A response to: Housing for homes – a classic case of market failure

A recent blog post published by Tom Healy, director of the Nevin Economic Research Institute, suggested that the current housing market in Ireland is an example of a failed market. Healy believes that the issue of under supply of housing can only be solved if the government expands provisions of social housing and extends its jurisdictions over prices and supply in the housing market.

Healy based his argument upon the assumption that the current housing market has failed and is unable to recover without intervention. He cites a chronic under supply of housing and the inability of government programs to sufficiently meet demand. While there is indeed a under supply of housing and rising prices due to pent up demand, a series of government construction plans such as the 2013 Forfas Strategy, Capital Investment Plan, and Action Plan for Housing and the Homeless, in addition to private investments are expected to dramatically increase housing supply within the next few years. These projects directly address the supply issue by promising 47,000 additional units of social housing before 2021.

The blog post proposes that a Housing Company of Ireland be established: a publicly owned company that will both build and rent high quality and affordable housing for the people. The idea gains inspiration from, and is a version of the European Cost Rental Model (ECRM), a model used in nations such as Austria and The Netherlands to finance Social Housing. In a paper published in March of 2017 entitled “Ireland’s Housing Emergency – Time for a Game Changer”, Healy and his colleague Paul Goldrick-Kelly advocates the Housing Company of Ireland, explaining how the initiative “will draw on long-term borrowing combined with an equity injection from the Ireland Strategic Investment Fund and undertake […] a programme of planning, building, acquiring and renting of new homes”. Healy believes that this initiative would be able to remedy the housing supply problem without driving up rents.

Currently, restrictions on raising rents already exist as part of laws such as the Planning and Development and Residential Tenancies Act. Pressure zones have been established where rents are the highest, such as in Dublin and Cork City. Over the course of 2017, these zones will expand to cover more counties across the country. However, Healy suggests that unlike the proposed Housing Company of Ireland, measures of rent control is unable to deal with the full scale of the housing problem.

Healy takes his argument even further, suggesting that the current trends in the housing market is “bad for capitalism”. He believes that the supply problem is driven by developers seeking private profit from rising prices and land speculation. Healy is correct in his conclusion, that an under supply of housing will cause a lack of competitiveness for the Irish economy as compared to that of other countries, however he exhibits a logical fallacy when assuming that the supply problem is reflective of a failure of the general capitalist system. In a competitive market, a shortage of housing driven by rising demand will eventually correct itself as developers pick up the pace of construction, and consequently, the price of housing will also stabilize. In a market dominated by a publicly owned company, creating artificially low prices and subsidizing low income families, the shortage of housing will only continue as private developers see their margins and opportunities falter.

Healy rejects the current model of the housing market in Ireland and the direction of current trends in public and private supply of housing. He believes that a the establishment of a public company with more jurisdictions and reach is better capable of solving supply issues in the housing market. Although he stands firmly behind his proposal, Healy acknowledges that his plan would “take billions of Euro of investment which the Government does not have”. One can easily argue that the sponsoring of an initiative such as Housing Company of Ireland is too ambitious and unnecessary for this time.

https://www.nerinstitute.net/blog/2017/06/02/housing-for-homes-a-classic-case-of-market-failure/

 

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