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Being Brexit ready (the case of housing)

Posted on November 16, 2018 by Tom Healy

Tom Healy, Director NERI
Tom Healy, Director NERI

As the time left to B-day on the 29th March next shortens, many organisations and individuals are making their own preparations. While a Withdrawal Agreement is far from certain at the time of writing this blog, it does appear that there is a considerable momentum to avoid a 'no-deal' situation as well as to avoid 'hard borders' at least for the immediate future ahead. It remains to be seen how recent and upcoming negotiations will lead to specific measures and fulfilment of guarantees. Much is at stake for workers, families, communities and businesses on these islands of the North West of Europe. Almost anything said or written about Brexit this week may be in need of slight adjustment the following week. Below, is the text of an opening statement I made at a meeting of the Oireachtas Joint Committee on Housing in Dublin on 13th March before the publication of the Draft Agreement on the withdrawal of the United Kingdom of
Great Britain and Northern Ireland from the European Union on Wednesday 14th and its endorsement by the British Government on Thursday 15th November. It concerns the possible or likely impact of Brexit on the housing market in the Republic of Ireland.

The withdrawal of the United Kingdom from membership of the European Union, next year, will in all likelihood impact negatively on the Irish economy. The extent of a negative impact will depend on the details of the final or temporary agreement if such is in place by March of next year.  Particular sectors and regions are likely to be more affected than others. Notably, small and medium-sized enterprises, the agri-food sector and regions dependent on vulnerable sectors are likely to be most impacted. It must also be borne in mind that any negative impact on the macro-economy is in addition to other drivers of economic growth. Brexit does not necessarily imply a recession in Ireland but – other things constant – it will in all likelihood lower the growth rate in GDP, in consumption and in derived demand for housing, compared to a situation where Brexit did not happen. Other factors and events on the global scene, for example, may impact in such a way as give rise to a continuing high growth rate for Ireland.

The Housing market

Construction activity including the rate of new dwellings is increasing. However, it is likely to be many years before supply catches up with a steady annual demand. In the meantime, there is a considerable pent-up demand and a shortage of accommodation especially in the greater Dublin area where excess demand is the highest and concerns of affordability are most acutely felt. In my view, the current approach to housing policy is not working for two reasons:

  1. It relies excessively on a developer-led model to fill the gap left as a result of systematic winding down of public house building over recent decades.
  2. The cost of construction, including development land, poses a major problem for supply.

In our research, we have proposed what we term a European Cost Rental Model which could, over time, be a game changer in Ireland’s dysfunctional housing market.

Possible Brexit impacts on demand for housing

There is a consensus that Brexit will, other things equal, boost foreign direct investment in the Republic and, with it, inflows of personnel generating greater demand for housing including rented accommodation. However, nobody has estimated how much, where and when this will happen.

The impact of Brexit on demand will be mediated principally through two channels: household income and, secondly, growth in population. The latter will be affected by Brexit to the extent that some companies may relocate to the Republic of Ireland. It is also likely that EU nationals who might have otherwise moved to the UK will arrive to live and work in the Republic of Ireland. Were this to happen, the negative general economic impact of Brexit on housing demand might be cancelled out as a result of increased demand associated with additional inward migration.

The Economic and Social Research Institute has modelled some possible impacts of an increase in net inward migration in a scoping exercise undertaken in 2015. Based on an additional inflow of 60,000 persons this might put downward pressure on incomes and wages. However, these effects could be cancelled out by the arrival of more skilled workers and productivity might be raised as a result. The Copenhagen Study of the impacts of Brexit published earlier this year did not model migration impacts.

It is unlikely that the relocation of financial services from London to Dublin or other cities would have a large impact on housing demand. However, many companies including some from outside the EU could choose to relocate here because they want a foothold in an English-speaking Member State of the European Union. 

Inward migration or investment flows are not evenly spread and tend to be concentrated more on the East Coast or in the Greater Dublin area. The possible or likely impact of these changes, not only on housing demand but the demand for public services needs to be considered. Given the transient nature of some migration flows, it is likely that additional demand for accommodation will place particular pressure on the rental sector in the Greater Dublin area.

Possible Brexit impacts on the supply of housing

It is not possible to predict how Brexit will impact on the cost and supply of raw materials and other goods used in construction. To the extent that the free flow of both labour and capital to and from the UK and via the UK landbridge in the case of goods is impeded the greater the cost of construction, here, other things equal. An additional risk arising from Brexit is currency fluctuations that would impact negatively on imported goods were sterling to depreciate very significantly against the Euro.

The Republic of Ireland has a trade surplus with the UK in construction-related products implying vulnerability on a number of fronts including divergence of product standards over time as well as currency changes that raise the costs of exported goods.

Conclusions

Even if we knew the final shape of a Brexit deal and transitional agreement, it is not possible to predict with any accuracy the net impact of Brexit. On balance, the impact on housing of the UK’s withdrawal from the EU may not be far from neutral as negative and positive effects cancel each other out. However, what is true in the aggregate may not be true in particular regions and locations worst affected by Brexit.

 

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