State should use Covid-19 impact on building costs to build homes

The housing crisis will be worse post-Covid-19 unless action is taken

While the global pandemic has had a hugely negative effect on certain industries such as travel, hospitality and retail, it has not all been doom and gloom. e-commerce, home entertainment, tech and pharmaceutical companies potentially stand to gain from it.

Although generally negative, the impact on property and construction has been more mixed and difficult to evaluate. This is partly because the situation is still evolving, and partly because no one knows how long Covid-19 will be with us. That said, one thing we do know, supported by figures collated by the Society of Chartered Surveyors Ireland (SCSI), is that the rate of construction inflation is decreasing, and that construction costs look likely to soften over the coming two years.

At times like these, Winston Churchill’s comment “never let a good crisis go to waste” always gets an airing, but perhaps that’s because it’s good advice. The housing crisis was with us pre Covid-19 and if anything, it’s going to be worse post-Covid-19 unless decisive action is taken to tackle the problem.

Hospital Report

That is why we believe the Government should take advantage of the softening in construction costs, and commence a large-scale building programme via local authorities.

Figures from the Banking and Payments Federation Ireland indicate house completions will be down 14 per cent this year to around 18,000. Based on current output projections, the SCSI believes it will be 2031 before new housing and projected demand reach equilibrium. It is unacceptable that Ireland, in 2020, has failed to ensure an adequate supply of suitable and affordable properties for young people who wish to purchase their own homes.

Clearly property is expensive and time consuming to produce. As outlined in the Cost of New Housing Delivery Report 2020 published recently by the SCSI, the average cost of a privately built, new three-bed semi in the greater Dublin area is €371,000. Our independent analysis found that 48 per cent of the costs were “hard costs”, ie the cost of labour, bricks and mortar, while the remaining 52 per cent derived from “soft costs” such as land, VAT, margin, levies etc.

Recently, the Department of Housing released figures on social housing procured by local authorities around the country. These figures attracted some attention on social media, with comparisons drawn between the lower public sector figures – circa €277,000 in Dun Laoghaire Rathdown, or €243,000 in Waterford – and the private sector figure of €371,000 as calculated by the SCSI.

While it’s very positive to see these issues being debated – and some people may have been misled by a reference to “all in” costs in the Department of Housing circular – in this instance like is not being compared with like. It is important to explain why.

While most of the attention on our report focused on the average cost of delivering a privately built three-bed semi – it is after all the way most new homes are delivered in this country – our report also identified that public sector housing is more cost effective to deliver, and can be produced for between €210,00 to €230,000.

Why the substantial difference? Let’s start with size. Public sector housing is typically smaller than that provided in the private sector, sometimes of the order of 20-25sq m of floor area. Obviously, this extra area comes at a cost, and must be reflected in any comparison.

As we noted in our report, savings will accrue on public sector housing costs under the following headings:

*Land costs – significantly reduced cost compared to private sector *No developer margin *Minimal finance costs *No local authority levies/contributions *No sales/marketing/legal costs

So while the “hard cost” construction costs between the private and public sectors are generally quite similar, if you remove the five “soft costs” outlined above – as shown in the graphic – you’ll see there is a substantial difference, on average €141,000 in monetary terms, between houses delivered privately and publicly.

Public sector

As indicated above, and in previous papers on housing, we do not believe the private sector alone will deliver the volume of homes Ireland needs, of between 30,000 and 35,000 a year.

In addition, there is a major affordability gap for first-time buyers trying to purchase a home in line with Central Bank of Ireland lending regulations, and this gap raises serious questions over the viability of new house building.

Based on these figures, we believe the Government should ensure local authorities have the resources they need to commence large-scale building programmes.

The previous Government targeted the building of 33,500 new social homes in its Rebuilding Ireland programme. It now looks as if only half that total will actually be delivered.

That is why a radical overhaul is required. We believe, amongst other measures, the present Government should leverage the Land Development Agency (LDA) and local authorities to deliver new alternative models of delivery for social housing by utilising private sector developer involvement.

Significant procurement delays are a common feature in social housing programmes, and these also need to be addressed.

Building sustainably is now more important than ever, and given that our population is projected to grow by 1 million by 2040 and a further million by 2050, building at scale and more compactly in urban areas is really the only option for the future.

With that in mind, local authorities and the LDA should employ compulsory purchase order powers to acquire strategically located vacant properties for town renewal projects.

Modes of work and lifestyles are changing dramatically in response to Covid-19, and the design, construction, and delivery of new homes – particularly apartments – needs to adapt accordingly.

It is not just new home building that requires attention. Revitalising and repurposing commercial property and retrofitting existing properties in rural towns and cities to sustain vibrant communities will also play a key role in generating supply.

We have repeatedly stated there is no single solution to the housing crisis. It will take private and public sector input, expertise and collaboration. If Covid-19 was to be a catalyst for a radical change in our approach to housing delivery and the beginning of a lasting solution, its legacy would not be all bad.

Micheál Mahon is president of the Society of Chartered Surveyors Ireland (SCSI)