Pandemic savings have yet to reach house prices

Household savings have increased significantly due to the pandemic. And, after two years, the exceptional sums collected by consumers amounted to a quarter of their disposable income. The high savings rate continued into the fall of 2021, with early data suggesting savings returned to a more normal level as last Christmas approached.

However, the exceptional savings accumulated remain largely in bank accounts. For now, there are few signs of how households will use their funds. Although, unlike the lockdown, people can now spend in bars, restaurants and on vacation abroad, the pandemic has also made people a bit more cautious, which is tempering consumer spending.

Habits have also changed, so there could be a slight but lasting shift in consumption patterns.

Although queues are a new normal at Dublin Airport, traffic volumes are still significantly lower than in 2019, while household incomes are now higher than there are two years. Thus, there is still some way to go before returning to pre-pandemic spending patterns, and there is certainly no evidence of a temporary savings-driven explosion.

Households, however, may need to dip into their savings to pay for higher energy costs.

Cautious demographics

It is likely that much of the additional savings was accumulated by wealthier and older households, many of whom already had a significant financial cushion. These households may be naturally more cautious and less inclined to splurge, which may explain why pent-up savings have not yet been markedly reduced.

A portion of the savings can be allocated to home improvements. However, with planning delay and a shortage of available builders, there will be a delay before such projects materialize.

Across Europe and North America, house prices are rising rapidly, fueled by exceptional pandemic savings levels. Here in Ireland, during the lockdowns, young people may have managed to save more for a security deposit, especially those who have saved on rent by moving to cheaper rural areas or with their parents. Mom and Dad’s bank has also managed to increase its nest egg.

All of this means that there are more funds available to spend on housing, while supply remains limited relative to demand. This savings glut is almost certainly one of the factors behind the exceptional rise in house prices of 15% in February this year compared to last year. This brings property prices back to about the same level as their peak at the end of 2007.

Housing stock

However, the impact of these factors on the housing market could have been even greater – household investment in housing in 2021 was only slightly higher than in previous years. This suggests that we have yet to see a significant share of pandemic-era savings enter the housing market. This is a relief, as the sluggish supply response means that a wall of money hitting the housing market would only lead to even faster inflation.

Post-World War II experience in countries that escaped major devastation showed that a significant portion of the excess savings accumulated by households during the war years were invested in expanding the housing stock . In countries like Ireland, Sweden and the United States, this led to a temporary spike in house prices in 1947 and 1948, two or three years after the end of the war. If such behavior were to repeat itself in Ireland after a similar time frame, it would suggest that there would be substantial additional pressure on the housing market in 2023 and 2024.

This underscores the urgency of expanding housing supply and being more nimble to respond quickly to growing demand, to ensure that any future increases in investment in home purchases produce homes rather than money. inflation.

In the late 1940s, housing production increased rapidly with the injection of additional demand. We built large volumes of housing in the Celtic Tiger years (although unfortunately some were characterized by poor standards, with high remediation costs).

However, the current supply response remains slow. On the one hand, there are many sites with fast-track planning permissions that have yet to be built, while many other projects are mired in planning or legal delays. The planning and approval cycle for public sector housing can take years before the foundations are laid.

We need to strike the right balance between simpler and faster processes while providing good quality housing. The urgency and speed that have characterized our handling of Covid would be a good model to follow in tackling the problem of housing supply.

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