In its latest economic forecast, the European Commission recently singled out Ireland’s ‘robust’ labour market performance as evidence that the economy is bouncing back.  Indeed, when viewed in a European context, the turnaround in Ireland’s jobs market has been nothing short of remarkable.  Last year an additional 61,000 new jobs were created, resulting in a net employment gain of 3.3%.  Across Europe, only Iceland and the Former Yugoslav Republic of Macedonia experienced stronger jobs growth, while employment actually contracted in the Euro Area as a whole.   

This resurgence has been led by agriculture where employment is up almost 30% in the last 12 months.  In part, this reflects a ramping-up of activity before the lifting of milk quotas next year.   The other star has been the hospitality sector, with over 17,000 additional jobs created in 2013.  This reflects the improving UK and US economies, and the success of a VAT reduction aimed at kick-starting activity in this sector.   

In sharp contrast, the building industry has contributed virtually no jobs growth.  From a high of 274,000 in 2007, construction employment has fallen to just over 100,000, and only 400 building jobs were created last year.  This is not remotely surprising.  Just 8,301 housing units were built across Ireland in 2013.  This is the lowest total since records began and compares with an estimated annual requirement of around 25,000 units.   It is a similar story in commercial building - no new office blocks have been completed in Dublin since 2011 and very little business space of any type has been developed since 2009.

The European Commission has identified these ‘bottlenecks’ as problematic.  In terms of housing, a key concern is that insufficient building has led to tight supply and rising prices - particularly in Dublin, Cork and Galway.   If continued, the fear is that this will price young families out of the market and lead to the return of urban sprawl.  In addition, it is feared that rapidly increasing property prices will drive wage demands, undermining the competitiveness gains achieved in recent years.

It is a similar story in the commercial market.  Strong jobs growth in the absence of any new construction has caused office vacancies to plunge below their natural level, and rents are being driven up sharply as a result.   According to The National Competitiveness Council, Dublin moved up six places in the league table of affordable office space between 2007 and 2012.  But with rents likely to rise by 20% this year these gains could quickly be reversed.  Even more worryingly, with just four Grade A offices of more than 3,000 sq m now available to let in Dublin 2, IDA Ireland has warned that a scarcity of accommodation could begin to deter foreign investment.

The development industry has recognised an urgent need for new building to avert these problems.  However it argues that construction is not viable in many locations because current property values do not cover building costs.   This has led to calls for initiatives to help rebalance the break-even arithmetic.   Suggestions include more flexible planning, reduced development levies and a cut in VAT similar to that introduced for the hospitality sector.

There is merit to these proposals, and the desire to avoid another property boom may well lead Government to adopt them in its forthcoming construction strategy.  One obstacle to this could be a concern that any measures which are perceived as providing a subvention for the development industry are likely to be politically unpopular.  However, this drawback is outweighed by an even bigger political incentive for the Government to stimulate construction.  As well as needing additional buildings, Ireland also needs the jobs associated with producing them.  Since the beginning of 2012 the Irish economy has churned out 85,000 new jobs. Unemployment has gone from 15% to 11.7%, and the numbers signing-on has fallen for 29 months in succession.  Impressive as this is, it will become increasingly difficult to sustain without an uplift in construction employment.  Currently there are just over 180,000 long-term unemployed people in Ireland.  Of these, 69% are males.  And of these males in long-term unemployment, 39% are under 35.  It seems reasonable to infer that many of this group were previously construction workers and that their skills profile remains best suited to work in the building industry.   

In its Action Plan for Jobs the Government acknowledges that the construction sector has “over-corrected and is now operating below its long-term sustainable level”. As well as leaving us short of buildings this has left us lagging on construction employment.  From a high of almost 13% in 2006, only 5.4% of Ireland’s workers are now employed in building.  If this could be brought back to the EU average of 6.9%, an additional 29,000 jobs would be created for difficult-to-place workers who may otherwise find it difficult to break free of long-term unemployment.  That really would be a good news story. 

Dr. John McCartney is Director of Research at Savills Ireland.