applications made to Ireland's 35 local authorities over the period 1990-2013. Section 4 presents stylised facts from the data and illustrates its use by exploring two potential determinants of whether an application was approved: the political make-up of the local authority; and whether the application was made in a "Section 23" zone.

The apparent countercyclicality of regulatory conditions--in other words, the evidence that it became tougher to have an application approved as the bubble reached its height--is reconciled with economic theory in Section 5. This is done primarily through the distinction between process regulation and output regulation, which will have different effects on the supply of and demand for planning permits. Section 6 investigates output regulations by examining the cost of building a dwelling over time, and relating this to prices and to incomes, before Section 7 concludes.

2. RELATED LITERATURE

As noted in the introduction, with housing prices determined by supply among other things, the determinants of housing supply are the subject of growing interest. Quigley & Raphael (2005) examine land-use regulation in California, using a sample of over 400 cities in the 1990 and 2000 Census years and a survey of land-use officials to measure the restrictiveness of land use in each city. They find that cities with stricter land use regulations suffered from fewer new homes built and thus higher house prices and greater house price increases 1990-2000. Ihlanfeldt (2007) found largely similar effects in Florida, accounting for endogeneity and demand-side effects. …

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