Housing as an economic stimulus

In its Quarterly Economic Commentary for Summer 2020, the ESRI suggests short-to-medium term investment in the provision of social and affordable housing in order to stimulate the domestic economy, alongside sustainable infrastructure projects.

The authors of the ESRI’s latest quarterly economic commentary, Kieran McQuinn, Conor O’Toole, Matthew Allen-Coghlan and Cathal Coffey, assert that by significantly increasing the social and affordable housing stock, it would be possible to stimulate economic activity, while simultaneously resolving a key socio-economic policy challenge.

Referencing a previous ESRI working paper, ‘Exploring affordability in the Irish housing market’, the report contends that supply has consistently fallen short of the structural demand for housing Ireland, exposing a dearth of affordable housing in the Greater Dublin Area.

With construction likely to be disrupted into 2021, McQuinn and Allen-Coghlan argue that the most significant impact of Covid-19 on the residential housing market, in the long-term, will be an exacerbation of this housing shortage. Until the onset of the pandemic, there was a concern that ‘overheating’ might occur and the rapid pace of growth in the Irish economy would outrun the housing supply. This, however, is no longer relevant.

The ESRI projects that under its baseline scenario, the deficit is on track to increase by a minimum of 9 per cent of GDP (€27 billion) in the context of Covid-19. As such, a sustainable, publicly financed housing stimulus requires that EU institutions ensure that borrowing costs remain as low as possible and for as long as possible.

EU finance ministers have mobilised and funded the European Stability Mechanism (ESM) so that it might lend to struggling member states at concessional rates. However, it remains to be seen if this funding can be applied to non-healthcare economic measures. The EU has also yet to agree on alternative sources of funding, including euro bonds. In ‘The ECB’s Mandate and Legal Constraints’, a paper submitted to the European Parliament Think Tank, Karl Whelan explores the consequential challenges for the ECB in providing such a stimulus.

The ESRI report contends: “Clear and specific guidance from European institutions concerning the fiscal strategies available to member state countries is essential over the coming months. The recent Franco-German proposal for the development of a recovery plan providing direct budgetary support to affected areas and regions is a step in the right direction and, by using grants rather than loan finance, would appear to be targeted correctly.”

A combination of a decline in house prices alongside increases in unemployment herald likely instances of mortgage arrears. Mortgage breaks and supports such as the Pandemic Unemployment Payment have cushioned borrowers from the economic fallout of Covid-19 so far.

However, the Quarterly Economic Commentary for Summer 2020 asserts: “If support payments are tapered and payment breaks expire, this will inevitably lead to higher arrears which will require some form of modification or management. Ensuring these dynamics do not hamper the bank lending channel will be important in any recovery phase. Financial stability considerations will become increasingly important as the depth and duration of the Covid-19 crisis prolongs.”