Dutch house price doubled in 350 years; Irish prices in 20 years

Finfacts reported in 2010 that the real price — on constant currency value basis calculated by stripping out inflation — of a Dutch house in Amsterdam, the commercial capital of The Netherlands, only doubled in more than 350 years according to IMF research. In Ireland through boom, bust and recovery, real prices have almost doubled in about 20 years.

Prakash Loungani of the IMF wrote that in 1625, Pieter Fransz built a house in Amsterdam’s new Herengracht neighbourhood. As the Dutch Republic rose to global power in the 1620s — with Amsterdam developing the world’s first major stock market as well as commodities and futures markets — the price of the house doubled in less than a decade. Over the succeeding three centuries, the price of Fransz’s house was hit by wars, recessions, and financial crises and rose again in their aftermaths. When the house changed hands in the 1980s, its real value had only doubled over the course of 350 years — offering a very modest rate of return on the investment.

The chart below from the Economist shows that real Irish prices were on average stable in the period 1980-1995. The index was 100.7 in Q4 1995 and 188.5 in Q2 2015.

Both Ireland and the UK have dysfunctional housing systems and during the boom period Ireland tracked UK prices but the UK is now an outlier as a result of its chronic underinvestment in housing. In Q3 2015 the index was 335.4 compared with 100 in Q1 1980.

The US index was 132.6 in Q3 2015; Germany was 88.2 in Q4 2014 and The Netherlands was at 147.8 in Q2 2015 compared with 96.3 in Q4 1995.      

Land prices and use

"Buy land, they're not making it anymore," Mark Twain (1835-1910), the American writer once quipped. However there is a big opportunity to make better use of it.

A 2014 paper based on research by German economists show that up to 80% of the increase in house prices between 1950 and 2012 can be attributed to land price appreciation alone.

Ed Glaeser, Harvard economist, commented in “Nation of Gamblers” (2013):

“Almost everywhere, prices in 1970 were below 1950 prices plus this construction cost related price increase. Even after the most stupendous change in America’s mortgage history, and a post-war economic boom, housing prices had gone up less than construction costs would warrant."

Neal Hudson of Savills shows here how residential land prices took off in the UK from 1995.

Savills' Irish unit said in 2007, that in France, each field changes hands at least once every 70 years, but in Ireland on average a field changes hands every 555 years! Total annual turnover in Ireland was less than 0.2% of the total acreage. "Countries with sales restrictions, such as France, are cheapest. Land is about €6,000 a hectare, compared with almost €60,000 in Ireland, as French land must be offered first to young local farmers. In recent years in Ireland, demand has been boosted by purchases of 'lifestyle farms,' especially within 100km of Dublin, coupled with the increasing trend of 'off-farm' employment leading to commercial farmers in effect becoming 'hobby farmers.'

In the early 1970s an official Irish report recommended that rezoned Irish land should be capped at 25% above the agricultural value. The average price of land in Co Dublin jumped by almost 50% to €23,496 per acre (€58,035 per hectare) last year according to the Irish Farmers Journal. The turnover ratio was 0.3% in 2011.

With EU subsidies accounting for over 70% of farm income, farmers have no incentive to sell land, which they can rent to top up CAP (Common Agricultural Policy) welfare from Brussels — Irish agricultural prices are now among the highest in the world.

The Irish Farmers Association (IFA) is one of Ireland's most powerful lobby groups and in 2001 it won a sweetheart deal from the Government giving its members 23% of the national road building budget, according to the National Roads Authority — land accounted for 12% of the cost of road projects  in England, 10% in Denmark, 9.4% in Greece and 1% in Iceland.

According to Eurostat, the share of the active population in predominantly rural regions varies considerably from country to country: in the Netherlands, the United Kingdom and Spain predominantly rural regions accounted for less than 10% of the economically active population, while at the other end of the scale predominantly rural regions in Ireland accounted for over 70% of the economically active population.

In territorial terms, more than 98% of Ireland is classed as Predominantly Rural (PR) and only 1.3% is defined as Predominantly Urban (PU) in the Eurostat definition. There is no territory classified as Intermediate in Ireland. In 2012 the EU average equivalents were 52% PR, 38% intermediate and 10% PU.

Finfacts 2015: EU farm numbers plunge 27% in decade; Ireland only riser

Kate Allen, then editor of Social Housing magazine, and now with the FT, wrote in The guardian in 2011:

The UK consists of 60m acres of land, of which two-thirds is owned by 0.36% of the population, or 158,000 households. By contrast, 24m households live on 3m urban acres — just 5% of UK's total acreage. If economist Kate Barker's target of 250,000 homes were built annually for 25 years (creating of 6.3m new households) just 1% of England's land would be used up, according to the Home Builders' Federation.

The Economist wrote last April that:

"Even in [these] great cities the scarcity is artificial. Regulatory limits on the height and density of buildings constrain supply and inflate prices. A recent analysis by academics at the London School of Economics (LSE) estimates that land-use regulations in the West End of London inflate the price of office space by about 800%; in Milan and Paris the rules push up prices by around 300%. Most of the enormous value captured by landowners exists because it is well-nigh impossible to build new offices to compete those profits away. High housing prices force workers to choose cheaper but less productive places. According to one study, employment in the Bay Area around San Francisco would be about five times bigger than it is but for tight limits on construction."

The UK's Town and Country Planning Act 1947 allowed local authorities to include greenbelt proposals in their development plans. And in 1955, the government published a green belt policy asking for local authorities to consider protecting any land acquired around their towns and cities "by the formal designation of clearly-defined green belts."

The aims of the policy were to prevent urban sprawl and protect the countryside.

Paul Cheshire, a professor of economic geography at the LSE, says that:

"Discounting inflation, house prices have gone up fivefold since 1955. But the price of the land needed to put houses on has increased in real terms by 15-fold over the same period...Estimates suggest that a 10% increase in incomes leads people to spend about 20% more on space in houses and gardens (Cheshire and Sheppard, 1998)...Just less than 10% of England is built up but gardens cover nearly half that area (Foresight Land Use Futures Project, 2010). In contrast, the most important land use in greenbelts is intensive arable (74% in Cambridge), which generates negative net environmental benefits (UK National Ecosystem Assessment, 2011). So the second myth about greenbelts is that they are ‘green’ or environmentally valuable. They are not because intensive farmland is not..Since our planning system prevents housing competing, land for golf courses stays very cheap. More of Surrey is now under golf courses — about 2.65% — than has houses on it. The final myth about greenbelts is that they provide a social or amenity benefit. The reality is that a child in Haringey gets no welfare from the fact that five miles away in Barnet, there are 2,380 hectares of greenbelt land; or in Havering another 6,010 hectares" — see here.

It's a restriction that benefits Nimbies (not in my backyard syndrome).

In the year to June, 131,060 homes were completed in England, a rise of 15% on the same period a year ago. For the year to end March 2015 completions in Scotland were at 16,281;

Prof Cheshire says that in the 19 years from 1969 to 1989, "we built over 4.3m houses in England; in the 19 years from 1994 to 2012, we built fewer than 2.7m." He says the UK should be building at least 260,000 houses a year

In Ireland the Local Government (Planning and Development) Act 1963 was largely based on the UK Act and it helped to make land scarce and expensive in a country that has the lowest population density in the European Union — see here.

Ireland will build up to 10,000 units in 2015 compared with 93,000 in 2006.

The current housing crisis is in the Dublin area and is the result of decades of poor planning, the aversion to high rise related to a misreading of the failed Ballymun public housing project in the 1960s, and the failure to address the land issue.

The evidence so far is that the current Irish Government like its predecessors hasn't the vision to develop housing and related transport policies for a capital city that will work for years ahead.

In the Budget statement in Oct 2014, Michael Noonan, finance minister, a strong believer in the power of tax incentives, announced the cutting of the crisis period windfall profits tax on rezoned land from 80% to 33% following lobbying from the likes of Tom Parlon of the Construction Industry Federation. Parlon, a farmer, was IFA president when the deal on land for road building was agreed in 2001. Two years later as a government minister, he warned that any changes in the property rights in the Constitution would be akin to an "approach...gift-wrapped in an ideology somewhere left of Stalin." In 2004 the Joint Oireachtas Committee on the Constitution said there was no constitutional impediment to measures which could be used to prevent speculators from distorting the housing market by hoarding land.

However, one of the world's biggest housing crashes and a public tribunal on planning corruption sitting for 15 years could not change the status quo that is the mother of all stealth taxes.

During the property boom site costs in Dublin jumped from less than 10% of the cost of apartments in the city up to the mid 1990s, to 50%. Also in 2004, Brian Cowen, finance minister, disclosed that 28% of the cost of a new house comprised Value Added Tax (VAT) and other public charges.

Prof Anton Murphy of Trinity College, said in a report on housing and land prices in 2004, that "there are no comprehensive housing land price data in Ireland so the land prices are derived from the house price data on the basis of guess-estimates."

He said that it was difficult to estimate the extent of hoarding of development land — where rising prices provided a strong incentive.

Fred Harrison, research director at the UK Land Research Trust, said on Ireland in 2010 (p. 22) "there is no record of land prices available from either official or unofficial sources. How, then, can one assess the net effects of public policies?"

Housing and land have become financial asset classes in recent decades in several countries and most politicians are reluctant to challenge holders of such assets, who are more likely to vote compared with young people who are deprived of having their own homes. 

Finfacts 2014: Price/Earnings multiple for Dublin houses is double 1993 level

Pic on top: from this report on global property returns

The Economist's global house prices interactive chart

Recognising the true economic effects of land-use planning — London School of Economics and Political Science (LSE)