Ireland- subsiding housing market failure

Economics has a lot to say about market failure, its causes consequences and resolution.  The government know these. Indeed, at the cabinet table sits a man with formal economic training, in Richard Bruton, who knows these things. If they don’t, or have forgotten, then a phone call to the Government Economic Service will refresh or remind. Yet, despite this they have determined to reinforce the failure in the housing market with more failure. What fresh hell is this? In an environment where we have record homelessness the government adamantly sets its face against the acceptance that the market alone cannot, will not, is not able to even if it wished, provide sufficient homes for people, whether rented or purchased.

Market failure is when the market mechanism fails to allocate resources in a manner which maximises welfare. Its not ideological, its not a pop at the market approach, it’s a technical issue.  Engineers talk of failure in bridges – that is not an ideological stance against bridges. Doctors talk of organ failure –that is not to decry the existence of  said organs and to seek alternatives. Just as in economics these are technical issues with technical causes and technical solutions.

What are the causes of market failure?  We can think of maybe six underlying causes, pretty much all of which are present in the Irish housing market.

A decent, affordable, liquid housing stock provides public good benefits to the economy over and above the private benefits of the individual houses. But public goods are subject to incomplete markets – there is no market mechanism that efficiently provides them.  At a certain level housing is indivisible, or should be.   People need a certain amount of space to live. Families need more than single persons. When we think of slums we think of hordes of people piled on top of each other, with no space. We are not at that yet but the reality is that people are forced to share housing goods at ages and  in family circumstances where they would normally expect to be doing other. There is a divisibility issue in housing.  The housing market is grossly imperfect. We have enormous land banks that are not being built upon; we have infill and brownfield sites lying idle in city and town centers that could provide rapid relief, lying idle; we have regulations not being enforced or provided towards “use it or lose it” for these;  we have irrational anchoring of cost and profit expectations on the part of providers of housing; we have a lack of joined up thinking as between various state and other actors which results in planning blockages. We have information aysmetries, where purchasers are at a serious disadvantage as to the true costs of production, the alternatives, the amenities available that add value, and are under serious pressure to close, resulting in their being unable to make a true cost comparison.  Housing is subject to massive and pervasive externalities, positive and negative. Poor housing and poor housing provision is a social and economic blight. Good by comparison is associated with huge spinoffs. But these are diffuse and unpriced.

So, we have market failure. What then can we do? Faced with market failure governments can in general do one of three things – regulate,  interfere in the operations of the market or subsidise. We have a government that has chosen the latter. The plan is to provide E10,000 of subsidies to the purchaser. This is crackers.

We face a situation where the market failure has resulted in, in effect, a very inelastic, constrained, supply of houses and a massive demand.  In such a case a subsidy to purchasers will have the single and sole effect of  raising prices.  We know this not just from economic logic but from the UK, where a recent estimate is that their version resulted in a 3% increase in house prices from a similar scheme. The consequences of the market failures are not to reduce demand  -the are to reduce and constrain supply at very best in growth terms if not in absolute terms.  The government know this. The E10,000e subsidy is a political decision to make it look like the government are helping the first time buyer while in reality it is a subsidy to the house building sector.  While it might aid the short-term liquidity of the housing sector it does nothing to address the long-term solvency issue. We have seen what happens in this country when we confuse liquidity and solvency. Meanwhile rents and prices rise as supply stagnates.


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The biggest issue facing the housing market is supply. Having overbuilt, but much of it in places where there is now little demand and little prospect of same, housebuilding collapsed. It is still running well below where it should be, resulting in house prices rising rapidly.  We have managed to segue from one construction related crisis to another without pause. This is sad stuff.

Relying on a failing market to increase supply will not work. All of the features of market failure noted are endemic to the housing market. This is why over decades, when the state was far less wealthy, we had an active and imaginative state housing provision.  It is a purely ideological decision to withdraw from that and to rely on the market not to fail when it is going to fail.  We need a government and politics that accepts that when markets fail governments intervene. Aggressive “use or lose” planning conditions; a site or land value tax of punitive level for hoarded land;  a massive rampup of state supply of houses; much less restrictive planning within a sensible integrated set of spatial guidelines; densification in the cities; planning policies that restrict greenfield and new until brownfield and infill are used up; regulations towards far greater transparency in costs; a sensible set of provisions to allow long-term tenancy ….  These and others have been suggested to increase supply. They are dull, quotidian things. They run the certainty of having the housebuilding lobby screaming. They wont give a short-term political boost but will give a shortterm political pinch, so we wont get them.

Published in the Irish Examiner, 30 September 2016


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