How The Housing Market Was Designed to Fail - Part 2

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1:16To understand the economy, you have to understand human nature.

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1:29David McWilliams: How you doing there? Again, time for the podcast. We are doing a special three-part series on the housing market in Ireland, but this is applicable to all over the Western world. We're doing this with Professor Ronan Lyons. And number one is we actually described it as the brittle housing market. Now we're going to look at not just what the housing market is, the state of it, but how we got here, how it was actually created. Because this didn't just happen accidentally. This has been the result of explicit policies to enrich one part of the society, to enslave another part of the society, and ultimately this is the process, this is the result of incredibly bad housing demographic population planning.

2:15David McWilliams: So let us rip into episode two of our piece on housing and we are going to be talking to Professor Ronan Lyons about how we construct this dysfunctional housing market in the first place. Hope you enjoy it. Let's go to Trinity College and talk to Professor Ronan Lyons. Ronan, you're back in the room. Good to see you. Thanks for having me back. I thought I might be banned after the last one. Well, no, the Department of Housing have issued an official complaint. It is now at the Podcast Complaints Commission. I'm in a safe location. I'm not disclosing where it is. Exactly. I'm sure if the Irish podcasting landscape was governed by, let's say, an official organization, there would be an Irish podcasting commission and they would have some, let's say, No, better man, David.

3:09David McWilliams: They would have an apparatchik who would be banning what we're saying. Here we go. Right, Ronan, how did we build this brittle system? Just give me the overview first and away we go. Yeah, and I think maybe the starting question, again, one I hear a lot, and you probably do as well, David, is, is this just a kind of a post-financial crisis thing? And there's a certain breed of scholar and they see everything through a financialization lens. And it's like, therefore, if there's a financial bubble and crash, then problems that emerge afterwards must be because of that. And don't get me wrong, the financial bubble and crash in Ireland and Spain and the US and elsewhere had significant real life consequences.

3:53But as we discussed the other day, the problems we are seeing now didn't just start in 2009 or 2012 or whenever you think the crisis finished. these are problems in Ireland's case that certainly have been building at least since the 1990s and I'd argue probably since the 1970s and the reason I argue that is well in Ireland's case the population didn't grow in the course of the 20th century I'm sympathetic to those in charge in the Irish system right for putting down on paper in the 1990s and even again in the early 2000s do you know what we're not going to put in population projections that are overly aggressive or ambitious, right?

4:29Because there's no history of that happening. This is a country that struggles to keep its people. But things did turn. Things turned relatively quickly in the 1990s. As you well know, David, you burst onto the scene in the late 90s.

4:42David McWilliams: I've always minded when you say burst onto the scene when Mika Richards said, I burst onto the scene in the late 90s and Roy Keane says, you didn't burst anywhere.

4:55So from Ireland's perspective, it went from a country that was struggling to keep people to a country that was adding lots of people. People were coming back initially, and then in 2004, Ireland opened up to new EU member states. And population growth has really, I mean, it's hard maybe for people outside Ireland to understand that a country, like it doesn't really matter where you talk about in the 20th century. If you're thinking about the Republic of Ireland, this is a country of 3.1, 3.2, maybe 3.3 million people. And now it's a country of 5.3 million people. And that's a big change. And that's a 1990s change.

5:29And at some point after 1992, when Ireland entered the single European market and found a business model for the first time in 150 years that wasn't just exporting people, right? It was now a hub for, in particular, North American businesses to have their European headquarters. That created a lot of jobs. The strategy needs to get updated, right? All of a sudden, all sorts of infrastructure were going to become binding constraints unless they were handled. And we see this with water and wastewater, with electricity and broadband, with housing, with hospitals, with schools and universities. Across the board, these are growing pains.

6:03And a lot of the Anglosphere is enjoying population growth, but typically it's enjoying population growth that's slower now than it was in percentage terms, slower now than, say, 50 years ago or 100 years ago. And in fact, Ireland is the only country in Europe to have faster population growth in the 21st century than in the 20th century. And that's how much of a change this is.

6:24David McWilliams: So we're real. We are an outlier. I mean, we're trying to say in the podcast constantly, look, you know, Ireland is representative. But you're actually saying, look, actually, there are some massively unique factors here. The main one being demography. Exactly. Other countries were able to get used to population pressures earlier on and earlier on when systems weren't so rigid, weren't so brittle, to use the term from the first episode. The term de jour, as the French would say. Or De Ciment, right? The trilogy. Our four French listeners are shuddering into their palet de chocolat. No, no, no, no, no.

7:00David McWilliams: They are not even shuddering. They are actually picking up grammatical mistakes and they will write into the podcast straight away. Complaints departments again. Yes, that's John's original title, was the complaints department. He's now moved on to HR. So in that sense, Ireland is a little bit different. But Ireland is also common in that falling household size. What we talked about in some detail in the first episode, more and more people in households of one or two persons for lots of different reasons. But that is not something that policymakers get to choose. This is like a fundamental change in how we live.

7:31That is common. And that is what has built up pressure in other systems. So if you look, if you look at the Netherlands, if you look at Sweden, if you look even in the US, that a lot of this is pressure around smaller households, pre and post family households, or indeed no family households, which are a greater share of the total. And that, in Ireland's case, dates from the 1970s. But throughout, if you take the 20 years from 1995 to 2015, seven in eight of the homes that Ireland built were not really future-proofed. They were either rural and or for larger households when we needed lots of urban and smaller household dwellings.

8:07David McWilliams: So already what you've talked to me is that it's a system that doesn't take signalling very well. That's funny you mentioned this because we talked about the last time about commissions of housing not taking into account data that was being provided. you know, let's say by economists or whatever. I remember many years ago writing a book called The Pope's Children. But The Pope's Children's Genesis was when I was working in the Central Bank 100 years ago, right, in the early 1990s. And I was asked to have a look at population dynamics. And, you know, when did the population peak, what were the trends, etc.

8:40David McWilliams: And The Pope's Children idea came to me as I was an economist in the Central Bank. Now, I didn't write the book until about 10 years or maybe 15 years later. But I was asked to look at the population dynamics and it struck me as quite interesting and kind of chuckling in my own adolescent way that the Irish population boom after independence peaked on the third week of June of 1980, nine months to the day after the Pope had arrived. But I fed this data into some machine, if you think about it. So we were actually doing population dynamics then. It wasn't that this was out of the blue. I mean, there were economists saying to me, look, have a look at that.

9:21David McWilliams: You're a young economist here. Have a look at that. So there was a sense that at least there were some signals coming up from the system. Now, whether they were listened to or not is another thing. But what I'm saying is this didn't come out of the blue completely. I mean, rapid population growth, even despite the word rapid in there, it really can't come as a huge surprise because... Precisely. We see them, right? Like the system sees them. I remember once talking to somebody in the education space and they were kind of, how could we possibly tell the number of university students we're going to need in five or 10 years time?

9:55Well, we know the number of eight and 13 year olds. So we know the number of 18 year olds. You need to make a few assumptions around enrollment rates and you're kind of there, right? Not that you get it exactly right, but this shouldn't be a surprise. It shouldn't be a surprise that if the number of 13 year olds is bigger than the number of 18 year olds, You're going to need more university spots in five years' time. In fact, we have a pretty good sense of how many university places we need in 18 years' time because we can look at the zero-year-olds and plan forward somewhere along the way.

10:22David McWilliams: So my question is, this isn't hard stuff. Not economics, it's arithmetic. Yeah, because certain people think, oh my God, economics is some sort of black box into which all these people who are good at sums and things throw in all this data and outcomes, this extraordinary number, and they have some keen insight. Most of it's really common sense. It is. As I say, it's arithmetic rather than economics. And this is why, going back to something we talked about the last time around, if you produce a set of numbers about how many outcomes are needed, and you make it available and say, okay, here are the assumptions I made, and here's why I made these assumptions.

10:57You don't need to argue about the shape of a supply curve or how much the demand curve shifted out or what your parameters on elast dissoning or whatever it is that economists might love. this is, okay, where did you get the number from? Why do you think it's that? And you can argue about relatively small number of parameters that go into getting housing. In fact, for the housing commission, for the Irish Housing Commission report, we pulled it down.

11:18David McWilliams: The one that's over John's shoulder there on things to do in April when I'm bored. Ocelescence, population size, and household size. And if you, obviously there's lots more that can go into it. But if you have those three numbers, if you've got some element, some idea on where those three numbers are, We know how many homes we're going to need. And it's trying to simplify, I think, and this is where the podcast comes in as well. One of your strengths, David, is simplifying what can seem, as you say, complex ideas. But actually, there's some relatively basic forces at work here. And this is, as I say, the population growth is somewhat unique to Ireland.

11:52But the household size, this is a pressure that's relatively common across, not just even the high income world. It's a pressure everywhere as fertility rates fall and people live longer lives.

12:03David McWilliams: Yeah, no, those Nigerians that have a brutal housing problem now in about 50 years' time, when their population, they're replacing rent goes from five to one. It's one of the last countries to do the transition, I think, when that'll be, yeah, I think, is it? That'll be well after we're gone. Okay. So basically what you're saying is for a variety of reasons, ineptitude, inertia, taken by surprise, all that stuff, the system in Ireland, the housing system, has not responded to the demographic and obviously income changes and expectation changes which are driving the family size figure. That's the first thing.

12:41Now, during the Celtic Tiger,

12:44David McWilliams: I suppose I was kind of at my own about, or very few of us, about the credit issue, right? What I saw was a banking system really losing the plot. Is credit an issue still in your way of thinking of how we got here? In terms of that journey from, say, in the Irish case, from the 70s to today, to me, credit doesn't play a huge role other than through the destructive bubble and crash, right? So credit amplifies the housing system it flows into, right? And if you have a housing system, like in the UK, in the interwar years, or in the US after World War II, you have a housing system that's geared to building lots of homes, the credit can come in and it actually just gets more homes built, right?

13:36Which is not to say it's always a good thing, right? There can be consequences to the form of credit. So in the US got a lot of sprawl post-World War II and there may be costs that in the longterm. But it doesn't have to bring about a price bubble and crash. It did in the Irish case because we've drawn some of the wrong lessons from the bubble and crash. If you look at the completion rate in Dublin at the height of the Celtic Tiger. So Irish people would say, if you stop an Irish person on the street and say, what characterized the Irish housing market bubble? They'd say lots of credits and lots of homes were built.

14:09But not in the cities. That the completion rate of homes per household in Dublin was higher in the 1960s, late 60s, early 70s than it was in the mid 2000s. That's amazing. I did not know that. Where it was off the charts was in the upper Shannon region, the kind of northwest. And that's not a surprise. It's because the government literally directed the credit into those areas. It designated them as rural renewal. And Leitrim doubled it, almost doubled its housing stock in the space of 10 years.

14:40David McWilliams: Well, I will give you a little story. The expression ghost estates is one I'm particularly proud of. And it came to me, I was giving a speech in Sligo, a place I don't know, haven't been there a huge amount. And I was probably giving the speech sometime in maybe the autumn of 2005. And I was like a broken down record player saying this thing's going to go bust and this disaster and we're going to end up, all that sort of stuff. But I was driving home and it's fascinating you say because I wasn't aware that the leader of Northwest region was the place that was most resplendent with homes. And I was looking at all these estates being built on the outskirts of really tiny villages, if not townlands, as we would call them in Ireland, you know, where there really wasn't any evidence of previous conurbation of any sort.

15:33I remember thinking to myself, nobody's going to live in these things.

15:37David McWilliams: And then the image of the Mary Celeste came to me. The idea that, you know, you would have a boat which looked as if it had all the fixtures and fittings and looked at it if it had been seaworthy, but there was no evidence of any crew on it. And it's fascinating, and that expression, ghost estates kind of stuck. I remember writing it in one Sunday, Business Post piece of note. But what you're saying is that ghost estates were engineered. Oh, absolutely. And I think this is, again, in terms of learning the lessons, the right or wrong lessons from the past crisis, the Irish housing policy system learned the wrong lesson.

16:16They look at, and you would still talk to them today, you'll still get the same answer. they look at what happened in the decade of 2007 and say this is what happens when you let the free market you know take charge right we need to micromanage everything what actually happened was they they asked they said if you build homes in these designated areas you won't have to pay income tax right and not just any income tax on the income you get from building those homes you don't have to pay any income tax from the cost of building those you can it's just a tax credit You can use it on any income. So it became effectively a free gamble to build in areas that the politicians designated as in need of renewal.

16:55It's the exact opposite of laissez-faire. Not that I'm pro-laissez-faire in that sense, but let's learn the right lesson from the last bubbling crash.

17:03David McWilliams: Just as a quick sidebar then, Ronan, if we know that people respond to tax incentives, and if we know that Irish people respond excessively well to tax incentives, and I know we're going to get the solutions next time out, but obviously is there a sense that, for example, right now, what you need to do in order to accelerate the building of homes is do exactly what was done around the Shannon Basin in 2004 and encourage and coax and persuade the market to respond to a massive incentive? so yes if i can add a little some details on that like one of the things that frustrates me about the policy discussion in ireland is it goes along the lines it's a little bit like we must do something oh this is something let's do this right and they go off and they do whatever it is and you're like but was it the right thing to do we did tax credits in the past there was a crash in the past therefore we must never do tax credits ever again right well how is it that other countries are able to do tax credits and not have a bubble and crash.

18:11Maybe we could learn about how to do these things well. You don't get on a bike the first time, crash off the bike, and go, well, I'm never cycling that again. You say, okay, well, what can I learn about how to do this better? And it does frustrate me, especially when we get on to the challenges and solutions bit. Viability is a huge problem, not just in Ireland, but in many countries. How do you build one - and two-person homes, typically apartments, at a cost that's affordable to those people? And with viability being such a big challenge, the tech system is obviously going to be part of the solution.

18:45David McWilliams: Without prejudicing the third part of the Space Odyssey trilogy, just another little piece of personal. Years ago, I bought a place when I was very young, young economist again, in Parliament Street in Dublin, where nobody wanted to live. In fact, we were the first residents in Parliament Street, I suspect, new residents in Parliament Street in the 20th century. Bought, I think, in 1994. But it was entirely made possible by a very generous tax break. So there was a sort of a virtuous circle. Parliament Street, which now you couldn't live in for love nor money, was derelict. The homes were derelict.

19:24David McWilliams: The developer who bought the old building got a tax credit. The three people who bought the three apartments got a tax credit. The government actually got some revenue. But more to the point, we were housed. We got on the so-called property market. And urban regeneration happened. This seems to me so obvious. And the problem is that that scheme was the one that got extended. They said, look, it's worked so well in the cities. Let's just do it everywhere. And they misunderstood that it wasn't the scheme per se that was delivering success. It was that the scheme applied in the right areas delivered success.

20:02But they said, okay, we've done this trick in these places. Let's do it in those places. And I'm sure it'll have the same impact. Of course, it didn't.

20:08David McWilliams: Well, we're going to come back to that because I do think it's an essential part of the armory next time out. But just one last thing. So, Ronan, we get the crash. Credit disappears as it tends to do in a crash. Money gets scarce. It actually evaporates. I know people can't get their head around this, but money can evaporate. It appeared out of nowhere. It disappears out of nowhere. Why? Because commercial banks create money out of nowhere. So that's one thing. It's not like a pool of money here of savings and we dole it out. That's where it comes from. It's just made up. It's called fractional reserve banking.

20:41Why once credit returned in Ireland did the supply not respond in some way?

20:48David McWilliams: Let's say talking like 2015, 2016, those years. So it actually comes back to those same tax credits and especially when it applied to the rural areas. So I'm working on a paper at the moment which looks at the cost of building homes over the last 50, 60 years. And there's a quote from, it wasn't called the Society of Chartered Surveyors at the time, but whatever the predecessor of that body was, the president of that is interviewed in about 2000 because they normally issue this, how much it costs to rebuild your home. And they hadn't issued it. So they rang them up and they said, what's the story?

21:23How much does it cost to rebuild your home if you've got it for insurance purposes? And he said, I can't tell you. They're like, what do you mean you can't tell us? And he's like, well, I don't know, because you can't get someone at the moment. And what had happened was, they'd taken that scheme you described, Dave, and they'd applied it in 97, 98, basically to all parts of what you might cynically call every marginal constituency in the country, or certainly lots of...

21:48David McWilliams: Not cynically, not cynically, accurately. Lots of rural Ireland. And it had supercharged demand for construction, labour, materials, et cetera. So all of a sudden, it became unclear whether you were able to get the people to build whatever you needed. And actually, when you do that long-term series, almost, I think about three quarters of the increase in build costs between 1995 and 2020 happened in about two years, between 1998 and early 2001. one. So the reason that matters to your question is that if it costs 100 grand to build a home, and you're selling it for 120 grand in the mid 90s, and credit pumps up that price from 120 grand up to like 360 grand, nobody really cares if the cost has doubled from 100 up to 200.

22:34Because if you think about that, it's like 360 grand and there's 200 grand cost, there's loads of profit, profit to be shared to everyone. But what happens when the price at home goes from 360 down to 180. And the costs do not change. In fact, the costs went up, the post-tax costs went up because it got rid of those tax reliefs. All of a sudden, you're stuck in this viability gap where even though the homes are needed, costs got ratcheted up, they didn't come back down, productivity and construction deteriorated. That's a common issue, but it's particularly bad in Ireland. And it was only in Dublin, really the greater Dublin area in the late 2010s that you start to see viability returning and homes getting built.

23:12David McWilliams: okay just as a another sidebar if you're interested in all this stuff and you're not an economist but you want to get the personalized story just as ronan was talking about rural ireland there's books by donald ryan one of our greatest contemporary writers really deal with the aftermath and the fallout of this crisis in rural ireland just if you're interested the spinning heart if you want to get a feel of what this did to small communities builders chippies, carpenters, second home investors, families. Read Donor Ryan. Enough of that literature stuff. Let's move on. More economics, right? Why did Ireland, or where did Ireland, another issue many people ask is, when did we become low density?

23:57David McWilliams: You know the way people say, well, why can't you be more like France or more Spain where everyone lives in apartments? Where did that come from? So this is a really interesting one because if you look across Europe, about 50 % of homes are what we would call apartments. They're kind of multi-unit structures. The definition varies a little bit country by country, but about 50 % apartments, 50 % houses. In Ireland, it's 85 % houses, 15 % apartments. And the Shetland Islands has a higher percentage of apartments than Ireland does. So there's definitely something going on with Ireland. Shetland Islands has a higher percentage of apartments.

24:30Yeah. As of the 2010s, I confess I haven't been keeping tabs with the Shetlandians in the last little while. But if you look at 1960s Ireland, 1960s Ireland was an agricultural country. Most of its exports were agricultural or agricultural related like food and drink. And the majority of Irish exports went to the UK. It made sense in an economy like that to be relatively spread out. What happened, the damage was done afterwards. What happened was Ireland urbanized its labor market, but it didn't urbanize its housing market. So we went, we skipped through the manufacturing, but pretty quickly went from agriculture through to tradable services and pharmaceuticals.

25:12So tradable services like online services, financial services and pharmaceuticals, they cluster. It's known that they cluster. So actually, if the urban system, if the housing was to match our jobs, we would be one of the most urbanized countries in the world. Instead, at least of the high income countries, we're the most rural. where we have about 65 % living in cities and towns. We have 85 % working or going to school or college in cities and towns. We've got this big mismatch between where we live and where we work. And that comes from, if you think of rural housing in Ireland, there's three waves, right?

25:49The first wave is the, they're called the Labourers Act Colleges. And people won't know them by name, but if you look around the country, almost any building in Ireland that predates the 1960s in rural Ireland is a Labourers Act cottage. Maybe a slight stretch.

26:05David McWilliams: This is the one story on the main street cottages. You see them. Yeah, exactly. They're standardised designs after a certain point. But for about 30 years, from the mid-1880s to the mid-1910s, the Westminster government, because Ireland was part of the UK at the time, the Westminster government heavily subsidised and increased the subsidy over time and it made the terms more generous. It was trying to kill home rule with kindness. It was trying to kill the demand for independence or autonomy by throwing money at the problem. But what Ireland got out of it was, a phenomenal housing stock, right?

26:34That rurally, people had really high quality homes. To qualify for these, you had to be low income and you had to be rurally based. It didn't really invest the same amount of money in urban housing, it was rural housing. But it meant that Ireland had a very high quality stock that it didn't pay for. Because when Dev came in in the 1930s, this is Eamon de Valera, came in as prime minister, as Taoiseach in 1932, the first thing he said was, we are not going to pay you back any more money for these land acts or labourers acts, right? So Ireland got lots and lots of social housing in rural areas, not just off balance, please, for free.

27:07Well, not quite for free, but not far off for free. And then the governor's like, oh, no, we have to manage these properties now. So he said, you know what we'll do? We'll make it even cheaper for the people who live in them to become unoccupiers rather than tenants. So all of a sudden, you now have a nation of homeowners, of rural homeowners. And that creates a precedent that when the Bungalow Bliss era comes along, And Bungalow Bliss was this kind of glossy brochure from the 1970s up to the 1990s about building a home in rural Ireland.

27:36David McWilliams: Invented by a man from Kells, by the way. I can give you a chapter in verse. Oh, I can't think of his... Is it John McManus? I can't think of his name off the top of my head. I'll give you a chapter in verse. The podcast notes. So that then meant that once... And the planning system was introduced in the 60s as well. We can come back to that. But Ireland was predominantly rural when it introduced planning and zoning. That kind of got doubled down on, that the system encouraged more rural housing. So by the time the bungalow bliss properties are kind of well-established all around the country, that's the second wave of rural housing.

28:06And absolutely everyone will know what I mean. Everyone from Ireland will know what I mean. If you drive around Ireland, you can't help but see 1970s, 1980s bungalow bliss bungalows.

28:13David McWilliams: And if you want to just hold that thought and you fuse bungalows with the obsession with Dallas in the 1980s TV show, right? That's very true. You will find wagon wheels as gates and eagles everywhere. I mean, short of finding Sue Ellen having a gin and tonic around the back, basically Dallas fused with bungalows is Irish architectural style from about 1978 to about 1988. Wonderful times. Keep going, Roland. And what it meant was that you had this now, this double layer of existing housing for when really Ireland should have been urbanizing from the 1990s very strongly, but it didn't. And what happened was that if you think about the bungalow blister, usually on a couple of acres, what happened was then you get the McMansion on the next field over.

29:02That somebody in the family takes the next field over and builds a big home on it. So you get this kind of, it's not that you shouldn't be allowed to do that. It's that an economist would say, you can do it. You just have to make sure you cover your costs in doing it. And the Irish system heavily subsidized rural housing which is significantly more expensive. You think of Ireland versus Singapore and Singapore is similar-ish population, right? Big picture, similar-ish population, but it's all effectively one city, right? You can have a hospital that specializes just in cancer and a hospital that specializes just in heart disease or in whatever it might be.

29:37In Ireland, everyone wants a specialist hospital in their area because you're everyone spread out. It makes everything more expensive, whether it's utilities, childcare, absolutely everything becomes more expensive when you're spread out. So it's about facing those costs and we kind of hid those costs. The Irish policy system hid those costs. And that's why we've ended up with kind of a low density one-off housing model. And the last thing is, what I love about one-off housing is, it is a law unto itself. It does not obey any law of economics I can recognise. How many one-off homes were built in Ireland in 2011?

30:08About 5 ,000. How many other homes were built in Ireland in 2011? Maybe 1 ,000, right? How many homes, one-off homes were built in 2024? About 5 ,000. So it doesn't matter whether it's bubbled or crashed. We're going to get about 5 ,000 one-offs every single year. It's about the rest. It's about getting the other homes built.

30:28David McWilliams: Now, do you think, serious question, if density is part of the solution, do you think a partner's not being allowed has just become normal now in Ireland? up until the 2010s even actually if depending on how you measure it into the 2020s the irish system had limits on how many apartments you could build or how many one and two bed units you could build in some parts of the country that's still true they're worried that if they don't micromanage the situation that we'll end up somehow with too many apartments i refer you again to the shetland islands right that's i don't know how we would suddenly end up with too many but that's the worry is that if left to its own devices, the market will somehow provide too many apartments.

31:12David McWilliams: What are we worried about? I mean, so what is the cultural fear of apartments? What's the cultural fear? And who are these anxiety-laden planners? So think of this as, what do you do if you're a planner or somebody senior in the Department of Housing, and it's 2010 and it's Ireland, and you're in the tail end of a crash after a phenomenal bubble? You look around and UK what did we do wrong and they looked around this there was a lot of low quality apartments built and I don't know if people actually really want to live in those so they must be bad therefore we must restrict them and this gets on to the planning system having a discretionary planning system nobody ever says what they actually want you only find out when you apply so what I love about this is suppose you you want to provide accommodation for students and to be clear Ireland needs lots and lots of student accommodation because there's lots and lots of students who do not have accommodation.

32:05They're living with mammy and daddy. So Ireland needs lots of student accommodation. If you build in certain parts of Dublin, you'll be told there's an excessive concentration of student accommodation. And actually I'm sympathetic to if you're in an area and all of a sudden lots and lots of student accommodation is built in a completely different area. I'm sympathetic to that complaint. It would sort of be in a case-by-case basis as to whether it's too much or not. The other one that gets me is if you then go and say, okay, well you don't want it there because you don't want excessive of concentration.

32:33We're going to build it here instead. Well, that would be a dangerous precedent. I love it. If they don't want it to happen, they can tell you, they can use some language that says, oh, there's too little or too much already.

32:46David McWilliams: Why? Why? Why? I was noticing that we're getting hyper-local here and we'll stop in a minute. But I was noticing the other day in Donnybrook, there was an Esso garage or a Stato garage. I can't remember, right? I know the one. Yeah, which had been... That's how local Ireland is. Do you know the petrol station? I do indeed. I know the petrol station. I've bought a Twix in the very same petrol station in the last 24 hours. But my point is, it was slated for student accommodation. People said, no, you can't have student accommodation. The planner said, but you can have another hotel. So now we have a hotel in the place we should have a student accommodation.

33:26David McWilliams: We've got transient accommodation in the place where we had, should have a student accommodation. and again it seemed the mind boggles as to why this is regarded as a good thing. And there's a plan close to there. They were going to build apartments and the tennis club was like, we don't want to be overlooked. And that was classed as a justifiable reason not to allow it. It was one of a number, but they had come up with a number of reasons. And the other one is not far down the road from there, close to UCD, Ireland's largest university, they were going to build student accommodation and a local councillor came out and said, we want homes for real people.

33:57Now, I tell you, if I was a student and I heard that, I'd know exactly he wouldn't be getting my number one in the next election. That's okay.

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35:54David McWilliams: so first of all we're talking about how do we engineer this system we're talking about the policymakers not responding to the evident change in the ground we're talking about the planning system we're talking about a weakness for one-off housing we're talking about ireland having a highly urbanized workforce but is still rural housing stock in that context can we say that ireland is too Dublin-focused? So this is one that comes up quite a bit, actually. Dublin's just too big. Given how common this is in Ireland, that for Irish politicians to fret about Dublin being too big, I think a lot of Irish-based listeners would be surprised to learn that County Dublin has a smaller share of Ireland's population now than in 1971.

36:42It was 29 % in 1971. It's 28%. Now, it could still be true. You're like, well, it was too big in the 70s and it's too big now. Now, job mission not accomplished. George Bush has not got the sign out. But actually, let's look at every other small European country or indeed in the rest of the world. And let's look and see how big is the biggest city? What share of the total is the biggest city? And Dublin is an incredibly usual, boring capital city. It's somewhere between a quarter and a third of the economy, of residents and so on. And if you go to Denmark, Austria, Sweden, Estonia, Portugal, it's the same.

37:24The only exception is Switzerland, and that is a very different case. Historically, there's no one main city for a variety of reasons there that people can fill in the blanks around the cantons and so on. But if you're a small country, and this, by the way, it scales. If you go down to Andorra or Liechtenstein, the biggest city is a very big share of the total. And the bigger the country, usually it's kind of 10 or 15%. The idea that Ireland would somehow be different baffles me. It's like, let's just look at every other country and see. What is true, by the way, Dublin is not too big. The next cities down in the ranking are too small.

37:59Right. So on an all island basis, actually, if you include Belfast and Derry, it kind of more or less lines up. If you're just looking at the Republic, that the second place city, Cork, is far smaller than the second biggest city in some of these other countries. Not every country, but some of these countries.

38:15David McWilliams: Now you've just raised the flag for Irish unification because obviously then Belfast would be probably similar to other countries. Like one of the reasons I think in Ireland is that there was a big bit amputated. And that big bit had a big city in it. And that big city would have had a proper relationship with the capital. But Sinead Scalella, right. Let us move on to renting, okay? What you hear in Ireland a lot, and I think it's absolutely the case, because many people feel it, is that renting is regarded as a poor second cousin of owning. And this, again, leads to a problem that everybody gets funneled into home ownership, whereas in most other countries, there's a very healthy rental sector which lives side by side.

39:00Yeah, now I'd push back on that a little bit and say, Ireland sits in a group of countries that are probably in the second to lowest in terms of home ownership across the high-income world. So the ones we know about, Germany, Austria, and Switzerland, they're actually the outliers. By having this kind of 50-50, 50 % renters, 50 % owner-occupiers. Denmark's close-ish, but most of the other countries in the OECD, that's this club of high-income countries, Most of those have a higher home ownership rate than Ireland. Ireland's in a group with the US, the UK, France, and a couple of other countries in terms of maybe about two thirds of people own their own home and one third rent.

39:40Now, if you ask renters, most of them will say, I do want to own at some point. So maybe the true kind of desired home ownership rate is actually a lot higher. I do think kind of perception and reality are both important here. Reality is important where maybe we're not as much of a country of homeowners as we like to think we are. perception that people do want to be home owners. That is also true. And it's because the tax system is heavily loaded in favor of home ownership. We are not a tenure neutral country, to use some jargon from the policy space. Tenure neutral. Tenure neutral means that you're...

40:12David McWilliams: Explique moi, as our French listeners will demand. Tenure neutral means that the tax system doesn't prefer home ownership to renting or indeed to social housing. What we have in Ireland is, suppose David you live in number one and I live in number two in the same street and you live in your house at the moment the house you own and I live in the house I own I don't pay any income tax and I don't pay any capital gains tax if I were to sell the home up until recently I could get mortgage interest relief if I had debt as well and that's the case in the US still and that you can get mortgage interest relief now suppose you and I were to swap and I now live in one and you live in two.

40:49I now have to pay income tax, but society should be completely indifferent about these things, right? Because nothing has actually changed, right? There's the same two people in the same two homes actually. So one house is rented, one house is owned. Well, so they start both being owned, owner occupied, and then you move into my house and I move into your house for whatever reason, because we're mad, right? But now you have an income tax bill, I have an income tax bill. If we sell the properties, you have a capital gains tax bill and I have a capital gains tax bill. So that is an example. You can write that large across the wider society.

41:23It makes a huge amount of sense financially for each individual household to go, do you know what? I am going to load my wealth into housing because it's effectively tax-free. There's nothing else you can get that you can leverage up and then get the gains tax-free.

41:36David McWilliams: So what you're saying is, we're back to this idea, the system has been engineered. Now, whether it's actually been engineered from the top or whether it's a function of lots of little bits stuck on to the system. Is it a function of lots of little bits stuck on leading to chaos? Or was chaos the objective at the start? Chaos wasn't the objective. Lots of countries are pro-home ownership. And there's kind of, there is research that says, you know, people who own their own homes. I'm not just talking about home ownership. I'm talking about the whole thing. We're taking home ownership. We're taking one-off housing.

42:08David McWilliams: We're taking a bias towards rural housing. You know, when we try to conclude this second part of the trilogy and we think, okay, this chaos was engineered. Was it engineered with bad intention, with stupidity, with naivety? Or was it simply the function of no proper oversight at the very top saying, well, if you do this, this is going to happen. And if you do that, that's going to happen. The one that John's always very fond of saying, the unintended consequence of this, that, and the other. What's your sense? Predominantly, this is unintended consequences mixed with what's known as path dependence, right?

42:53Housing doesn't get regenerated every year, every night or whatever. Lots of other markets, if you make a mistake last year, it's sort of blank canvas. Off you go again this year. If you're selling equities or whatever it is, you just try again, fail bigger, whatever it is. With housing, what you do lasts. with anything that you put in terms of real estate or infrastructure, and it lasts for decades. So we live with the consequences of these things, but they're predominantly not bad faith decisions. The decision to deregulate building societies in the 1980s, that was motivated by, well, do you know what?

43:25We don't have enough local savings to fund the mortgages we need. So let's tap into savings elsewhere. That in itself is justified, but wasn't maybe justified was forgetting to regulate credit markets once you've done that. We eventually introduced mortgage rules too late in 20, well, not too late, later than needed in 2014, 2015.

43:45David McWilliams: I'm possibly in the building society example, maybe having slightly competent people running them might have been also a bit of a help during the boom. But that's another, that's for another scale. Go on. But it's a good point that not just Ireland, the UK, the US, lots of countries have moved from specialised financial institutions, like savings and loans in the US and building societies in the UK and Ireland, to universal banks. Yes. It would confuse, I think, lots of people, or at least surprise lots of people who are in their 20s and 30s today, to know that Bank of Ireland or AIB never gave out mortgages until, or almost never gave out mortgages until the 1990s.

44:21That wasn't their thing, right? They were commercial retail banks. They were about the money that businesses needed, not the money that households need. I think it would actually confuse executives in the banks themselves if you said that to them. Try and make a living without doing mortgages because everything they do now is geared towards getting that one big transaction at the end. But going back to the policy side of things, whether it's the one-off bit, the bungalow bliss, and the Labourers Act colleges and the McMansions, none of this is motivated by the rent controls. None of it is motivated by trying to do the wrong thing.

44:54it's motivated by reactiveness right De Valera deciding to sell off a whole load of colleges in the 1930s it was like it's a reaction to all of a sudden we'll have to manage these unless we do something let's do this and it sets a in that case a precedent and then selling off council housing De Valera was doing it before Thatcher was even born probably well maybe not maybe she was just born so this path dependence means that we've ended up with a very brittle system it's kind of layer by layer there's brittleness in in all the different parts and it's not an Irish story only. That brittleness is there in the UK, it's there in the US, Canada, maybe to certain parts, especially around supply.

45:31Symptoms are common across lots of different places.

45:34David McWilliams: Okay, so leading to the third part, because what you're saying is this is a function of lots and lots of reasonably well-intentioned but ultimately poor decisions which taken together have led to a sort of collective chaos. Chaos, I'm using the expression chaos to loop back to the previous podcast, which is it is chaotic if you are in the blocked cohort of the population, because your lifestyle is not commensurate with your income or your expectations, and you're getting angry. So next time, the third part of the trilogy is, if we know kind of how we got here now, what does fixing this mean? And we'll be back with Professor Ronan Lyons next time out.

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47:17If you've used Babbel, you would. Babbel's conversation-based technique teaches you useful words and phrases to get you speaking quickly about the things you actually talk about in the real world. With lessons handcrafted by over 200 language experts and voiced by real native speakers, Babbel is like having a private tutor in your pocket. Start speaking with Babbel today. Get up to 55 % off your Babbel subscription right now at babbel.com slash acast. spelled B-A-B-B-E-L dot com slash ACAST. Rules and restrictions may apply.