Another Crisis? Blame the Workers!

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We have a housing crisis.  90,000 on the social housing waiting list of which 60 percent have been waiting for two years or longer.  The private rental sector is not fit for purpose for many household types (and, in any event, is a highly fragmented, mom-and-pop operation).  There are over 100,000 in arrears and that doesn’t count buy-to-let mortgages.  The planning system is unreformed and we are stuck with inefficient and costly suburban sprawl.  And there is a major supply problem in the main urban areas, especially Dublin, where rents are experiencing double-digit inflation.

So what’s the answer?  Blame the workers, of course.

Prime Time had a feature on the housing crisis followed by a panel discussion.  And what comes up?  The alleged high cost of labour in the construction sector.  There were two parts of these assertions.

Hubert Fitzpatrick of the CIF claimed:

House prices today are approximately 50 percent of where they were seven years ago but the cost of actually building those houses has not fallen by the same extent.  

Economist Ronan Lyons stated:

The Government needs to be very forensic in saying if we have labour costs in construction that are 25 percent higher than in West Germany, why?  Is there a reason for that?  Can we get our labour costs in line with Eurozone partners? 

We have had a spectacular roller-coaster ride in the property market, fuelled by speculation, non-regulation, massive capital inflows and, then, outflows – and we come back to ‘wages are too high’.  You really would weep.

How valid are these assertions?  Not very when you look up some basic facts.

First, it is true that property prices have fallen substantially.  It is also true that building costs haven’t fallen by the same extent.  But during the boom period house prices rose at an exponential rate compared to building costs.

hcc_chart1

Between 1994 and 2007, new house prices more than quadrupled.  Construction costs didn’t even double.  If house prices were to fall back in line with the cost of building a house, they’d have to fall even further, by more than a third.   If there are problems in investment returns or margins, it’s not coming from the cost of building a house – of which wages are a significant component.

What about the claim that construction labour costs are 25 percent higher than West Germany?  Here is the latest data from the European Labour Force Survey which measures labour costs per hour.

LC_chart2

Ireland is below the mean average of other EU-15 countries.  And below Germany.  Compared to our peer group – other small open economies (Austria, Belgium, Finland, Sweden and Denmark) – Irish construction labour costs are 28 percent below their average.

And what about West Germany – the former Federal Republic?  Destatis (the German equivalent of our CSO) shows that gross construction earnings are six percent higherthan the national average.  This is due to the lower wages in the former East Germany.  So Irish construction labour costs are even further below West German labour costs.

And what’s happened since 2011?  Eurostat estimates construction labour costs have increased by 3.2 percent in the EU-15 and 5.4 percent in Germany.  In Ireland, labour costs have increased by a lowly 1.3 percent – falling even further behind European and German levels.

So here we go again.  If there is a crisis going, blame the workers; blame the wages; blame the labour costs.  Same ol’ same ol’.  To be fair to Ronan, he did state we shouldn’t get hung up on wages and pointed to real problems in the housing market – namely, supply and, in particular, housing for one and two-person households.  He also nailed the Government’s proposal to stoke the housing market – again.

There are a number of complexities in housing market that defy simple mono-solutions.  It is a jig-saw that we must piece together carefully (not having a housing policy for the last six years doesn’t help). However, in doing so we should always start with those in most need – those on the waiting list, the homeless, those living in unfit or overcrowded accommodation, households with medical needs.   Not only will this stimulate economic activity and address social equity, it will open up more private rental accommodation to the market with the hope that this can take the heat out of inflation.

We need to focus on the private rental sector itself.  There are issues of supply, price, quality and long-term stability.  This should lead us to greater regulation (tenants’ rights, rent controls) and to consider a public intervention in the private rental sector – to create best-practice in the market and increase investment.  This will provide another channel for demand.

But we desperately need a paradigm shift in our treatment of housing.  The historical fact is that the major developments of housing for people was driven by the state – from Red Vienna to our own housing programmes in the 1930s.  If we continue to treat housing as a private investment vehicle, if we think the COS’s Property Price Index is the bellwether of economic recovery, then we will stumble from crisis to crisis, band-aiding and creating perverse outcomes. (Question:  why don’t we talk about the benefits of depressing housing costs to households and the productive economy?).

But if we allow the issue to be obfuscated by unsubstantiated assertions that labour costs are the problem, then we will end up in an even worse place.

I’ll leave the last word to Rob Kitchen, Professor of Geography in Maynooth and a leading expert on housing and urban development.  He hangs out at Ireland After NAMA (you can follow him here:  @RobKitchin ).  He summarised the Prime Time programme in this simple tweet.

‘PT re aff housing: need no regs, incentivize dev, lower taxes & wages – leave housing 2 free market . . . welcome back 2005′

Too too true.

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2 Responses

  1. Glenn Fitzpatrick

    May 23, 2014 3:02 pm

    Good work Michael. Student Accommodation needs a mention. We’re the lowest of the low. No 9 month leases anywhere anymore. Especially in Dublin.