The law of supply and demand is fairly easy to understand, once you get your head around it and ignore technical economic terms like “price equilibrium”.
Essentially, it posits that the more in demand something is, the higher the price will rise. Because the price rises, it becomes more profitable to make that thing, meaning that more people go into the business of making it. As more people make the thing, the price will either stop rising or will fall back a little.
A good example of supply and demand in action is oil prices and shale oil extraction: Extracting shale oil is much more expensive than drilling a well in an oil-rich country. Therefore, it only becomes profitable to extract shale oil when oil prices are above $50 or 60$ per barrel. If the price drops below that, shale oil producers make a loss, and shut off their wells. This causes supply to fall, and prices to rise again. This is a big reason for relative stability in oil prices in the world at the moment, with prices for Brent Crude roughly ranging from $40-80 a barrel over the last half dozen years or so.
If we apply the same basic principle to housing, we should see the market at work. As prices rise, wages in construction and building should rise, as should profits, meaning that the market should deliver more homes. As prices fall, wages and profits should fall, sending builders out of business.
But what happens when demand soars, but prices do not rise?
In Ireland, the state has decided on a housing policy that artificially suspends the laws of supply and demand. Our national policy is that as demand for rental properties rises, the cost of renting a property should be frozen. Further, that it should be artificially suppressed through policies like “cost rental homes”. Further again, that the balance of rights between landlord and tenant should be dramatically shifted in favour of the tenant, driving up regulatory costs for providers of housing and deterring small landlords who may fear the existential cost of a bad tenant they cannot evict.
Or to put this another way, what do rent caps do? They ask suppliers of property to supply homes at 2025 costs, but 2020 prices.
There is a reason that the Irish state has missed every housing target it has set itself over the last fifteen years. Actually, there are several. They are not hard to understand.
First, the state is actively opposed to landlords and construction firms making excessive profits (who defines “excessive”, by the way?) off the back of the housing crisis. This is essentially a moral position: That already wealthy people should not profit excessively off poor and desperate home-seekers.
Second, the state is actively opposed to rents being set at the market rate. The Irish Government is actively suppressing the law of supply and demand in order to ensure that prices do not rise, which in turn limits the attractiveness of being a landlord of whatever size.
Third, the state has laden the housing market with regulations. Consider the cost of all the Government’s laws and regulations relating to energy efficiency alone, and the additional regulatory cost of building a new dwelling. Consider also the ban on so-called “bedsit” properties. These regulations artificially raise the “floor” of the market, meaning that the cheapest housing can no longer actually be built. Many of us, this writer included, live in housing that could not actually be legally built today in accordance with modern regulation. That our homes are perfectly serviceable is no barrier to politicians insisting on ever further regulation.
Fourth, the state has facilitated a whole array of planning law that makes the construction of homes more difficult than it has ever been. There are over 70,000 homes in Ireland awaiting planning permission. The state has created an array of legal barriers to building homes, and made the planning process prolonged and costly.
At the same time, the state is expending masses of cash subsidising demand. First time buyer grants, rent assistance, mortgage interest relief: All of these policies may be worthy in and of themselves, but all of them subsidise the demand side of the equation. The net effect of state policy in Ireland is more money chasing ever fewer homes, while the market is actively inhibited from providing greater supply.
The housing disaster, in short, is a disaster of state policymaking. Precisely because it is not structured around supply and demand, but around the simpler and entirely political notion of goodies and baddies, where the people seeking homes are the goodies who must get more money, and the people supplying homes are the baddies who must get less of it.
This tends to be what happens when politics infects the market: Supply and demand gets swapped out for notions of morality, goodies, and baddies.
Politicians prosper in this sort of environment because getting a house becomes an act not of self-achievement, but something that you owe to a politician. Politicians have no incentive to sweep away their own regulations and let builders make more money, because to do so would put them on the side of the baddies in the housing narrative they have created. It would also reduce their own power over the process.
There are some on the Irish nationalist right who believe that this crisis can be resolved with different regulations: But the truth is that politicians, whether they be right wing or left wing or nationalist or globalist will always play the same basic anti-market game: They will always be tempted to favour the goodies and punish the baddies. You see it in the language that gets used around “vulture funds” and other such nonsense.
Solving the housing crisis cannot be done by anybody overnight, or even in a few years. But the fastest way to do it would be to let the market work much more freely than it currently does: Relax planning laws, undo rent restrictions, reduce housing standards, and let people buy the homes that they can afford and desire to live in.
This kind of agenda is on nobody’s radar though, in Ireland, because we have entirely dispensed with the basic laws of economics when it comes to housing, and substituted in the laws of politics. It will continue, sadly, until the population figures that out for itself.