Building apartments for sale becoming less viable as costs rise, pre-Budget papers show

The viability of building apartments for sale to owner-occupiers has worsened in recent years as building and financing costs have grown, according to papers setting the scene for the National Economic Dialogue next week.

A paper on housing, written by Department of Finance officials before the annual pre-budget consultation and discussion forum in Dublin on Monday, highlighted that the cost of developing an average two-bed apartment is now €450,000-€550,000. However, the median price for existing apartments is €330,000 in Dublin and €265,000 nationally, it said.

The paper highlighted that the economics of the build-to-rent sector are different, as institutional investors can pay a premium as they look to make returns over an extended period, typically of about 25 years.

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However, it noted that commercial residential investment fell 75 per cent to below €500 million last year, as larger schemes in particular were affected by rising interest rates.

The document also pointed out that the State can only remain a minor player in the funding of home delivery in Ireland, especially as the Government’s new target for 250,000 new units to be built by the end of the decade will cost more than €20 billion a year,

It said that that a total of about €5 billion was allocated by the State for home construction this year. This includes exchequer funding, investment by the Land Development Authority (LDA) and loans issued by the Housing Finance Agency (HFA).

“The Department of Finance estimates that annual development financing of €13.6 billion is required to produce 33,000 units. Should the national housing supply target increase, as expected, that funding requirement will grow,” it said. An accompanying chart pointed to a cost of more than €20 billion to deliver 50,000 homes.

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“In other words, notwithstanding the significant increase in public funding, the scale of housing need means that the State is likely to only ever be a minority provider of development capital,” it said. “Accordingly, tens of billions of euro will need to be invested by the private sector over the coming decade.”

Elsewhere, the papers bring attention to analysis from the Departments of Finance and Enterprise, Trade and Employment, which estimates that the Irish labour market is “marginally more exposed” to the advent of artificial intelligence (AI) than the average advanced economy.

“Nevertheless, while many jobs may be exposed to AI, relatively few are at risk of disappearing completely,” it said. “Indeed, as a ‘digital frontrunner’ with Ireland’s comparative advantage in this sector, the AI rollout may create opportunities for the Irish economy.”

This year’s pre-budget forum – where Taoiseach Simon Harris will deliver the opening address – is focusing on challenges and opportunities for the Republic in a “more shock-prone world”.

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The Government currently forecasts that modified domestic demand – a measure of the underlying Irish economy – is expected to grow by 1.9 per cent this year and accelerate to 2.3 per cent in 2025. It sees headline inflation falling back to 2.1 per cent this year from 5.2 per cent in 2023.