State must avoid housing initiatives that fan prices
High construction costs are curbing house supply. These must be reviewed
Both the Government and Economic and Social Research Institute agree that about 25,000 houses need to be built annually to satisfy current demographic trends. Photograph: Frank Miller
The current housing supply shortage has many consequences and many causes, but not everyone agrees on the solutions. Last year, only 8,000 housing units were built nationally; in 2006, the equivalent figure was 93,000. Both the Government and Economic and Social Research Institute agree that about 25,000 houses need to be built annually to satisfy current demographic trends.
While banks are willing to lend to buyers, albeit on strict terms, they won’t lend to builders, because they were so badly burned by this cohort last time round.
However, to access these funds, Healy says builders have to stump up 40 per cent of the equity themselves. Because so many builders have run down their cash reserves to stay afloat during the recession, these terms are too prohibitive and will do little to stimulate building activity, he says.
Economist with property website Daft.ie Ronan Lyons agrees the problem is on the supply side but disagrees with what he calls “the capital market failure thesis”, insisting the lack of finance is more a symptom than a cause.
“There’s plenty of capital globally that’s looking for a good return; the problem is that with Irish property you won’t get a good return.”
He says the financial maths of building a high-density block in central Dublin do not stack up. With development levies and socially affordable housing taxes still at boom-time levels, the per-unit cost of construction is simply too high, up to €60,000 per unit in some parts of Dublin, he says.
“For me, the big concern is not that capital isn’t flooding into construction. If the underlying maths were right, other banks would be coming in from abroad and doing it.”
In the period leading up to the crash, the price of housing was so far above construction costs that developers didn’t care about levies; now the situation has reversed, says Lyons.
If the Government was serious, it would have done an audit of building costs and compared it with the price of a new house in its recent Construction 2020 report, he says.
Another blockage is planning. Six years after the Mahon tribunal revealed the toxic interplay of business and politics in the planning process, its main recommendation – the establishment of a planning regulator – remains on the Government’s to-do list.
There are currently planning permissions for about 30,000 housing units in Dublin, of which 21,000 are for apartments – when the market simply doesn’t want apartments. Perhaps the answer is for the State to step in, for a limited period, and buy land and commission builders to build houses for a fixed return. This would do away with the rampant speculation that whipped the market into a frenzy last time.
Nama’s role The National Asset Management Agency is, to some extent, already operating in this guise, and has about €2 billion earmarked specifically for development finance.
Unfortunately, the State has a long history of dealing with supply-side problems in housing by stimulating demand, more often than not at the behest of the construction industry lobby. Are we to have our housing policy once again hijacked by the industry?
Prof John FitzGerald says the strong demand-side measures rolled out and kept in place before the crash, which included mortgage interest tax reliefs, first-time-buyer grants and section 23 tax breaks, only served to make the business more profitable for developers.
He believes the Government should be very wary about responding to industry demands or doing anything that would stimulate demand.
This is what makes Minister for Finance Michael Noonan’s plan for the State to guarantee a portion of mortgages for first-time buyers to incentivise banks to lend so extraordinary.
The move would almost certainly fan further price increases. It is understood the Central Bank opposes the move. While FitzGerald agrees building costs are too high, he insists they must be brought down without inflating prices.