The Irish construction sector is experiencing a fundamental shift that deserves far more attention than it's currently receiving. After years of post-pandemic recovery and ambitious national housing targets, we're now witnessing a slowdown driven not by falling demand — demand remains exceptionally strong — but by something far more problematic: the economics of development are breaking down.
This isn't speculation. It's visible in delayed project announcements, stalled apartment schemes, and quiet conversations with developers who've gone from confident to cautious in the space of 18 months. The phrase you hear repeatedly is simple but stark: “the numbers don't work anymore.”
For Galway, a county still facing acute housing shortages and significant unmet demand, understanding this dynamic is critical. When development economics fail, housing supply suffers, and supply constraints eventually push prices and rents higher, creating the affordability pressures that make housing crises persist.
The foundation of this slowdown is straightforward: construction costs have risen dramatically while the revenue side of development equations has failed to keep pace. Developers who acquired land between 2020 and 2022 are now discovering that build costs have increased 25 to 40 per cent, depending on project type and location.
Labour costs are up substantially. Skilled trades remain in short supply, and wage inflation in construction has outpaced most other sectors. Material costs are rising rapidly once again.
Compliance costs involving fire safety, building control, and accessibility standards have intensified following regulatory tightening after well-documented construction defects.
None of these increases are unreasonable in isolation. Higher standards improve building quality. Fair wages reflect skilled labour's value. The problem emerges when you compound these increases across every input while financing costs have simultaneously surged.
The European Central Bank's interest rate increases, from effectively zero to over four per cent at peak in 2024, fundamentally changed development economics overnight. While rates have since moderated to two per cent for the deposit facility in early 2026, markets are pricing in possible rate increases later in the year due to geopolitical tensions and energy price pressures. Development finance that was available at approximately six to seven per cent before the rate increases now costs 10 per cent or more depending on project risk profile and developer track record.
This matters enormously because development is capital intensive and time consuming. A typical residential scheme involves land acquisition costs carried for years during planning, construction financing across 12–24 months of building, and holding costs during sales or lease-up periods.
The mathematics are brutal. Consider an apartment scheme requiring €20 million in development finance. At six per cent interest over three years, financing costs might be €3.6 million.
At 10 per cent, that becomes €6 million. That €2.4 million difference comes directly from profit margin.
Apartment developments are feeling this pressure most acutely, and this has specific implications for Galway city where higher-density housing is critical to meeting demand sustainably.
Apartments are expensive to build. Multi-storey construction requires more complex structural engineering, lifts, fire systems, enhanced services, higher insurance and compliance costs, and longer construction timelines. They also typically require institutional investment because individual apartment sales don't generate the same early cash flow as suburban housing developments.
Institutional investors, pension funds, REITs, and insurance companies have become markedly more cautious. Projects that met investment criteria 18 months ago no longer clear today's hurdle rates.
However, the Government has introduced a reduction in the VAT rate on apartment sales from 13.5 per cent to nine per cent, effective from October 2025 until December 2030, specifically aimed at improving apartment viability. While this helps address the cost equation, it remains to be seen whether this intervention alone is sufficient to restart stalled schemes.
The result? Apartment schemes are being delayed, redesigned, or shelved entirely. For cities like Galway, where sustainable urban development depends on density rather than endless sprawl, this creates serious long-term problems.
What we're experiencing is a viability crisis, not a demand crisis. Ireland still has severe housing shortages, strong population growth, high employment and wage growth, rental markets with near-zero vacancy, and buyer demand significantly exceeding supply. None of that has changed. What has changed is that the cost to create housing has risen faster than the value that housing can command in the market.
Developers only build when expected profit exceeds risk. When margins compress to the point where projects become marginal or loss-making, rational developers simply stop. Economics must work. Right now, for many project types and locations, they don't.
Galway faces its own version of these pressures, with local nuances that intensify certain challenges.
Land values in Galway city and desirable suburbs rose substantially during 2020–2023. Developers who paid premium prices for sites now face the double burden of high land costs and elevated build costs.
Infrastructure capacity constraints in certain areas add delays and costs. Water and wastewater limitations restrict what can be built and where. Road infrastructure in suburban areas requires upgrading before large schemes can commence. These problems add time and cost, both of which reduce viability in a high-interest-rate environment.
Planning timelines, while improving, still create uncertainty. Every month of delay adds financing costs and pushes break-even thresholds higher. At current financing costs, delays can be economically devastating.
When project commencements slow, hiring stops. Subcontractors face reduced workflow. Suppliers see order volumes decline. Government housing targets become harder to achieve because national and local authority objectives for housing delivery depend heavily on private-sector construction.
Tax revenues decline. Stamp duty, VAT, and development levies all fall when transaction volumes and construction activity reduce. Most perversely, housing costs ultimately rise. Reduced supply meeting unchanged demand inevitably pushes prices and rents higher over time.
The trajectory from here depends partly on factors beyond Ireland's control, particularly ECB interest rate policy and broader European economic conditions.
Policy responses matter significantly. Ireland will likely need viability gap funding for strategic projects, accelerated planning processes, reduced development levies in certain circumstances, enhanced supports for affordable housing delivery, and infrastructure investment to unlock constrained sites.
At Fair Deal Property, we're seeing this play out in real time. Developers are being more selective about sites they pursue. Schemes are being redesigned to reduce costs and accelerate delivery. Buyers are adjusting expectations about what's coming to market and when.
Ireland's construction slowdown is not a temporary blip or a confidence issue that marketing can resolve. It's a structural challenge rooted in the economics of development.
The numbers that once worked no longer do. Higher costs and higher financing expenses have compressed margins to the point where many projects cannot proceed profitably. Apartments, higher-density housing, and schemes in infrastructure-constrained locations face the greatest pressure.
For Galway, this creates serious medium-term risks. The county still needs substantial housing delivery. Demand isn't falling. But if the supply pipeline continues slowing, the housing shortage will intensify, affordability will worsen, and the social and economic consequences will compound.
Acknowledging this reality is uncomfortable, but necessary. Only by understanding what's actually happening can industry, government, and communities respond effectively.
That conversation needs to happen now, before the slowdown becomes a stall, and before the housing crisis we're trying to solve becomes materially worse.
For more information visit www.fairdealproperty.ie
Johnny Gannon is the founder of Fair Deal Property Auctioneers and Estate Agents. For advice on buying or selling in the Galway market, contact Fair Deal Property on 091 394593.
