From an energy efficiency perspective it must be clear to everyone that the insulation standards of newly built houses should be increased rapidly. There may be a fear that were this to be done this would increase construction costs and hence the price of houses. Is that fear well founded? I do not believe so.
In urban housing markets increased construction costs cannot be that easily passed on in the form of higher house prices. I appreciate that for many this may not appear to make sense and runs against common intuition about the operation of markets. I believe that a better understanding of how urban house markets work would clarify some of the issues involved in the determination of house prices. In turn this would facilitate the introduction of higher standards of energy efficiency in newly built houses.
House prices have been a topical issue for a number of years and attract much discussion in the media. Since the 1990s there also has been much serious research into housing and the phenomenon of exceptionally high prices. From the Bacon Reports of the late 1990s to the NESC study of late 2004 and a plethora of research reports from academics, estate agents and financial institutions the level of understanding of the operation of housing markets in Ireland has improved considerably. This must be good for the future operation of the market and will allow more sophisticated judgements to be made about housing policy including that about standards of insulation and energy efficiency.
I think it is fair to say that this increased analysis has already improved the quality of policy responses from government on housing, often a very contentious issue where a populist approach can be politically attractive. Importantly this has meant that government has refrained from introduction of measures which have a superficial attractiveness but would either distort the operation of the market or simply have resulted in further price increases; larger grants to first time buyers which would simply be passed back to developers, being a case in point.
Another more recent example of a more sophisticated understanding of the market influencing government thinking was the response by the Minister for Finance to calls for the removal of stamp duty in this year’s budget. Whatever about the merits and demerits of the case for doing this, at least the effect of doing so on the price of housing and the distribution of the gains were part of the explanation the Minister gave, indicating a more sophisticated approach to the market than in the past.
This more sophisticated understanding is also facilitating the introduction of higher standards of construction in Dun Laoghaire Rathdown and Fingal where decisions have been taken to increase standards without an outcry that the effect will be to increase the price of housing in their areas. If legislated for by government on a national level, a dramatic increase in house building standards, and in particular insulation standards, could be achieved without affecting house prices. It may appear contrary to economic logic to say this but consider the following.
It must be acknowledged that saying that the cost of production, or building in the case of houses, could go up without a consequent price increase, does not accord with most peoples’ understanding of the operation of markets. This is because most people have a learned understanding of the operation of the law of supply and demand where an increase in costs to producers tends to result in increased prices. This law is thought to be universal in its operation and reliably predictive, telling us what will happen in response to changes in the market place. The law of supply and demand is very strongly embedded into our understanding of how markets function and we assume that all markets work to this law in the same way. The law now forms part of an important belief system that allows people to understand how the world works.
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