Oireachtas Joint and Select Committees
Tuesday, 13 November 2018
Joint Oireachtas Committee on Housing, Planning and Local Government
Impact of Brexit on Ireland's Housing Market: Discussion
At the request of the broadcasting and recording services, members and visitors in the Public Gallery are requested to ensure that their mobile phones are switched off completely for the duration of the meeting or switched to aeroplane, safe or flight mode depending on the device. It is not sufficient to place phones in silent mode because this will maintain a level of interference with the broadcasting system.
Today, we will discuss the impact of Brexit on Ireland's housing market. On behalf of the committee, I welcome Dr. Tom Healy from the Nevin Economic Research Institute and Dr. Kieran McQuinn, Dr. Conor O'Toole and Mr. Barra Roantree from the Economic and Social Research Institute, ESRI.
Before we begin, I draw attention to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to the joint committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to do so, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.
I invite Dr. McQuinn to make his opening statement.
Dr. Kieran McQuinn:
I thank the chairperson for the invitation to the ESRI to appear before the committee. I am research professor and head of economics and I am joined by my colleagues, Dr. Conor O'Toole and Mr. Barra Roantree.
While we have not specifically addressed the impact of Brexit on the Irish housing market, researchers at the institute have examined the impact of Brexit at an aggregate and sectoral level. We have also built up an extensive research expertise in the area of housing. As a result, our comments are informed by a considerable body of research. I will start by summarising the results of some analysis, which has examined the overall impacts of Brexit on the economy.
The macroeconomic effects of Brexit are significant and negative for the economy. Depending on the nature of the UK's exit from the European Union, Irish output levels could, by 2026, be up to 4% less than a baseline no-Brexit case. While 4% may not appear to be a significant impact, it has to be borne in mind that this impact will cumulate over a long period. Therefore, income levels will be lower than otherwise would be the case and unemployment rates will be higher than in a no-Brexit scenario. In the case of the latter, it has been estimated that under a WTO-style exit, unemployment in the Irish economy could be almost 2 percentage points higher than under a no-Brexit situation.
In the area of housing demand, the impact of Brexit on income levels and unemployment are particularly important. When we think of the demand side of the housing market, we think of income levels, interest rates, unemployment and demographics as being key fundamental variables. Across a number of markets, movements in these variables have been shown to be key drivers of house prices. The impact of Brexit on income levels and the labour market is fairly unambiguous - both are expected to be lower than a no-Brexit scenario. In this respect, housing demand is likely to be lower due to both factors. The situation in the context of demographics is less clear-cut. As a result of the fact that Brexit will have an adverse impact on domestic economic activity, it may reduce the number of people coming to work here. This, again, would reduce the demand for housing and result in lower house price growth relative to a baseline no-Brexit case. On the other hand, Brexit could result in a large number of people moving to Ireland from the United Kingdom, particularly if there is significant fallout for the financial sector in London. This could see an increase in the number of people coming to live and work, particularly in Dublin, which would increase housing demand. Therefore, one could see significant regional differences in the impact of Brexit on the Irish housing market. The rest of the country may be adversely impacted while the greater Dublin market may be less so.
One other issue worth mentioning in the context of demographics is the potential for what we call increased friction in the relationship between the Irish and UK labour markets. By friction we mean anything which prevents people from moving and working in one jurisdiction to another. Traditionally, the UK labour market has operated as a form of safety valve for the Irish economy. When unemployment starts to increase significantly in the domestic economy, people tend to move to the UK to find employment. If this becomes harder to do as a result of Brexit, it will increase the scale of negative shocks in the Irish economy. Therefore, housing demand will experience greater fluctuations than would otherwise be the case. In terms of the flow of mortgage credit, if financial stability risks in the banking sector materialise following Brexit, this could limit the availability of mortgage financing which could also put downward pressure on prices and subdue demand.
Colleagues at the institute have carried out extensive research on the implications of Brexit for the production processes of Irish firms. Where this might impact the housing market is in any difficulties Irish firms may have in securing relevant materials and labour from the UK market. If Brexit causes a significant increase in the cost for Irish firms in securing labour and materials, this will push up the cost of house building domestically with associated implications for prices. This may also extend to financial sector considerations. If access to finance for development becomes impaired due to disruptions in financial markets, the flow of financing to commercial real estate development may decline if international equity flows moderate. Again, this could increase the cost of supply, with prices being pushed up as a result. Overall, and notwithstanding the particular case of the Dublin market, Brexit may lead to lower levels of housing demand if income and employment effects are considerable and no inward migration boost materialises. The risks to housing supply are more clearly on the downside.
At this juncture, it is important to note that housing supply levels are considerably lower than structural demand, with our research showing this is most clearly the case for lower-income households. If Brexit were to result in a lower level of housing supply by the private sector, it is important that the State continues to invest in affordable and social housing. Brexit-induced reductions in income and employment, or increased inward migration to Dublin, could also have implications for what will soon be the Government’s main income-related social housing support for private renters, namely, the housing assistance payment, HAP. Eligibility for HAP is determined by a family’s disposable income, with maximum limits set on the rent that can be covered. If income and employment growth are slower than anticipated due to Brexit, the numbers of families that qualify for HAP in the coming years will likely be higher than currently expected.
Similarly, if Brexit results in greater migration to Dublin, and therefore results in higher rents, HAP expenditure is likely to be higher than currently anticipated while the rent limits set down by regulations may require more frequent revision. Those were last revised in March 2017, and rents have increased by 12% in the capital since then.
Regarding market expectations, these changes in the demand and supply side of the market have all been discussed in the context of changes in economic and demographic variables. However, expectations, both those of consumers and producers, are extremely important in the residential market. To date, the entire Brexit process has resulted in a marked increase in uncertainty in the economy. Greater uncertainty typically makes households and firms more cautious in their decision making, therefore, resulting in less activity in a market such as the housing one. This, again, is likely to result in lower housing demand and supply.
Regarding some legacy issues in the housing market, mortgage arrears is still an issue in the Irish market. While rates have fallen in recent years due to improved economic circumstances, they are still above European averages. Key drivers of mortgage arrears are income, employment and house price levels. As we have already seen, income levels and employment levels are likely to be less than would otherwise be the case, while house price levels will likely grow at a slower pace compared to a no-Brexit situation. Therefore, the rate of decline in mortgage arrears is likely to slow due to Brexit. This, in turn, will have implications for the non-performing loan levels on the balance sheets of Irish financial institutions, which will impact their performance as we go forward.
Brexit may slow the extent to which the European Central Bank, ECB, wants to normalise monetary policy. If Brexit brings about slower growth across the eurozone, this may lead the ECB to moderate the degree to which policy rates are increased. Lower policy rates are likely to result in domestic mortgage interest rates being lower than what they otherwise would be. This would improve affordability in the Irish mortgage market as interest rates are a key determinant of affordability.
I thank the members for their attention. My colleagues and I would be delighted to any questions they may have.
Dr. Tom Healy:
I thank the committee for the invitation to address this question of the impact of Brexit on this area. We in the Nevin Economic Research Institute, NERI, have undertaken research in the area of Brexit and separately in the housing area but, in common with other researchers, we have not examined specifically the possible or likely impact of Brexit on the Irish housing market. In fact, I could not find any specific research carried out in this area by the Economic and Social Research Institute, ESRI, Copenhagen Economics or by any other individual researcher who has assessed the economic impact of Brexit in the Republic of Ireland.
To put this in context, we are all aware of the uncertainties about the final shape of a Brexit deal and given that uncertainty, it is extremely difficult to make any projections either on the supply of, or the demand for, housing. It is surely the case that consumption and income will be negatively impacted, all other things being equal. An important qualification to make is that in any economic outlook we are looking at the effect, in isolation, of one change, be it Brexit or another factor. However, other factors also impact on growth and the demand for housing. We do not know the evolution of the world market. Many other factors, including the extent to which multinational investment and the state of the domestic economy, can affect and interact with demographics and, thereby, impact on the housing market. Therefore, it is possible that economic growth could remain at a high level. Yet we know from the data and evidence of other research that Brexit, in isolation, in all likelihood will have a dampening effect on economic activity. My point, essentially, is that other factors could outweigh and disguise, in a certain sense, the negative impact of Brexit.
Turning to the housing market, the problem is that, as matters stand, supply is still very inadequate but we also need to reflect on the regional and the compositional aspects of the Irish housing market. There is a particular issue of excess demand in the greater Dublin area.
Over and above that, the output of apartment dwellings, for example, is relatively very low. Apartment building is almost entirely a Dublin phenomenon to the extent that it is happening nationally, according to the most recent Central Statistics Office, CSO, data. This factor makes us somewhat unique in European terms in that we have a very particular composition of housing output, that is, either single housing or housing that is part of a scheme. In many other European countries apartment living is much more the norm and there is a much greater density of accommodation in large cities. The point is that Brexit, to the extent that it may impact on inward migration, will increase in all likelihood the demand for rental accommodation, particularly in the greater Dublin area and the other cities. There are details here on the regional and compositional aspects of the housing market that are crucial. The important lesson here is to be ready and to be as best prepared as possible. This underlines the importance of good social policy not only to accelerate the output of new homes but also, over time, to adopt a strategic approach to the housing stock and the composition of housing and also the need to change the insulation of housing, for example, to meet the challenge of climate change and of moving towards a zero-carbon economy. Therefore, what we would need to be doing anyway if there were no Brexit is all the more the case with the uncertainty and the likely negative impacts of Brexit.
To focus specifically on the demand side for a moment, as already mentioned, it is the combination of household income effects and migration that works on the demand side. My view is that the net effect will probably be a higher than otherwise expected demand for accommodation arising from Brexit. We should not exaggerate the likely phenomenon of, for example, UK financial institutions relocating to Dublin or other cities. This will happen and is happening but it is likely to have a limited impact in the bigger picture. What is probably more likely to happen is that workers, families and individuals who might have moved to the UK from other parts of the EU will now, other things being equal, move to the Republic of Ireland. We should also bear in mind that if tariff barriers were to be erected between Ireland, as a member of the EU, and the UK, including of course Northern Ireland, it is quite likely that UK companies would relocate some part of their activity to the Republic of Ireland. This is exactly what happened in the 1930s if one thinks of companies such as Cadbury that located part of their operations here, in the Irish Free State, behind newly erected tariff barriers. As an English-speaking country with a common law system, we have certain elements of attraction to multinational companies quite apart from the low headline corporation tax rate of 12.5%.
I will say a quick word about the supply side. One of the issues in this regard is currency fluctuations and their impact on materials imported by the construction sector. We also need to bear in mind, however, that the construction sector is a net exporter of goods. This, too, could be impacted were sterling to depreciate significantly in the months and year after Brexit actually happens. There has recently been much focus on and discussion about the way in which a customs union could limit or attenuate some of the impacts of Brexit and avoid what people refer to as a hard border, be it in the Irish Sea or on the island of Ireland.
We must reflect that it is the non-tariff barriers and the 1,001 regulatory and product standards and inspection issues raised by divergence from the Single Market that will matter more than whether there is a customs union. People are very much focused on the visible aspect of trade in goods, but there is another issue that is much more difficult to measure that could have an effect on the construction industry.
Brexit really does challenge all areas of economic and social policy, and we need to be vigilant. We need to do more of what we should be doing already, and this includes a much more ambitious approach to building public housing. In our research we have proposed a model of cost rental that would provide much more choice and flexibility in the housing market and could be a significant game changer in terms of ending the dominance of the private rental sector or a developer-led model.
I will happily take questions or join the discussion.
I thank the witnesses for their presentations and submissions. Last night, I read the submission papers. While there is a series of risks, we do not know how Brexit will pan out and we simply have no way of knowing, assessing or measuring its likely impact on the housing market and housing system. Other than highlighting the risks, and both presentations have done so very well, perhaps the discussion the committee really needs to have, knowing that we do not know these things, is on the types of mitigation measures we should argue should be put in place so that, whatever the negative impacts, we are in a better place to deal with them than we are at present.
Whatever one thinks about Rebuilding Ireland, and there are members of the committee who are strongly in favour of it and others who are critical of it, the one thing we can say with certainty is it was designed without an eye to the type of issues being raised here today. Whether we are for or against the plan, we can all agree clearly that something has to change or something has to be added to it to mitigate the measures outlined by the witnesses. My questions are more about where we go from here.
I am working on the assumption that while both public and private sector housing delivery is affected by the negatives, the private sector is clearly far more vulnerable to them. The increased costs of construction labour will equally affect public and private sector housing output, but the difficulties with credit do not have the same impact on the public sector because it is using Exchequer revenue, Housing Finance Agency funds or European Investment Bank funds. Likewise, the overall developmental costs in the public sector are much more controlled because it is not as dependent on land prices and developer profit and risk. Looking at the overall output and quantum of social and affordable public housing, is it fair to say that a key mitigation measure would be to state that the sector is a little bit less at risk and think about increasing over time the output of social and affordable housing delivered on public land with public finance? This way we might be able to pick up some of the slack that might inevitably come in the private sector because of the concerns that have been outlined.
Do the witnesses have other views on mitigation measures? There is very little we can do in terms of increased demand. We remain within the European Union and the free travel area, and whatever happens on that front will happen. It is the supply side issues that are clearly of concern and anything that makes it more difficult to supply public and private housing is a concern. Do the witnesses have other ideas or suggestions? If not, are there avenues they believe the committee could pursue in terms of future considerations to deal with it?
In some areas of Government and public policy there have been quite significant discussions and debates about the impacts and, therefore, the mitigation measures. From what both organisations have said, there seems to have been a bit of a blind spot towards this one. In fact, it is only something that has come onto the committee's agenda recently, primarily because of the interest of the Chair and others. Is this really the case? Is there really very little discussion at public policy fora level or in the organisations' interactions with Government and State agencies?
Have the issues raised by the delegates today not been part of the discussions and, if so, is that a concern? What can the committee do to try to raise the profile of some of these concerns to ensure that whatever mitigation measures are possible and appropriate are prioritised in terms of how Government and public agencies prepare for Brexit?
Recently, Fr. Peter McVerry stated that he estimates that there are now 500,000 persons living in the State who experience distress on a daily basis on foot of their housing situations. We are in the middle of the greatest housing crisis this State has known. Whenever Brexit is discussed we hear much about its impact on jobs, wages and economic growth. It is not a criticism of the institutes but a criticism of the State that four and a half months from the deadline for Brexit we are still in the dark in terms of the impact it will have on the housing crisis and the people affected by it. It is not entirely an unknown unknown. I note with interest that the Economic and Social Research Institute, ESRI, and the Nevin Economic Research Institute, NERI, have laid emphasis on the fact that an important preparatory measure would be a significant ramping up of the State's investment in social and affordable housing. This is an important conclusion emanating from the presentations today.
I have two questions for the delegates, the first of which relates to measuring the effect. It is sometimes possible to measure precisely but at other times it is only possible to measure within a particular range. In previous discussions on Brexit impacts we have heard it could result in the loss of 20,000 jobs and that in particular sectors it could result in wage cuts of between 5% and 10%. One report states that it could have a depressing effect on growth of, perhaps, 2%. Are we in a position to make assessments in terms of key housing indicators?
For example, one of the key impacts pointed to today is an upward pressure on rents, but I am not 100% sure as to the basis for it. I understand financial industry is relocating here from the UK and that this has a depressing effect on the housing market in terms of more people seeking rental accommodation in that circumstance. I also have an idea of the reason for an upward pressure on rents but I would like to know if we are in a position to measure it. Yesterday, Daft.iereleased data which points to an 11% year-on-year increase in rents nationally. Are we in a position to state that in a particular Brexit scenario the upward pressure effect on rent is likely to be in the range of 1% to 3%, 3% to 5% or 5% to 10%? What is the best scenario and what might be the worst? I accept there is an element of speculation in this regard and that the witnesses might not be prepared to speculate but, perhaps, they would comment on the issue.
My second question relates to the issue of regional variations, which I think both witnesses pointed to as well.
Greater Dublin has been highlighted as an area in which, for obvious reasons, increased upward pressure on rent might be the greatest. Would our guests be prepared to comment on the effects of Brexit on the housing situation in other areas? There will be a big difference between the midlands and west of Ireland as opposed to some of the larger cities outside Dublin. I refer to Galway in the west, Limerick in the mid-west and Cork in the south-west. Would our guests be prepared to comment on the likely effects on those cities?
Dr. Kieran McQuinn:
Those were relevant questions. I agree with the point made by Dr. Healy on the mitigation strategy, which was one of the first issues raised. There clearly are structural issues in the housing market regardless of Brexit. We are all familiar with them. We have an issue with the structural demand for housing. As we have estimated it at somewhere in the region of 25,000 units to 30,000 units are required each year. This year, however, we are only likely to build in the region of 18,000 units. That is not just a year-on-year issue. It has been accumulating over many years, unfortunately, and is a significant issue. For the past three or four years, we observed the marked slowdown in the number of social housing units being provided and that there was an urgent need to address that. Unfortunately, that issue also accumulated over a number of years and it is not something that can be addressed in any one year, unfortunately. It will take years.
On mitigation, we pointed out that if there is a reduction in private development, or the number of units coming from the private sector, then, ideally, the State would be in a position to step in and escalate the level of housing supply it is providing. That is the desired outcome. The only issue with this - and something we have to mention - is that Brexit is also going to have an impact on the public finances, which is ultimately what is going to fund the increased provision of social housing.
If Brexit has a significantly adverse impact on the public finances - as it more than likely will if there is a very dramatic Brexit, such as a no-deal Brexit or even a World Trade Organisation-style Brexit - then that will impact on the public coffers. The public coffers, in turn, are where the extra funding for housing would come from. That has to be taken into consideration as well. As already stated, ideally, the State would be in a position to step in a countercyclical fashion and be able to boost and increase the rate of housing supply. That is, therefore, one consideration to raise in respect of that issue.
Dr. Kieran McQuinn:
It would probably be on the revenue expenditure side. I had not thought of it in respect of other ways. It is something that has to be borne in mind in respect of the likely future path of the key fiscal metrics such as the deficit, the debt to gross domestic product, GDP, and the gross national income (Star), GNI*, metrics. It is something that would have to be taken into consideration. We would also note that, while calling for increased expenditure on social housing - and there was a significant increase in the last year in the recent budget - there is also the additional problem with the economy growing at a very strong rate. A balancing act has to be achieved. We do not want to overheat the economy with the State spending a particularly large amount and increasing the level of expenditure. Those are two risks in this context. The point is well made in general, however, that, ideally, if the State can increase its provision of housing, where there is a slowdown in the private sector, I think that would be a desired outcome.
Regarding the issue of whether we would have expected more on this in respect of dealing with policymakers, in general, we are a little surprised. We carried out the initial macroeconomic assessment using the range of models we use to perform analysis. I referred to the results at the start and there have not been more since then.
In part we can blame the lack of concrete policy proposals from the negotiations, by which everybody has been struck. There has been very little in the way of tangible and realistic policy proposals that have emerged and which we could consider. On Deputy Barry's point, it is something at which we certainly could look. We have the models to examine house prices and housing supply, as well as the impact of reducing income levels and higher employment rates. We did an extensive amount of work recently in considering affordability across the property market and could factor in those issues in looking at the implications for affordability if income levels fall, unemployment rates increase or even if there is some impact, for example, on interest rates. We can certainly answer such questions right now, although it is difficult off the top of my head to indicate specific impacts on the key variables.
If there is a no-deal Brexit and the United Kingdom simply crashes out of the European Union, we will have to hold up our hands and say it will be very difficult. Economic models have strengths, but often they are estimated in periods of relative calm and stability. We are used to answering such questions in that context. When we get into a position that nobody has anticipated or there is a dramatic series of events where British aeroplanes cannot land on the Continent or the ports are closed, for example, economic models will not be very relevant. That is an extreme set of circumstances that I hope will not come to pass.
A relevant point was made about the rest of the country and Brexit. Colleagues of ours in the institute specifically examined regional matters. It is work by Dr. Martina Lawless and Professor Edgar Morgenroth. The different sectoral implications of Brexit are very significant and the agricultural and related food processing sector will be particularly affected, especially if there is a scenario involving rules akin to those used under the World Trade Organization. In that case, it is interesting to examine the areas of the country that are very heavily reliant on agricultural income and the agriculture sector. As we know, the south west is very heavily reliant on agriculture, including places such as north Cork, south Tipperary and across that part of the world. These areas and regions are likely to see a particular impact, as well as Border locations because of their heavy reliance on cross-Border trade, of which agricultural trade is a part. There could well be key regional differences.
We made the point in the opening statement that, overall, there could be a depressing effect on the national housing market if there were particularly high levels of inward migration to Dublin because of issues related to the financial sector in London or elsewhere in the United Kingdom, for example. There could be anomalies whereby the Dublin market would be quite different in terms of the overall impact versus the rest of the housing market outside Dublin. It would probably stretch to the cities generally, including Cork, Limerick and Waterford. The impact for those cities would be somewhat different from that in the surrounding regions.
Dr. Conor O'Toole:
I will pick up on two points from Deputy Ó Broin's questions that are relevant to the work we are doing. First, I reinforce Dr. McQuinn's comments in that the research we published earlier in the summer in considering housing affordability made it clear that the issues in the housing market were structural, relatively speaking, rather than cyclical. It is particularly important as Brexit would be a cyclical shock, although it might change some of the structural economic relationships. What we have seen from the financial crisis to now is generalised under-provision of social and affordable housing in the economy. What we have been calling for in a number of our economic commentaries is a long-term structural commitment to providing a very large layer of social and affordable housing. That is not a cyclical matter. It is very clear when we consider the data. For example, the study indicates that in the private rental sector households in the bottom 25% of income distribution spend, on average, 50% of net income on housing.
It is quite a heavy burden on those types of households. Then, we get a big shock like Brexit and we are asking whether our suite of policies are fit for purpose in terms of mitigation strategies. Certainly, having a suite of housing delivery solutions that is invariant to the economic cycle allows one to have a buffer that allows one to manage these things. As Dr. McQuinn has said, we are well below the structural demand levels in terms of the number of completions. If we see that slowing again, if the private sector faces heightened credit constrains or other difficulties, then the State can step in and, possibly, ramp up its activity to ensure that we provide this component of the market, which is critically important.
An area of information that is relevant to understanding how Brexit may have a direct impact on the housing market is the supply chains in the construction sector, and whether particular products may be more affected relative to others. Let us consider, for example, some of the information from the CSO this morning, particular regarding types of product groupings such as plumbing or electrical fittings and prefabricated buildings. Nearly 50% of our imports of these types of products come from the UK. There may be vulnerabilities in specific product areas that may make disruptions to the supply chain greater in housing than in other areas. We have not done detailed research work on that aspect it is something that could be examined in a lot more detail. The reliance on wood and wood products from the UK is quite high at about 30%. These are structural trading relationships that will come to the fore in terms of trying understand the impact of Brexit. For example, if there was a heightened tariff regime, there is the question of what would be the likely impact on these types of products.
Dr. Tom Healy:
I will first deal with the regional question. As already stated, there is likely to be a stronger negative impact outside Dublin and this also will impact on small and medium-sized enterprises. The agrifood sector, in particular, could be very severely impacted with aggregate job losses being significantly higher than 20,000. I refer to the multiplier effect in this regard, not just in the Border area and the north west, but in the south west and south east, where many enterprises are heavily UK-orientated and would be very adversely affected, particularly in the dairy and beef sector.
Brexit is challenging but Dublin may do well out of Brexit. There is an upside to Brexit but it is much more likely to be concentrated in the bigger cities, particularly Dublin.
With Brexit there is a greater risk of social and economic inequality. For example, the demand for low-skilled workers could be affected, vis-à-visthe supply of low-skilled workers. Wage inequality could increase if there was higher unemployment in particular sectors and among particular low-skilled categories of workers. There would be a social impact immediately.
We have not touched on another important regional issue of which we are very conscious as an all-island research body. The impact regionally on Northern Ireland will be worse than in any other UK region. That will have spillover impacts, particularly in Border areas, but also in the construction sector because there are very close ties between the construction sectors in the South and North. At the moment there is a certain degree of migration of labour taking place and one can see it in some of the new developments that are taking place in and around Dublin. The impact on the construction sector will, possibly, be quite severe and we cannot underestimate the potential for inward migration and businesses in the North relocating to the Republic. We must also be concerned about the impact on housing and on the general economy and society of Northern Ireland as a region that is closely allied to the Republic.
As for measurement issues, we were asked whether we were surprised there had been so little analysis in the construction and housing area. I do not think so. The work undertaken in 2015 by the ESRI tells us pretty much what we need to know about the larger possible economic impact of Brexit. Let us remember that it was done before the Brexit referendum. The Copenhagen Economics study of February 2018 does not say a great deal more than had already been signalled in the 2015 exercise. While it is true that nothing specific has been done on housing and construction in any of the larger studies and that is certainly a gap, the difficulty there is that we do not really know how this is going to shake out in terms of inward investment and migration. The CSO has projected population figures on various assumptions with migration ranging from 10,000 net inward migrants per annum up to a maximum of 30,000 net inward migrants per annum to the year 2030. Those are probably conservative estimates or assumptions and we could be looking at much higher effects. One final point to bear in mind is that public services broadly will be impacted, including education and health. It is not just housing. All of these factors are, of course, interrelated.
The question of how to be ready falls to be addressed. There are two different approaches or emphases which can be adopted here. Groups like the Irish Fiscal Advisory Council, IFAC, and the ESRI underline the importance of prudence, in particular fiscal prudence because of the uncertainties around Government revenue in light of any slowdown. However, our emphasis is a little different and is on the importance of ramping up investment, which is to say targeted, quality investment in key areas. I give a practical example. If one wants to order a kitchen from Germany, the chances are that the bits and pieces will be transported across the English landbridge. We have to think about Cork Port, Waterford's Belview Port, which is connected by rail, and Rosslare, which is a roll-on, roll-off facility. We have to think about the hard infrastructure to facilitate trade to move more freely. We must also get out of fossil fuels more quickly than planned because a major proportion of our crude oil and gas comes through the UK. We must be mindful of the need to take action on climate issues in any case. While Brexit has complicated our lives immensely, it has challenged us to adopt as a matter of urgency the social and economic policies we should have been implementing anyway. The urgency is greater now that we are faced with this prospect of an unknown outcome in five months' time.
Dr. Healy said a figure of 20,000 job losses in the event of a hard or chaotic Brexit was perhaps an underestimate and that it could be significantly higher. When he says "significantly higher", what is he talking about?
Dr. Tom Healy:
If one looks at the total employment in sectors directly impacted by Brexit, including agrifood, chemicals and pharmaceutical, albeit the last is a very different story to the first, one might have a chain reaction which percolates through a particular region. Bearing in mind the fragility of areas, in particular in the north west, which typically have the lowest incomes per capita, one could be looking at a much more negative impact. While that may be counterbalanced by more growth and inward movement in the Dublin area, we do not really know. It could be much worse than the figures mentioned of 20,000 to 40,000 job losses. However, I am not prepared to speculate.
There is no modelling underlying this and it is probably not even possible to estimate the regional impacts in any reliable way. However, it underlines the need to be prudent and ready.
I welcome our guests and thank them for their professionalism and advice. Over the years, the ESRI, as an independent, professional body, has been on the button in terms of informing public policy as well as advising the Government and the Opposition.
Despite the appalling vista it presents, Brexit also gives us the opportunity to change significant policies, particularly with regard to housing. Our guests have made the point that the provision of social and affordable housing should always be a constant and that whatever need exists should be met. As the market changes, Government spending on social and affordable housing should increase. The figure for this year is around 18,000 units which is expected to reach 20,000 next year and 25,000 from 2020 onwards. Notwithstanding the fact that this will not be enough, our guests are identifying a key policy issue on which we can all agree, namely that there must be a model for building social housing as a constant. That must always happen, regardless of the climate.
In the 1930s and the 1950s, significant numbers of very fine, solid local authority houses were built. These houses are still in use today. Economics were very bad at that time and we had an enormous national debt. What was the model at that time? Did the ESRI or the Nevin Economic Research Institute look at that? Are there lessons to be learned from what was done during that period?
The North will suffer more than any other part of the island after Brexit. In terms of the regional development policy and Project Ireland 2040 attention must focus on the Sligo, Letterkenny, Derry axis and the Drogheda, Dundalk, Belfast economic corridor axis. Government investment which is planned for these two regions must be fast tracked because they will suffer the most. In terms of job migration, there is some evidence in County Louth that jobs may migrate from Northern Ireland to that county. I know of two pharmaceutical companies that are considering such a move. There will be job losses in the North because companies that want to invest in Europe that were considering the UK will now look elsewhere, possibly to our benefit. This is particularly true of US companies or those companies that are English language-based and that want to access the European market. That said, most Europeans are very competent and speak English as well as we do. Are there policy change options available in this context? Are there opportunities for us in that area?
A key point is the political instability that could result from depressed economic circumstances. There will also be a requirement for increased vigilance in the context of tax collection. We will need to focus on cross-Border relationships and those towns and cities that straddle the Border including Sligo, Letterkenny, Derry, Dundalk, Drogheda and Newry. These areas will be key in terms of future stability.
Notwithstanding the difficulties to which Brexit will give rise, North and South, there is a case to be made to the European Union that it must recognise the disproportionately negative economic impact on Ireland relative to other member states. We must consider specific issues such as the cost of housing, including that part of it relating to materials and so on.
If the State is paying the cheque the EU, through the European Investment Bank or whatever other route, must recognise our increasing disadvantage in terms of addressing key issues arising from Brexit. There has to be a benefit to Ireland above and beyond what we would normally get and the EU must recognise that in our housing, economic and employment policies.
They are the main issues I see. What is happening in Britain at the moment is appalling. When one reads the newspaper, in some cases one sees demagogues appearing on the political stage, and not just in America. Some are beginning to appear in our own country. The stability that is essential for our economic well-being and our democracy will not be improved by Brexit. I welcome the expertise we have here today. I am grateful for the opportunity to ask questions.
I will be brief as I am conscious of the time. I have a few comments to make and two questions to ask. I thank the panel for coming in. All of us in this room know that we have a housing crisis. I was very interested in the comments of Dr. Healy, Dr. O'Toole and Dr. McQuinn. They all referred, in a very interesting and pointed way, to the delivery of social housing. That was very interesting because it is not something we always hear, yet here we have general consensus and agreement on it. I will not go as far as to say they were critical, but in some ways their remarks were very pointed. It will be interesting to look back over and read the transcript of this meeting because I believe the witnesses were spot on. I welcome their comments. The reality, as we all know, is that we need to be building or rolling out approximately 30,000 houses. Someone said that earlier on. Nothing less will make any real or significant difference. The reality, as we know, is that there is a crisis in social housing, affordable housing and in both private and public housing. There is very little public housing. The situation is improving but there is very little. It is simply not good enough. We are not building enough public, social and affordable housing.
Where does all that fit into our deliberations today? We are of course focusing on the impact of Brexit on the housing market so I want to keep my comments to that issue. It is important that we acknowledge that Brexit will have a very significant impact on our economy. It will affect jobs, budgetary constraints and employment. It is going to affect an awful lot of things. From what I have seen in both papers, I would suggest, and Dr. Healy possibly suggested this in his paper, that while this demand will be felt in many ways, there will also be opportunities. There are potentially many opportunities for Dublin and the east coast, but Brexit will also impact on Dublin, where the housing crisis is greatest in terms of the delivery and building of social and affordable housing, the purchase of private housing, and every other aspect of people's accommodation and housing. We already have major demand and now we will have this impact.
Dr. Healy suggests in his paper that, all things being equal, Brexit will possibly boost foreign direct investment into the Republic and, with that, inflows of personnel which will generate greater demand for housing, including rented accommodation. I welcome any opportunity that Brexit brings because in every crisis there is an opportunity. I welcome the opportunities on which we can capitalise in terms of inward investment and inward migration. That has to be positive. We have to be ready and prepared to seize that opportunity. The crisis will be in accommodating these people and providing them with homes and housing. That is the real challenge.
I want to ask two questions. Dr. O'Toole talked about the construction industry. He mentioned that and picked up on it in previous comments. Has either organisation done an in-depth analysis in respect of the construction industry and the impacts on it in terms of bringing in product and labour and all the issues associated with that? The two questions I want to ask specifically, and which I ask the two organisations to address specifically, are as follows. What challenges will the construction industry face following Brexit according to their projections and analysis of the situation? What potential effects, if any, will Brexit have on the movement of construction materials between Ireland and the UK and, for that matter, the rest of the European Union?
I will be fairly brief. I will try to speak specifically about housing, as opposed to the broader economic implications of Brexit. The one thing that is coming through is uncertainty. None of us knows exactly what we are headed for. The other word I have used in the context of Brexit is "stability". Stability is required in all markets if we are going to try to get out of this. Reports have identified that while other areas of Ireland might be exposed in the broader Brexit situation, the areas that are currently facing a significant housing crisis - Dublin and surrounding areas, and possibly other city-centre locations - will be further exposed by a bad Brexit. The supply of materials and skills in and out of the country is an issue in the housing sector in the context of Brexit, just as it is an issue in all sectors of society. It has been clear in my mind for some time that there is a need for the State to take greater control of the delivery of social and affordable housing, and this view has been confirmed here. We need to reduce our reliance on the private sector to deliver such housing. As we take that into account, we must equally acknowledge that a bad Brexit will cause our economy to contract. In such circumstances, the Government will not have the fiscal space to deliver on the need for social and affordable housing. This brings me back to the cost-rental model, which was mentioned by Dr. Healy when he was before this committee previously. For once and for all, the State has to find an off-balance sheet model that can deliver social and affordable housing for this country now and moving into the future. I ask the witnesses to comment on the fiscal space and the off-balance sheet model. I believe we can create a sustainable model as we move forward by using the cost-rental model or a differential model with a top-up from the State. The only way the State is going to fix the housing crisis is to take greater control of the housing sector, as opposed to allowing it to be dealt with by the private market.
I will keep it very short. I thank the Chair. I think everything has been said. I want to thank our guests for their reports. There is uncertainty. We are really no further on than we were this time last year. I think we are nearly looking at a backstop. We are getting very good reports. The uncertainty is caused by the lack of evidence of what will happen in the long term. People are really concerned. These reports refer to local authority housing, but we know that such housing is not being built at a national level. The Minister comes in every few weeks to tell us that there is plenty of money for housing. Ultimately, there is so much confusion. All the reports we are receiving are welcome. We have spoken about farmers and exports in the context of Brexit, but we must also speak about businesses and housing. People are living longer. As we build houses, we are not able to cater for what had before Brexit. Please God Brexit will not happen. We cannot even handle what we have, let alone what we hope will not happen. That is my concern.
I attended a public meeting last night. Many elderly people who spoke at the meeting feel their needs are not being met through local authorities because not enough houses are being built. No two-bedroom houses are being built. No houses are being built for people with disabilities. We have to look at insulation. All of these issues, which are of concern now, are affected by the uncertainty of Brexit. What are the answers? We can do as many reports as we want. They are all welcome. Are there any reports that tell us what the answers will be if Brexit happens? All of the uncertainty is causing people to ask where we will go if Brexit happens. What plan of action do we have in place? It has been suggested that Brexit could have a good effect on mortgages because interest rates could drop. That is welcome, in a sense.
However, the approach is based on the situation in cities and rural Ireland is being completely forgotten. The approach is always based on Dublin. Although I acknowledge that homelessness is a far bigger issue in Dublin and other cities than in rural Ireland, the other areas of the country must be considered. All of the reports are based on cities such as Dublin, but rural Ireland is forgotten. We must eliminate the uncertainty of people across the country by ensuring that consideration is had for all areas, rather than only looking at cities.
Dr. Healy stated that Brexit could have a big impact on cities. What will its impact be on rural Ireland? The witnesses have put forward very interesting figures. What will the repercussions be for rural Ireland and its people? I ask for clarity on measures that may be of assistance to the people of Ireland post Brexit.
Dr. Tom Healy:
Rural Ireland faces huge challenges apart from Brexit, such as the imminent closure of certain peat or coal-burning stations and the related impact on the midlands, as well as the position in respect of Moneypoint in County Clare, which will cause the loss of a significant number of jobs and will have a serious impact on the local communities. The extent of one-off housing and the reliance on solid or fossil fuel heating in many parts of rural Ireland are noticeable. Car dependency is a huge issue. The majority of those living in rural Ireland depend on a car to get to and from key services, shops and workplaces. Brexit is another reason for us to invest in public transport and the reskilling of some workers who are facing job losses whether Brexit goes ahead or not. The creation and loss of jobs is always a feature of economic change but there is currently an imbalance in Ireland in that regard.
A development bank for the north west of Europe is an important proposal in terms of economic change and Brexit. In the context of negotiating a Brexit transition and to deal with job losses and some of the issues raised by the Senator relating to the rural areas of Ireland, a development bank modelled on the KfW bank in Germany would lend and advise and help SMEs to re-orientate their activities and undertake new ones. Such activities could initially involve a radical retrofitting of more than half a million houses, many of which are in rural areas and badly insulated, to take advantage of the current technological possibilities in terms of solar and wind power.
The Senator asked for a summary of construction-related impacts. It is likely that there will be higher costs, a possible temporary shortage of materials and continuing pressure on skills, which will probably be worsened by some of these adjustments. We do not know whether the availability of skilled labour from Northern Ireland will be assured post Brexit. The net effect will probably be greater demand, although it will be dampened by economic slowdown in some sectors. That gives further credence to the importance of a European cost-rental model, which would provide greater choice, security, affordability and quality accommodation both to those in need of social housing and to all income groups. Mixed income groups living in public housing and that being done off balance sheet would not solve all of our problems but it is one important way of solving the housing crisis.
Doing it off balance sheet is one way. It is not going to solve all our problems but it is one important part of tackling the housing crisis.
Mr. Barra Roantree:
A few questions were asked, including by Deputy Casey, about how to find a sustainable model for the financing of housing development that can be sustained through a downturn and if there was a hit on revenues. There is a whole set of reasons that can limit the ability of local authorities and approved housing bodies to build. One of the aspects that has been highlighted by Michelle Norris of UCD, among others, is the fact that rents received by councils are often extremely low in a lot of counties because they are capped by the differential rent scheme in a county. Maybe this is in the background but it interacts a lot with how to get approved housing bodies or local authorities to be able to finance housing. If their revenue stream is very restricted by a very low capped rent, they will not be able to raise the finance themselves. If the rents do not even cover the cost of maintenance, it will be difficult to get them to invest and it reduces their incentives in that regard. That is one set of issues that fall under the committee's remit in terms of looking to see if something can be done with the differential rent schemes that operate around the country currently. Perhaps the schemes are not particularly coherent across counties. The definition of "income" differs a lot and the ways in which people's means are assessed for the schemes can differ wildly. This is probably the one thing that often falls under the radar but is important when we are thinking of ways to build the finance model that can sustain housing throughout.
I wish to respond to the comment. That is a challenge and the reality is that we have capped rents for a reason. It is because people cannot afford to pay rent. I do not mean any disrespect to Mr. Roantree but the-----
Hang on there. It was raised. It is a very pertinent point and despite the considerable qualifications of these people here, professional as they are - I respect them all as professional people - there are a lot of people who cannot pay rent and any suggestion that there would be a change or-----
Senator, can I just intervene at this stage? I do not believe there was any suggestion about the differential. We have spoken previously about the weakness in the differential in rents. We have spoken about the differential and the need for a direct top-up from the State, if local authorities are going to-----
I would have thought that it is common practice that the people who present to the committee are entitled to their own views, whether one agrees with them or not. That has been the practice for as long as I have been in the House since 2007. Senator Boyhan's contribution probably points to a bigger issue with the presentations and the discussion we are having. I apologise for not being here for the presentations but I read both presentations yesterday. I wanted to come in to discuss some issues. The papers we have here are housing papers that mention Brexit, as opposed to being Brexit papers on housing. Dr. Healy has highlighted some very valid issues with regard to housing policy, housing delivery and the type of housing models. If one was to remove the word "Brexit" from Dr. Healy's submission these issues would still be pertinent whether Brexit was happening or not. That is not a criticism. It shows the crossover in terms of us trying to grapple with what would be the specific effects on the housing sector based on Brexit but especially a hard Brexit.
The presentation by the Economic and Social Research Institute gave some specifics around what it sees as the increase in unemployment based on a hard Brexit or a no-deal scenario, which is around 2%. I disagree with other Senators present who say there are opportunities here. Any opportunities from Brexit are far outweighed by the negative impacts of Brexit.
On both submissions, I wonder why one aspect was not mentioned. We are supposed to be talking specifically about housing, and perhaps the witnesses addressed this in reply to the questions. The common travel area will endure, whatever happens. With regard to the risk to labour one the submissions referred to the UK being used as a valve to switch on or off, depending on economics.
Even if we consider what has been discussed between the European Union and Britain about the reciprocal rights of British and EU citizens, I am not sure why that plays such a prominent role in both of the submissions. I do not understand why the common travel area, CTA, is not mentioned if we are talking about a threat to the workforce from the North. Maybe it was mentioned and I missed it.
On the all-Ireland electricity market, the east-west interconnector is a major piece of infrastructure for delivering energy security. As such, it will be important for new and existing homes. Again, I do not see any reference to the interconnector or the North-South energy market in either submission.
On the increasing cost of building, we know the issues that arise in this regard and Dr. Healy, Mr. O'Toole, Professor McQuinn and Mr. Roantree addressed them. On the issue of a potential increase in the cost of materials, has either of the institutes done work on what level of material is imported from Britain? Is the issue that material comes via the British landbridge or that we are overly dependent on British material for building products? That is a building-specific Brexit issue on which the witnesses may have information and, if so, perhaps they will share it. I have tabled parliamentary questions to the Minister asking whether the Department of Housing, Planning and Local Government has a housing specific contingency plan in place based on a difficult Brexit scenario. The answers indicate it does not have such a plan in place. That issue is a difficult one to grapple with because we are in a housing crisis.
Many of the issues raised in the submissions would be valid regardless of whether Brexit happens. For this reason, I am trying to find out what the Brexit-specific pieces are, for example, what is our dependence on the British market for building, expressed in percentage values, be that through material, personnel, energy security or fuel imports? Dr. Healy referred to fuel and I know our dependence on gas imports reduced as a result of the Corrib gas project. Renewable energy was also mentioned.
This is not a criticism. I am just trying to get under the bonnet because we are a housing committee. The witnesses mentioned housing issues that we are already dealing with. What additional factors arise as a result of Brexit because I am at a loss in some respects?
The benefit of being the final speaker is that many of the questions have already been asked. This is a report that we want to do and we want to get very definitive answers if possible. What effects could Brexit have on building costs and completions? Do the witnesses expect delays in completions? If the UK were to leave the Single Market or customs union or in the event that there was no Brexit, what would be the impact on the cost of materials or the delay in delivering them?
Dr. Healy indicated that 30% of wood products and 50% of rapid build, electrical and plumbing materials come from the UK. It would be of great benefit to have more detail of this nature. If the witnesses do not have it with them, it would be helpful if they could send it on to the committee.
On infrastructure, Project Ireland 2040 outlines, for the next ten years, areas in which investment will be made in infrastructure, for example, tier 1 and tier 2 ports. Should other infrastructure be prioritised and, if so, what and where is it? The skill shortage has been covered in the questions on whether Brexit takes place or not.
Deputy Ó Broin wants to make a final point.
To return to the mitigation measures, Professor McQuinn stated that if one of the consequences of these risks is a reduction in private sector supply, it may be prudent for the State to increase its delivery. As he knows, Rebuilding Ireland is to deliver 136,000 social tenancies over its lifetime, of which 40,000 will be properties built or bought by local authorities and approved housing bodies, 10,000 will be private sector units leased over the long term and 86,000 will be private sector units leased over the short term. That means that 71% of these tenancies will be in private sector units. Given what Professor McQuinn outlined in terms of the risks, would it be prudent, particularly over the next two or three years, to revisit the 71% to 29% private-public split in Rebuilding Ireland to take account of the possible negative impact of Brexit on private sector output?
Dr. Conor O'Toole:
I will comment on a broad set of themes raised by several of the Deputies and Senators. I will address first the questions raised by Senator Boyhan. They relate directly to Deputy O'Brien's comments and the challenges the construction industry faces. We have not conducted a specific study of the import content of the construction sector. I mentioned it as being an area that warranted future research. Let us consider what could happen from a day-to-day perspective if there is a hard Brexit. The direct trading supply chain links would be disrupted. It is difficult to know the degree of disruption because it would depend on the tariff arrangements in place and whatever deal or no-deal scenario came to pass. It would also depend on what non-tariff barriers, including regulatory alignment or types of standard, would be required between the two jurisdictions following the deal. I mentioned some figures for the dependence on specific import types. For example, 50% of imports of prefab material and plumbing and electrical fittings and fixtures come from the United Kingdom.
Dr. Conor O'Toole:
Exactly, yes. Up to 30% of cork and manufactured wood product imports came from the United Kingdom in 2017. There is a considerable reliance on these types of structure that are building and construction oriented.
Some other risks should be pointed to. If construction firms face difficulties in the credit market in raising capital or financing in a post-Brexit environment, that could be a particular constraint on their typical ability to deliver units.
There is a related financing point relevant to the mortgage market. If the banking sector is hit by a material financial stability risk, those involved may have to pull back on some of their lending activities. That would affect construction firms and the demand side of the housing market if mortgage availability were to reduce. I know that some of the Irish banks have large activities in the United Kingdom and they could be exposed to some of the major financial stability risks in that context.
I am keen to comment on a basket of points raised by Deputies O'Dowd and Casey about the model for delivery of particular types of unit of social housing. One thing we have learned from the crisis and in thinking about the types of policy that are appropriate is that there is a need to have a system that can react whenever shocks occur. It is important not to have a particular over-reliance on one delivery solution. For example, let us consider the work of the local authorities, approved housing bodies and other models of private sector cost rental or for the delivery of cost rental units. They all have to be part of a basket of solutions to have a healthy functioning market that can withstand shocks and downturns, whether they are Brexit-related or others. Certainly, the research we published in June suggests having a range of delivery mechanisms is the most appropriate for any market to function well. When we have a shock like Brexit and the problems are exacerbated in the requirements for housing, we can withstand it better.
Dr. Kieran McQuinn:
We engaged in a scoping out exercise on Brexit in late 2015 and early 2016. The electricity issue and the energy issue in general were explicitly dealt with in a paper by John FitzGerald and Edgar Morgenroth. I will make two brief responses, the first of which relates to the common travel area and labour. Again, the question was explicitly dealt with in that work.
There were four or five chapters, one of which considered the overall macro issue. Then there were the sub-sectors on issues such as energy and labour. The crucial fact about the labour market is that we are used to a highly fluid relationship between the UK and Ireland. That is how economists typically referred to it over the years. Regardless of whether we like it, the UK has acted as a kind of safety valve when we have had particularly bad economic shocks and, as happened in 2009 and 2010, unemployment rates escalated sharply. People then moved to the UK. That puts a cap on the degree of unemployment we witness in the domestic market. If that is in any way impeded, if there are any frictions that prevent people from moving back and forth and if that safety valve does not operate to the same extent, the scale or magnitude of the shock will be greater in the domestic market than it would otherwise be.
Very few people have inquired in great detail as to what is the most efficient, cost-effective way of delivering a certain number of social housing units. That should be analysed. If we have learned anything over the past ten years, it is that we really need to guarantee, however it is done - whether by the State, through local authorities, etc. - that a certain number of units are built every year. The problem that arises is that when that breaks down over several years we end up with this big backlog of a problem which will require a lot of money to be spent in order to resolve the problem, and we have to be careful about how and when that money is spent. That is the number one lesson. We are not alone in this; the UK has also had this problem. We spoke to colleagues from the National Institute of Economic and Social Research recently. The problem in the UK in the 1980s when they sold off the public housing stock, which was positive for many of the households concerned, was that this stock was not replenished and that led to a decline in the amount of public housing. There have been long-standing problems in the UK market as a result. Other economies have had this difficulty. We need to heed the lessons to be learned in this regard. When we were building crazy numbers of houses in 2005 and 2006 - with 70,000 or 80,000 units per annum - one of the ways we thought we would deliver social housing was the notion that a certain percentage would be provided by the private market. It is fine to provide 10% of 80,000 units if that number is being built. However, the model collapses when the private sector is building practically no units. It is very important that we have a mixed response in order that it is more robust to withstand economic shock, but there must be some underlying guarantee that the State will provide a certain number of housing units year in year out. That withstands most economic shocks that occur.
Deputy O'Dowd asked about opportunities from Brexit. This work was done by Ron Davies of UCD and a colleague of ours, Iulia Siedschlag, as part of a scoping out exercise or a subsequent analysis on FDI inward flows that may arise. They noted some increase in inward flows of FDI as a result of Brexit but overall that did not outweigh the negative aspects.
Dr. Tom Healy:
To address the question about the common travel area, the honest answer is that I do not know because we have three interfaces here, with Northern Ireland, between this island and the next island, Great Britain, and with the Continent. When we factor in all the proposed backstops and the fact that one of the major reasons was concern about migration, this does not add up. Something has got to give somewhere. If we have a common travel area with the next island, we will not have a common travel area with the Continent.
If there is a common travel area around the frontier of the European Union, there will have to be controls at the border between the North and the South. Something has to give somewhere and it will impact on workers coming into the South every day to work on building sites and developments who can be seen on the M1 motorway and in other places. There is another land bridge about which we have not talked. It is the road from Aughnacloy to Strabane, known as the A5. Our fellow citizens in northern Donegal are connected by a slender slice of EU territory south of Bundoran. It is a serious point for people living and working there. Many people living in County Donegal work in Derry and vice versa. It is similar in many other areas along the Border. There are major unanswered questions, to which not even the British Cabinet, as it meets tomorrow, has definitive answers. It will take many years for all of this to unravel. Politically, the only way to move forward is to develop a sufficiently broad fudge in order that enough people will be on board to get it over the line in 27 parliaments, plus the British Parliament.
There is then the question of the Belfast Agreement. There is no mention of economics in the Good Friday Agreement because it was just assumed that the European Union would make everything possible in terms of markets, convergence and movement towards an all-island economy, but Brexit has changed everything. The Good Friday Agreement is not the same, or at least it is not premised in the same way as it was in 1998.
Someone asked what we should prioritise. We should prioritise education, skills, retraining and investment in public transport. I mentioned ports, but we also need to get our fossil fuel import dependency rate down quickly, from the current 85% to something much lower, because we are very vulnerable. We cannot put all of our eggs in one basket. An interconnector to France would help, but that is not going to happen any time soon. We have to look at native sources of renewable energy to replace some of the external dependency.
There are lots of challenges and unknowns. I wish I could provide more certainty on some of these estimates, but we are dealing with a very fast moving situation. In addition to all of this, of course, Brexit is only one thing that is changing. We have climate change, geopolitics and a possible breakdown of the multilateral trade system; all of which will probably matter more than Brexit in the long term. We are talking about one of many challenges.
I thank the delegates for attending. It is a fascinating topic and we would keep them here for days if we could. If there is further information they think is relevant to our report, we would really appreciate it if they forwarded it to us.