Hectare of agricultural land costs €24,000 in Ireland, €6,000 in France
Land prices and zoning restrictions are the main drivers of property prices but in recent times very low-interest rates coupled with supply constraints after the severe recession in several countries, are also boosting prices. For example, house prices rose 23% last year in Amsterdam (see Dutch price trends here) and this is a market where the price of a house built in 1625 only doubled in inflation-adjusted terms between 1628 and 2008.
Mark Twain (1835-1910), the American writer, once said, "Buy land, they're not making it anymore" and a forecast from The Economist that humans will need to produce more food in the coming 40 years than they did in the previous 10,000 put together, also underpins rising land and commodity prices across the globe.
However, on the bright side, The Netherlands, a country of 17m people, is the second-biggest agri-foods exporter in the world after the US, and already shows how farming could hugely boost output.
Boom, bust and recovery
With Dublin as expensive as London; Irish consumer prices at the 2nd highest in the EU; Dublin residential rents rising at double-digit rates; the average price of a Dublin apartment up almost a third since 2011 as supply fails to meet demand; as regular industrial wages rise 4.5% in 2011-2016 compared with consumer prices rising 2.1%, young workers are facing challenging times.
The current Irish housing crisis is a problem in the Dublin region and reflects not only demographics but poor urban planning and land management, zoning often determined by objecting residents, and a policy in recent decades of selling-off social housing and providing rent subsidies for private rentals.
Owner-occupation rose from 52.6% of households in 1946 to a peak of 80% in 1991 (page 22) as government policy was to sell social housing at a significant discount.
The current Irish social housing stock ratio of 8% contrasts with 33% in The Netherlands and 20% in Denmark (page 41).
County Dublin accounted for 28% of the national population of 4.77m in 2016 while according to the Central Statistics Office (CSO) GDP per person in the Dublin region in 2014 was 62% above the national average.
In August the Institute Professional Auctioneers and Valuers (IPAV) reported that Longford was the cheapest for 2-bed apartments at an average of €52,000 compared with Dublin 2 at an average of €383,334. Four bedroom semi-detached houses in Dublin 4 sell at an average of price of €1.3m while Dublin 2 comes second at an average of €900,000 compared with Longford at €120,000.
The results of a recent government survey of builders revealed that it's not viable to build "affordable apartments" in Dublin with sales prices of between €240,000 and €320,000 a unit — average per capita annual earnings in 2016 was at €36,919.
The demand for prime office space is also high and at least 15 global financial institutions have announced their intention to set up or extend their existing operations in Ireland. Prime office rents are expected to return to the 2008 peak this year and that will have a ripple effect across the capital.
A young aspiring entrepreneur faces twin property cost challenges and historically low-interest rates have also put several other cities in bubble territory.
UBS, the Swiss banking giant, warned earlier this year in its 2016 Global Real Estate Bubble Index that Vancouver, London, Stockholm, Sydney, Munich and Hong Kong faced bubble risk while deviations from the long-term norm, point to overvalued housing markets in San Francisco and Amsterdam. Valuations are also stretched, but to a lesser degree, in Zurich, Paris, Geneva, Tokyo, and Frankfurt. In contrast, Singapore, Boston, New York and Milan are fairly valued, while Chicago’s housing market remains undervalued relative to its own history. UBS adds:
"Buying a 60m2 (646ft2) apartment exceeds the budget of most people in most world cities who earn the average annual income in the highly skilled service sector. In Hong Kong, even those who earn twice the average income would struggle to afford an apartment of that size. House prices have also decoupled from local incomes in London, Paris, Singapore, New York and Tokyo, where price-to-income (PI) multiples exceed 10. Unaffordable housing is often a sign of strong investment demand from abroad and tight rental market regulations. If investment demand weakens, the risk of a price correction will increase and the long-term appreciation prospects will shrink. In contrast, housing is affordable in Chicago, Boston, Milan and Frankfurt, which limits the risk of a price correction in these cities. Due to relatively high incomes, purchasing an apartment is also still feasible for residents of San Francisco and most European cities, with the exception of Paris and London."
Irish land prices outpace the UK in 50 years
In 1973 the ‘Report of the Committee on the Price of Building Land’ from an official committee on land prices that was chaired by Mr Justice John Kenny of the High Court, noted that the price of County Dublin serviced development land on average rocketed by 530% in 1963-1971 compared with a rise in consumer prices of 64% in the period.
There is no official Irish data available on development land prices — mainly because of the strong traditional vested interest power of the construction industry and the farmers’ union.
The national agricultural land value based on data then available show that in 1963-1971 prices rose by 239%.
Irish land prices peaked in 2006 — the craziest year of the property boom — at €58,000 per ha, when Ireland built a record 93,000 new housing units and 800,000 new homes were built in Spain, which amounted to more than in the UK, France, and Germany combined.
One hectare is equivalent to 2.47 acres and in September 1966 a UK acre cost £161 and £7,672 per acre in September 2016, according to Knight Frank, a property agent firm while research on land prices at the Said Business School at the University of Oxford “shows that farmland real price (adjusted by the Consumer Price Index) growth was 0.33% annually from 1781 to 2013 and 0.71% from 1801 to 2013 as measured by the geometric mean. Second, land offers comparative returns to other (speculative) assets.”
Adjusted for inflation, the rise in land prices almost trebled in Ireland in 50 years while doubling in the UK.
Land price per acre at IR£127.50 in 1966 converted to euros and hectares was €400 per ha. CSO data show that the 1966 land price in 2016 euros was €6,450 compared with the actual per ha in 2016 of €24,000 — a real rise of 2.8 times the 1966 Irish value.
Bank of England data show that the 1966 UK land price of £161 per acre in 2016 pounds was valued at £2,752 compared with the actual value of land per acre of £7,672 — a real rise of 1.8 times the 1966 UK value.
There was a surge in Irish agricultural land prices following Ireland’s entry to the European Economic Community (later the European Union) in 1973. The 1979 peak price shown here , boosted by a bank loans credit boom for farmers, was not scaled again until 2000 (euro conversion rate for prior 2001 is 1.27).
The price of land is not only an issue for housing but it also impacts on food production, the key indigenous sector, putting a high moat for entry by young people to farming.
According to the Teagasc National Farm Survey 2015, half of Irish farm households have off-farm employment and 2/3 of Irish farmers are over 50.
Public subsidies, mainly from the EU, support about 70% of the typical farm household.
Ireland vs. France
In 2013 France had the highest utilised agricultural area (UAA) in the EU28 and Ireland was in 8th place (see first Eurostat chart below).
France’s 27.7m ha compared with Spain’s 23.3m; the UK’s 17m; Germany’s 16.7m and Italy’s 12m.
Ireland’s 4.9m ha was ahead of Denmark’s 2.6m and the Netherlands’ 1.8m — but the Dutch and Danes are more productive.
France in 2016 had an almost 18% share in agricultural output in the EU while Ireland had a 12th ranking (see second chart below).
In 2010 according to Eurostat about three-quarters of the Irish agricultural area was farmed by the people who actually owned that land while the rest was farmed by tenants.
In France, 6.5m hectares of UAA (23.6 %) were farmed by the persons who owned that land in 2010
The French have the highest rate of land tenancy at almost 90% while the Irish have the lowest percentage of land rented at less than 20% — using the traditional 11-month conacre contract system.
France regulates the land markets with limits on rentals and preferences given to sales to young farmers or people who have trained to be farmers.
The official regulator Société d'Aménagement Foncier et d'Etablissement Rural (SAFER) reported in 2016 that French sales were at 1.2% of the UAA in 2015 — the ratio of land sales in France has been about 1% annually for several years.
In 2015 Irish land sales accounted for 0.42% of UAA according to the CSO, compared with as a low as 0.2% during the property bubble, and a peak of 2.1% in 1978.
The ratio in the UK and Germany in 2015 was at 0.41% and 0.53% (Destatis, Germany’s national statistics office) respectively.
According to Savills, in 2007 in France, each field changed hands at least once every 70 years, but in Ireland on average a field changed hands every 555 years!
Irish land, wages & house prices
The average price of a new housing unit in Ireland in 1968 was €5,334 according to the Central Statistics Office (CSO) and €304,307 in September 2016.
Adjusted for inflation the 1968 house value was €80,500 meaning that the real price almost quadrupled by 2016.
However, CSO data show that in 2015 the real weekly wages of industrial workers were 2.5 times the 1968 level.
We noted earlier that the real price rise of agricultural land in 2016 was quadruple (the price rise was treble) the inflation-adjusted 1966 price.
House prices would reflect the higher value of development land but it should be kept in mind that in large urban areas less land would be used per housing unit in recent times as the ratio of apartment units rose and house floor areas and gardens were downsized.
It has been a convenient myth among Irish political leaders to excuse decades of inaction on land prices and its vested interests, by claiming that there would be a conflict with the property rights clauses in Articles 40 & 43 of the 1937 Constitution.
In 2000 the Supreme Court ruled that a section of the 2000 Planning Act on the acquisition of land for social & affordable housing, was constitutional – this was a year before the Government signed a sweetheart deal with the Irish Farmers Association (IFA) giving farmers 23% of the national land-building budget of about €18bn when road land acquisition costs were an average of 10% of budget costs in Denmark, 12.5% in England and 6% in Germany, according to the National Roads Authority (see chart).
The 1973 'Report of the Committee on the Price of Building Land' recommended that building land should be compulsorily acquired by local authorities for the agricultural value + 25%.
The chairman Mr Justice John Kenny was later a Supreme Court judge in 1975-1982.
In 2004, the All-Party Committee on the Constitution said in a report it wasn’t “persuaded that the existing constitutional provisions place any unjustified impediment to infrastructural development. It does not, therefore, consider that constitutional change is necessary before any reform of the existing system of compulsory purchase and acquisition is attempted.”
The Committee also said: “It is very likely that the major elements of the Kenny Report recommendations – namely that land required for development by local authorities should be compulsorily acquired at existing use values plus 25% – would not be found to be unconstitutional. Indeed, it may be that in certain respects, the Kenny Report was too conservative.”
European and global land prices
The Global Farmland Index produced by Savills, the UK real estate firm, shows an overall rise of 600% since 2002.
Savills reported this year that less than half of UK land buyers in 2016 were farmers while Sir James Dyson, renowned for inventing the bagless vacuum cleaner, is one of Britain’s biggest farmers, owning about 33,000 acres in England.
A study published in Environmental Research Letters in 2014 reported that at least 126 countries are involved in purchasing or selling global farmland. The most active buyers are investors in the United States, China, UK, Germany, India, and the Netherlands. They're typically seeking to invest in land in South America, Africa, and Asia — particularly Brazil, Ethiopia, Philippines, Sudan, Madagascar, Mozambique, and Tanzania.
In 2015 ANZ New Zealand, New Zealand’s largest financial services group, said that of the 12 countries, based on consistency and reliability of data, it analysed, "New Zealand’s annual gain of 13.6% since 2000 was the highest. The catch was New Zealand’s land prices were the second most volatile after Ireland over this period."
ANZ said: "The Netherlands was the most expensive place to buy farmland, with prices averaging US$48,000/ha since 2000. Ireland was next (US$28,600/ha), then Denmark (US$25,200/ha), Italy (US$19,400/ha), the UK (US$19,200/ha), Germany (US$12,400/ha) and Spain (US$12,100/ha). The average for New Zealand over this period was US$8,150/ha. The picture changes a bit when we focus on the past three years (the average for New Zealand was US$11,100/ha) and changes still more when we eye current prices, which have been close to US$15,000/ ha. This implies we may have well passed Germany and Spain in recent times."
There isn’t consistent data available on land prices across Europe but it’s safe to say that latest Dutch average prices at €57,900 per hectare are the highest national prices in Europe.
Zoning restrictions are a big factor in rising land and housing costs.
The escalating cost of land in urban areas is a common problem in many countries and in Britain house prices have gone up 5-fold since 1955. But the inflation-adjusted price of development land has increased 15-fold over the same period according to London School of Economics research.
According to research by German-based economists on house price trends since 1870 in 14 developed economies including, the US, UK, Germany, and France, inflation-adjusted house prices have tripled since the start of the last century but most of the rise has occurred since 1950. The economists say that about 80% of the increase in house prices in 1950-2012 was due to land prices. The transport revolution has been a factor as have artificial restrictions on the supply of development land.
In November 2015, Jason Furman, President Obama's chief economic adviser, in a speech cited zoning restrictions that add as much as 50% to the cost of a house. Paul Krugman, the New York Times columnist, has said that “this is an issue on which you don’t have to be a conservative to believe that we have too much regulation.”
Also last year the Economist wrote that an analysis by academics at the London School of Economics (LSE) estimated 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%.
The Economist noted in 2014:
"Over the past decade farmland prices have grown at twice the rate of prime London property prices, with good agricultural land increasing 270% in value compared with a 135% rise for London houses during that time, according to Savills, a land agent. This makes it three times the price of farmland in America and 15 times the cost of such land in Australia."
Over the last full economic cycle, from 1993 to 2008, the cost of a hectare of residential land in London rose by over 300% in real terms, to more than £8m ($15m) and enough green-belt land is available in Greater London to build 1.6m houses at average densities, according to Paul Cheshire of the London School of Economics (LSE) — about 30 times the number of new houses London needs a year. "But opposition from homeowners is strong — especially from those near the green belt, who do not much like the thought of newcomers bringing down property prices. Today, though approved applications to build on it have risen a bit, the green belt is virtually as big as it was in 2007. Many argue that developing brownfield land (land previously used for some industrial purpose) would solve London’s problems. Research by Nathaniel Lichfield and Partners, a consultancy, however, concludes that brownfield sites could accommodate less than half of the homes required up to 2030."
The Economist added later:
"A plethora of other regulations also block development. By one count there are ten protected views of St Paul’s Cathedral, including one from a specific oak tree on Hampstead Heath. This imposes severe restrictions on building height across the city. Population density in central London is about half New York’s. According to Mr Cheshire and Christian Hilber, also of the LSE, restrictive planning policies inflate the price of office space in the West End by about 800%. A square foot there is twice as expensive as in midtown Manhattan."
Restrictive planning policy means housebuilders struggle to find open land to develop. Some 50,000 fewer new-build houses come to market each year now than in the 1980s.
"Demographic changes are also at work. An ageing population is a less mobile one. The way council tax is levied also gives elderly folk less incentive to downsize. It was last updated in 1993 and the priciest homes are taxed lightly. Meanwhile, more Britons live alone. Since 1981, the share of households with one occupant has risen from 20% to nearly 30%. Singletons are less likely than those with children to need extra space, so they may not need to move up the housing ladder."
Photo on top: Irish Farmers Journal