So just as property investors in Australia rely predominantly on capital appreciation to make ends meet, investors in Ireland were doing the same.
However, once property prices began to fall, Ireland’s over-geared investors rushed for the exits, thus helping to force house prices down. The risk of investors fleeing the property market en masse was acknowledged by the ICB in 2007 just prior to the crash:
“…buy-to-let landlords, acting as dispassionate investors rather than emotionally involved owner occupiers, might decide more quickly than owner occupiers to dispose of properties in the event of a house-price fall, and this could potentially destabilise the wider housing market. The concern is a mass exodus of investors at the same time would put additional pressure on an already fragile market, causing a quicker downward spiral than would have otherwise been the case.”
Still, in true central bank fashion, the ICB rejected the notion that Ireland would experience a sharp housing correction, instead predicting a soft landing due to strong underlying fundamentals:
“Regarding future house price developments, factors that will have an influence on the future direction of house prices are investors’ participation in the property market, the sustainability of current rates of immigration and the future direction of monetary policy. The underlying fundamentals of the residential market continue to appear strong, as evidenced by rent increases. The central scenario is, therefore, for a soft, rather than a hard, landing.”
Ireland’s planning system also contributed to the initial boom and then bust of house prices by creating a system of supply that was unresponsive to market demand. A 2005 paper by the UK’s Policy Exchange explained the Irish supply situation well, whereby the Government granted planning permits too late, resulting in the building of large numbers of standardised, small, poor quality homes in satellite locations far away from the major cities:
According to Dr Stevenson of UCD Dublin, development for new housing actually took off much too late. “In the early years of the boom, we did not see much building in Ireland”… Because supply was late to meet demand, by the time construction activity actually took off it was too late to deal with the backlog in a reasonable way. All that planners and developers could do was try to satisfy the huge pent-up demand quickly. The result was a quick fix, not a thoroughly reasoned solution…
First, large numbers of flats – something the Irish were not used to – went up, in the form of large apartment-blocks. Second, whole new housing colonies were built, often consisting of hundreds of virtually identical semi-detached or terraced houses lacking any individual character. However, these were often far away from existing amenities, hardly provided any amenities themselves, were poorly built, and served as dormitory towns for existing cities (mainly Dublin). They were also much smaller than comparable houses built twenty or thirty years ago…
To sum up, in the words of Dr Brendan Williams: “The quantity of our supply is very, very good. The quality leaves a lot to be desired”…
Much of the hasty development that Ireland has seen over the past few years could have been avoided if supply had reacted earlier and in a more flexible way to rising demand. But in the early years of the boom, central government had still not realised how important it was to encourage housing development, and local councils, left alone without an independent tax base and lacking the incentives as well as the means to engage in proactive planning, did not plan for enough new houses.
Then, when it was almost too late and prices had already skyrocketed, the government realised the dangers of this situation and encouraged building. But, as Ronan O’Driscoll put it, “the government only thinks in numbers and units” – thus failing to understand that good, flexible and strong supply means more than just “throwing in a few hundred two-storey, three bedrooms semis” (Liam O’Donnell). And this “thinking in numbers” was passed down from central government to local planners, who could basically declare that they had done their jobs properly if they could only show that their numbers had gone up. The quality of these developments does not appear in the statistics and is hard to quantify anyway.