IRELAND’S housing crisis is facing another serious hurdle as average wages in the construction sector climb by 10% year-on-year.
The Economic and Social Research Institute (ESRI) has warned that these escalating costs could severely undermine the Government’s housing delivery targets under the National Development Plan (NDP).
In its latest Quarterly Economic Report, the ESRI cautioned that the economy is operating near full capacity, with mounting evidence of overheating in the construction sector.
The institute pointed to labour inflation as a growing concern, driven by the intense demand for workers across housebuilding, retrofitting, and major infrastructure projects.
“Labour inflation in construction needs to be monitored closely,” the ESRI said, noting that difficult trade-offs will be necessary as capacity constraints tighten.
According to the Central Statistics Office, average hourly earnings in construction rose by 10% in the second quarter of 2025.
The growth comes despite a legally mandated 3.4% pay rise for certain site workers under a statutory wage order introduced last year.
Jean Winters, Director of Industrial Relations at the Construction Industry Federation, noted that wages outside the scope of this order are negotiated directly between employers and employees, potentially contributing to wage divergence within the sector.
The ESRI flagged that the spike in labour costs is not being offset by increased supply.
Although employment in construction rose to 190,300 in Q2 from 177,800 in Q1, the gains are for multiple areas, from housing completions to energy retrofitting and infrastructure upgrades.
While the ESRI revised its 2025 housing completions forecast up to over 35,000 units, citing a rush to finish homes before the end-of-2026 waiver deadline for development levies, the outlook for 2026 has dimmed.
A steep drop in new commencements this year, down over 80% following the expiry of key incentives, has led the institute to lower its 2026 forecast to just under 36,000 units.
The ESRI warned that the slow pace of planning approvals and new project starts suggests a deeper supply crunch in the coming years, particularly in 2027 and 2028.
In July, the National Competitiveness and Productivity Council warned that government support for retrofitting is drawing labour away from urgently needed homebuilding.
With the construction labour force already stretched thin, balancing the climate agenda with housing targets is emerging as a significant challenge.
Despite pressures in construction, the overall economy remains resilient.
The ESRI projects 8% GDP growth in 2025, fuelled largely by a surge in pharmaceutical exports ahead of newly introduced 15% US tariffs.
However, this is expected to ease in 2026, with GDP growth moderating to 2%.
While exports remain strong, the ESRI has joined other advisory bodies in urging a more restrained fiscal approach ahead of Budget 2026, set to be delivered by Finance Minister Paschal Donohoe and Public Expenditure Minister Jack Chambers on October 7.
The planned €9.4 billion budget package, comprising €7.9 billion in new spending and €1.5 billion in tax measures, has drawn criticism from both the ESRI and the Irish Fiscal Advisory Council.
Both institutions argue that these spending measures are ill-suited to an economy already operating at full tilt.
“At full employment, addressing housing and infrastructure bottlenecks is highly challenging,” said Dr Conor O’Toole, Associate Research Professor at the ESRI.
“Expenditure needs to be targeted and sequenced carefully to address these constraints.”