Ten years ago, in 2006, Irish property prices were approaching their peak. In the 1990s they had been pushed up by a combination of demographic pressures (population growth and net inward migration) and economic ones (rising employment and increased disposable income). Inflation stemmed from a mismatch of supply and demand.

The Irish property bubble did not inflate until the early 2000s, when many people assumed that these fundamentals were a perennial feature of the market. This assumption ushered in a period of loose credit, with banks taking lower margins to chase bigger volumes, culminating in the spectacular crash of 2007-8.

From peak to trough – February 2007 to August 2012 – property prices fell by 57 per cent in Dublin and by 51 per cent nationally.

But by August 2014, with the country still smarting from the worst recession in decades, annual house-price inflation was 25 per cent in Dublin and 15 per cent nationally – effectively back to boom-time levels. First-time buyers are once again being priced out of the market by cash-rich investors.

Another bubble?

Some saw the 2014 rises as the start of another bubble, albeit without the backdrop of loose credit. In 2014 just €3.9 billion of mortgages were drawn down – hardly comparable to the €39.9 billion loaned in 2006.

Nonetheless, the Central Bank of Ireland felt compelled to intervene, establishing mortgage-lending restrictions at the start of 2015. The move appears to have taken the sting out of the market, with house-price growth in Dublin down to less than 3 per cent a year.

But there is a chronic problem of housing supply – and, apparently, no quick solution. In its latest quarterly bulletin the bank estimates that 14,000 homes will be built this year, a reduction from its previous forecast of 18,500 and less than half of the State’s long-term average of 32,600.

With the level of household formation – effectively, the underlying demand for housing – averaging about 25,000 a year, demand looks certain to outstrip supply for some time.

The Investec economist Philip O’Sullivan says that the turnover of existing housing stock is also unsustainably low. “We estimate that there were only 50,000 residential property transactions in Ireland in 2015, which equates to 2.5 per cent of the housing stock.”

A turnover rate of 2.5 per cent means that, on average, an Irish home changes hands only once every 40 years.

“In the absence of any meaningful level of new-build activity a very depressed secondary market causes a lot of trouble for people who want to get on the housing ladder,” O’Sullivan says.

He believes that in a healthy housing market about 4 per cent of second-hand homes should change hands each year. He does not expect to see much expansion in housebuilding until at least 2018.

Data from the Central Statistics Office suggests that in 2014 planning permission was granted for just 785 apartments – the fewest for 40 years. O’Sullivan also points to Ulster Bank’s latest barometer for activity in the construction sector, which suggests only a modest recovery in housebuilding.

“The path of least resistance for Irish house prices is upwards, because demand is materially outstripping supply and will continue to do so for the next couple of years,” he says.

For Ronan Lyons, the Trinity College Dublin economist and author of a Daft.ie report, the fundamental metric underpinning the housing-supply problem is the cost of construction.

He says the standard construction break-even for a basic two-bedroom apartment, inclusive of materials, labour and a 12.5 per cent developer’s margin, is about €275,000 – equivalent to a break-even monthly rent of €1,400.

“If you look around the country there’s almost no part that can sustain that level of rent for a two-bed apartment,” Lyons says, pointing out that in Cork, Limerick and Galway such homes typically rent for €750 a month.

Building specifications

Costs have risen on the back of new building specifications and a certification regime that puts the onus of regulation on the architect.

“If you’re an architect that means, instead of visiting projects every 10 days or two weeks, you have to be there every day to make sure every single aspect comes up scratch,” Lyons says.

This is estimated to add about €25,000 to the cost of each home. In Northern Ireland, where certification is still done by local authorities, the cost to the developer is £200.

“The hard costs of construction are just way out of line, and that’s why we’re seeing nothing built,” Lyons says.

The National Competitiveness Council has committed itself to a benchmarking exercise to compare construction costs here with those abroad. The move appears to have been prompted by concern from US multinationals, including PayPal and Google, about the lack of affordable housing for their staff.

“There’s often a tradition in Anglo-Saxon countries of limiting supply to drive up house prices, because homeowners vote, and homeowners like high house prices,” Lyons says. “You will hear people saying, ‘I’d love it if my children were able to afford to live near me,’ but they actually wouldn’t if it meant their own houses were worth 30 or 40 per cent less.”

Late in 2015 the Government’s influential tax-strategy group presented a paper to Cabinet that suggested average house prices were almost nine times average household disposable income, and moving closer to a long-term average of 10:1.

“It’s completely unaffordable for a single person today on average earnings to purchase a house,” says Annette Hughes, director of the DKM economic consultancy.

She says that the traditional ratio of houses costing about three or four times the gross income of a single person no longer applies – “most couples need two incomes to stand any chance of securing a mortgage.”