Dr. Conor O'Toole:

I thank the Chairman for the invitation to appear before the committee. I am joined by my colleague, Dr. Rachel Slaymaker. We are delighted to have the opportunity to have an input into considerations around the Bill. To do so, we will report our recent research studies that may help the committee's discussions in terms of an evidence base for interventions to address housing affordability.

All of this information must be contextualised by the fast moving economic developments relating to the Covid-19 pandemic and its ability to impact both the demand and supply sides of the affordability equation. Two years ago we presented research to the joint committee on which households faced housing affordability challenges in Ireland. We found that affordability pressures were primary among low to middle income private renters, especially those in urban areas. In an updated study, that was published in 2020, we separated the rental market into two groups, those in receipt of State housing supports such as housing assistance payment, HAP, or local authority tenants, and those private renters without supports. The latter group accounted for approximately 47% of the rental market and was the main focus of our research. We found that even though this group's gross income was higher than the rental sector overall they face significant affordability pressures. Indeed, one in four of these households was paying more than 30% of their net income on rent while almost one in three, or nearly 70,000 households, did not have sufficient income remaining after housing costs to cover a minimum standard of living expenditure before the pandemic. Given that these renters were more likely to be employed in those sectors most impacted by Covid-19, it is likely that the economic fallout from the pandemic will exacerbate existing affordability challenges.

So if renting is so expensive then why have not more renters become homeowners in recent years? Since 2011, the share of homeowners in Ireland has dropped due to many co-determining factors such as tighter credit conditions on the part of banks and the new macro prudential rules, labour market developments, high house prices and a limited housing supply. Of these, the supply channel is likely the most important. The number of housing completions in recent years is well below he estimates of structural demand. Estimates by the ESRI and other commentators put the structural housing demand levels at between 30,000 and 35,000 units per annum, which is well above the current level of housing supply. The disruption of the pandemic will only widen this gap between supply and structural demand.

In evaluating the efficacy of policies that target the demand side, so the borrower purchasing power such as shared equity loans or other instruments, it is critical to understand the extent to which households face credit constraints. In a recent research paper we find the existence of both equity constraints, which is an insufficient deposit, and income constraint, which is insufficient loan size to income, in the Irish market among those renting households who wish to purchase a property. The bulk income and equity constraints are evident and suggest that separate policies covering loan availability and deposit supports can be of merit.

At present, there are already interventions in the market that aim to address equity constraints with the help-to-buy scheme and income constraints through the Rebuilding Ireland home loan. A shared equity loan instrument for lowering the required loan amount would also act to alleviate both income and deposit constraints.

Its benefit in theory would be to facilitate credit access for some constrained households. However, the targeting of any credit market intervention is critical. If the credit access supports are provided to those households which would have otherwise been able to finance the transaction, then the economic benefit is lessened. For example, a review of the help-to-buy scheme data suggests that many households with large deposits have received support under the scheme. It is likely these households were not constrained and would have been able to complete the transaction anyway.

Furthermore, and most important, this static approach does not take into consideration the fact that housing supply is so constrained in Ireland and that increasing purchasing power for households through a loosening of credit constraints will likely lead to higher house prices. Such rises in house prices are likely to exacerbate affordability problems down the line. These dynamics may or may not be observable in actual price data which will be affected by a multitude of other factors, coupled with scale of the intervention, but they are likely to occur.

Our research suggests there will be a considerable number of households in Ireland which will not be able to become homeowners and who will face high rental costs. For these households, as well as those who do not wish to become homeowners, the introduction of non-market priced rental tenure in cost rental is very welcome. Many countries have successfully incorporated longer term rental options into their markets which provide long-term, stable rents for tenants and this has been absent in Ireland on a broad scale. In the context of the current Bill, the definition of cost rental would appear to be set to cover middle income households, a group our research certainly shows face considerable affordability pressures. Indeed, as a supply-side intervention which will lead to the introduction of new units to rent, it cannot come quickly enough. The success of this intervention over the medium term should be gauged by three metrics, namely, the number of units, the pricing and the eligibility criteria. To have a meaningful impact on overall housing supply, the number of units provided would need to expand rapidly over the coming years. On the price side, the initial level may reflect construction costs and ensuring that developments can be provided as efficiently as possible to minimise the subsequent rent levels is important. Regarding ongoing price inflation, maintenance costs for property upkeep can often exceed the broad consumer price inflation. How these costs are passed through to tenants is important to ensure continued investment in upkeep, maintenance and quality, but also to ensure affordability.

Affordability challenges in the housing market are a critical and long-standing issue for Ireland. Addressing these challenges is difficult as increasing housing supply is problematic in the short run. Considerable care must be given to interventions on the demand side given the supply concerns. Credit market supports such as the shared equity scheme and other interventions may lower credit constraints by facilitating home purchase for buyers who otherwise would have been unable to enter the market. However, on balance, with the current supply shortages it is likely these benefits will be outweighed by inflationary pressures. The most successful interventions over the medium to longer term will be those that operate through the supply side not the demand side of the market. Cost rental schemes are a very welcome addition to the market and their expansion over time will help to build a broader rental sector. We thank the committee for its time and look forward to answering any questions.