The primary driver of this ranking in Ireland is population growth. At 1.5% per annum, it is the fastest growing country in the sample along with Canada and Australia, which are also growing at the same rate. While Canada, like Ireland, is also struggling to account for the growing population (2.9 population growth per one new household), Australia is faring much better with a ratio of 1.9 of population growth to new housing growth. 

By contrast, Spain’s poor ratio of 3.4 (only behind Ireland), is primarily due to an inability to ramp up housing supply rather than keep pace with an expanding population, as it has witnessed population growth of just 0.5% per annum over 2015 to 2023. Last year, Spain delivered just 90,000 new housing units – a figure some have muted as the appropriate target for Ireland – but for a population of 48.6 million people. 

Germany’s aging population is evident with just 0.3% average population growth over the period, with immigration driving it into positive rather than negative territory. While immigration has also contributed to Ireland’s population growth, Ireland also has by far the highest natural population growth (births minus deaths) in Europe.

Housing affordability declining despite rising incomes

Looking at the effect of this population-supply imbalance on housing affordability yields some interesting results. Ireland has experienced income growth of 27% (second only to the United States) between 2015 and 2022 (latest data across the sample), while residential purchase prices grew by 66%, a differential of just under 40%. While this sounds high, it places us in the middle of the road (5th) of the nine countries examined, despite having the worst house building to population growth ratio. Compare this with Canada, who saw its prices grow by 104% but incomes grow by 23%, a differential of 81%.

The reason Ireland hasn’t seen a run-up in house price growth – despite the poor supply dynamics outlined earlier - can largely be attributed to the Central Bank of Ireland rules introduced in 2015 which placed limits on the amount that people can borrow to purchase a home.  The mortgage lending rules introduced a limit on the amount a buyer can borrow relative to both the value of the home and their income. The latter was initially set at 3.5 times the buyers’ income, with that threshold raised to four times the income of first time-buyers in January 2023. 

The Central Bank rules are a positive for the market, increasing the stability of both the banking system and the wider economy, ensuring that a repeat of the previous boom-bust cycle can be avoided. However, while the measures have protected the stability of the purchase market from becoming over inflated from a pricing point of view, the lack of supply has meant that inflation has been funnelled into the rental sector as people that would have bought are forced to rent, thereby adding to demand for this market segment. 

Figure 3 outlines rental growth versus income growth between 2015 and 2022 and demonstrates that Ireland has witnessed by far the greatest decline in affordability over the period of the countries examined. While many countries saw relatively subdued rental growth in comparison to income growth, on a comparative basis rents grew by 19% more than income in Ireland. This is despite – or more accurately because of – rental caps which were introduced in late 2016 and have constrained supply in the build to rent sector. The US and the UK saw the next highest rental growth after Ireland, but crucially, rental growth was lower than income growth, thus improving affordability.

Overall, the picture shows that the low interest rates environment which prevailed between 2015 and 2021 led to a large increase in house prices across advanced western economies. While prices have also increased in Ireland, there is little doubt that they would have increased by much more if these regulations had not been introduced in 2015. As a result, Ireland sits middle of the road when comparing it with other countries based on changes in house prices versus incomes. 

While the rules are designed to strengthen household and banking financial stability, they are having the side effect of increasing demand for the rental sector by making it harder to buy a house, thus increasing inflation in the rental sector. In some ways, this reduces household financial strength on a macro basis – the opposite target of the Central bank rules - by making it more difficult to save for a deposit and build lifetime equity via home ownership. 

This also has implications for future pension savings, again an issue of financial stability. In this respect, increasing the help-to-buy scheme for first-time-buyers in-line with inflation from its current limit to €614,000 would strike the right balance in terms of protecting macro stability but helping prospective home owners purchase. This analysis also shows that rent caps give the illusion of helping renters in the short-term, but ultimately hurt them in the longer term by limiting and making supply more expensive.