Nowhere To House Workers/No Workers To Build Houses

​The opening paragraph of T.K Whitaker’s seminal work, “Programme For Economic Expansion”, in 1958 reads “The programme for economic development contained in this White Paper has been prepared in the conviction that the years immediately ahead will be decisive for Ireland’s economic future.” The paper was motivated by the economic paralysis that plagued the Irish economy at that time lending itself to high unemployment, emigration and an over dependency on exports to Britain.

Whitaker sought to end protectionism and to make Ireland a more open, global and trade-friendly economy. 65 years later the immense success of these policies is clear given how Irish policymakers today face the enviable challenge of how to spend the government’s enormous tax revenues wisely.

Despite full employment and strong economic growth, the government plans a €6.4 billion spending spree next year as part of Budget 2024. This, of course, has come contrary to the advice from the Irish Fiscal Advisory Council (IFAC), the ESRI, and the Central Bank who warn of fuelling inflation.

While I agree that spending in some sectors would be ill-advised, major infrastructural deficits since 2008 are a growing concern and urgently need addressing. The risk of inaction, particularly as it relates to housing, will do little to curtail rising house prices. With nowhere to house our workers and no workers to build our houses, the Irish economy has reached an impasse. The years immediately ahead will indeed be decisive for Ireland’s economic future, as Whitaker once said.

Here’s the long and short of our housing problem.

Pre-financial crisis, the Irish economy was building roughly 80,000 residential units per annum. Last year, only 29,000 new housing units were built, a reduction of over 35% since 2007.

Dublin added 216,000 new jobs in the last decade but only built 40,000 new homes. Put another way, there was a 40% increase in jobs but only an 8% increase in houses.

Dublin’s population has grown an extra 190,000 since 2008 while the total population of Ireland has increased by 680,000.

At the end of 2022, there were approximately 127,000 people employed in the construction sector, a reduction of 45% since 2007.

With our population surging and fewer builders working in construction, house prices are only going in one direction.

Granted, house price inflation has decelerated considerably over the past 12 months and in some parts of Dublin house prices have actually fallen. But the likelihood of this downwards trend in prices continuing long into the future is unlikely. All things being equal, and barring another banking crisis or a recession, house prices could shoot back up again when the ECB cuts interest rates. Best case scenario, that could be as soon as the first quarter of next year if inflation recedes.

If our long term objective is to increase the supply of houses and make homes more affordable, we must address the fundamental issue of labour shortages in the construction sector first and foremost. Every other housing policy in the meantime is superfluous.

Likewise, paying down our national debt or setting up a sovereign wealth fund, as many economists are in favour of, might keep consumer prices at bay for a short while; but these policies won’t affect the trajectory of house prices or rents.

It is estimated by the Irish Construction Federation that 180,000 extra construction workers are needed for the government to fulfil their National Development Plan and Housing For All scheme. So at the risk of sounding like a broken record (I wrote about this topic previously here and here) why aren’t we having a meaningful conversation about immigration? Where else are these workers going to come from?

As birth rates fall and the population ages, politicians in developed economies will need to face up to immigration sooner or later. We are only delaying the inevitable. Housing aside, productivity and labour supply in our general workforce is set to decline over the next few decades. What’s the plan around these eventualities? A.I? Robots? No one knows for sure how these technologies will evolve or indeed how useful they will become. The notion that machines will ultimately overtake humans in the workplace is still quite a stretch. We should be doing what we can to counter our demographic challenges in the meantime.

A revised housing policy with immigration front and centre would set out the government’s long term objectives while underscoring some of the short term trade-offs. An honest, pragmatic approach to housing would sway public opinion in the government’s favour making immigration much less politically toxic.

Here’s how the new policy could be laid out.

Instead of budget giveaways, the government could use its surpluses to fund subsidised rents and lower income taxes for immigrant workers. These measures would be part of an enhanced ‘Critical Skills Programme’ to attract builders back to the country.

To house these workers and to avoid adding to our existing cost pressures, we simply shift our current resources in infrastructure from one sector of the market to the other. If that means building fewer hotels or office blocks for 2 or 3 years while we build homes for immigrant workers then so be it. We should be treating our housing problem like climate change where the collective works towards a common goal that benefits everyone.

The provision of rent subsidies and tax credits could also be extended to the wider public to garner further support for the government in the interim. These extra supports would likely quell anti-immigrant sentiment if tensions flare.

If, as many expect, government tax revenues fall in the years ahead, the government can continue to pursue its goals by (shock, horror) borrowing money. When planning for the long term, that’s what capital markets are for. The pro-cyclical nature of capital investment by the government in recent decades must end. In good times and in bad, stick to the script.

Currently, the yield on a 30-year Irish government bond is 3.2%. While yields have almost doubled in the last 12 months, they are likely to fall again when inflation becomes less of a problem. By historical standards, 3.2% is still quite low. The cost of borrowing for the government during the Celtic Tiger period averaged around 4%-5% per annum before the banking crisis. Yields then shot up to 9% pricing Ireland out of capital markets and forcing the government to accept Troika bailouts in 2010.

Despite what some commentators have said recently about our national debt, we shouldn’t fear another crisis like 2010 occurring again given the ECB’s now dominant role in sovereign bond markets. Allowing future bond crises to arise in Ireland, Italy or Greece is off the table given the risk of contagion to other countries within the Euro area. Having learnt its lesson, the ECB will want to avoid another currency crisis at all costs. If that means buying billions of euro worth of government debt then this is what it will do. Indeed, it has been the ECB’s policy for over a decade doing “whatever it takes” to preserve the Euro. The enormous response to the pandemic served as another reminder of how ECB policy has dramatically changed in recent times.

Like it or not, we now live in an era where central banks dominate the economic landscape more than ever. We shouldn’t let this fact lead us down a path of fiscal recklessness but knowing that the parameters have somewhat changed allows us some flexibility when revising our models.

Having now likely peaked in employment and tax revenue terms, the Irish economy has arrived at a critical stage in its economic development. How do we preserve our competitiveness and living standards using the same economic models that have run their course? Without a healthy functioning housing market, the economy grinds to a halt and societies breakdown.
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The longer we leave it the more likely it is that the ghosts of emigration’s past will fix our problems for us. Having come so far in recent decades, that’s hardly a compromise we should be willing to make. Irish policymakers should know, just like T.K Whitaker knew in 1958, that the economy is now at a crossroads. The direction they take will shape the future of generations to come.