According to a new Treasury Department analysis, high construction costs are now built into the Irish housing market and ‘are not likely to come down significantly – even in the event of an economic downturn’.
In a new note from Economic Insights, Department economists say Covid- and Brexit-related supply disruptions have pushed up the cost of building a home by 13 per cent in 2021 – and that price hikes this year have been driven by the war in of Ukraine and the energy crisis have gotten worse.
These pressures are unlikely to abate in the short term, says the notice, which “poses a major challenge to the goal of large-scale increase in the supply of affordable housing, particularly in urban areas.”
Cost inflation is already impacting housing starts, which have slowed this year, according to new data from the Housing Department, which shows a 43 percent fall in new home construction in the second quarter.
Higher prices for building materials and labor could also threaten the profitability of home construction, which Goodbody says is responsible for all of the new home construction growth this year.
“After a sharp surge in housing starts immediately following the reopening of construction in April 2021, housing starts have slowed throughout 2022, with the latest data showing renewed annualized levels below 30,000,” said Dermot O’Leary, Goodbody’s chief economist wrote in a customer note.
“With profitability concerns growing as construction costs soar, there is a real risk that production will fall well short of the government’s target of 33,000 per year, at least in the short term.”
Mr O’Leary added that housing construction in Dublin has been “pioneer” for the surge in housing starts since 2019 and is now “threatened” by the rise in construction costs over the past 12 months.
While the latest rise in costs was the sharpest in 22 years, high costs have plagued the housing sector for about a quarter of a century, the ministry’s statement said.
Housing cost inflation has accelerated since the late 1990s.
By the end of last year, they had risen 38 percent more than consumer prices over the period due to low productivity, labor market constraints, structural inefficiency and a volatile property market.
High cost is now a “Structural Trait”
As a result, the new build segment of the housing market is becoming less and less affordable for both buyers and tenants, the authors say.
Not even the devastating property crisis of 2008 changed the cost context, leading them to conclude that high costs are now a ‘structural feature’ of the Irish construction sector and are unlikely to change without major reforms.
However, this fatalistic view is not universally accepted.
Rating agency DBRS Morningstar offered a more optimistic outlook in its latest assessment of the Irish economy.
While it was noted that “acute” supply chain and capacity issues had caused construction costs to rise more than 18 percent in the year to April, it said demand for new home completions remained strong.
“DBRS Morningstar continues to believe that overall pricing pressures will ease over the course of the year as construction costs fall and housing completions pick up again,” read a statement confirming Ireland’s AA sovereign credit rating.
https://www.independent.ie/business/irish/high-building-costs-are-now-baked-into-irish-housing-permanently-putting-targets-in-jeopardy-41849635.html High construction costs are now permanently etched into Irish homes and put targets at risk