Affordable house schemes come with expensive risks

New house-purchase scheme is in danger of repeating past mistakes

Ó Cualann Cohousing Alliance, a not-for-profit provider, has built houses in Ballymun, Dublin,  starting at €140,000

Ó Cualann Cohousing Alliance, a not-for-profit provider, has built houses in Ballymun, Dublin, starting at €140,000

 

Following a hiatus of almost a decade, the State is once again becoming involved in the private housing market. It plans to build thousands of homes on local authority land under a new affordable purchase scheme which is due to be in place within weeks.

While the scheme will be “new” to this generation of first-time-buyers, it is essentially a resurrection of old affordable housing schemes first introduced almost 20 years ago.

When house prices started to bolt in the late 1990s, and the prospects of low- and middle-income workers ever becoming home-owners began to wither, the idea of creating a State subsidy to make housing “affordable” emerged.

Affordable housing schemes would give these workers – which would include gardaí and nurses – the chance to buy new-build houses at a discount on market values, generally in the 25-35 per cent range, with the State chipping in the difference.

The houses were provided through two principal schemes.

The 1999 Affordable Housing Scheme saw local authorities become developers, building on their own lands and selling to qualifying home-owners at a discount.

The following year the requirement for private developers to provide 20 per cent of any new housing estate for social or affordable housing – or provide a cash equivalent to their local authority – was introduced. How that 20 per cent was divided between social and affordable was up for negotiation, though developers were far keener on providing affordable, rather than social, in their housing estates.

Under this scheme, known as “Part V” in reference to the section of the planning Act under which it was introduced, the local authorities would agree a price for the housing at the planning stage, and then once the houses were built they would be sold on to qualifying buyers at a discount.

In general the local authority gave the developer lists of people eligible to buy an affordable house in that area. However, if the first two people on the list rejected the house or apartment, the council was obliged to buy it from the developer at the agreed discounted price. The obligation then fell on the council to find a buyer.

‘Clawback’

Under both schemes home-owners who sold up within 20 years had to pay a percentage of the proceeds of the sale to the local authority, a “clawback” to repay the discount.

In a rapidly-rising property market the schemes were wildly popular, particularly in Dublin. In early 2008, Dublin City Council said it needed to stop accepting applications for the rest of the year because of a backlog of more than 8,000 applicants waiting to buy houses.

There were approximately 500 affordable houses being built in the city annually at the time, and applicants were waiting on the list for more than three years before they were made an offer.

However, by the end of that year everything had changed.

The agreed price of the affordable house was set before the house was built, so generally this meant at least a year, and often more, before the development was finished and the house was offered to the buyer.

In 2008 the open market price of developments began to fall to just nominally above the affordable house price agreed the previous year. With the narrowing gap between the affordable house price and the open market price, the prospect of being tied into a deal with the council for 20 years started to look less attractive.

When market prices then began to dip below affordable prices, sales dried up altogether.

By January 2009, Dublin City Council was left with 300 unsold houses that were costing it upwards of €300,000 a month in bridging loans and fees.The buyers, so eager just one year previously, had evaporated. The local authority’s response was panic.

Further discounts

The council said it would offer further discounts of 25 per cent on houses it had already discounted by up to 35 per cent of the original market price.

A year later it had offloaded about half of these homes, but the debts on the loans had risen to €18 million. It decide to scrap the clawback altogether in an attempt to cut its losses and get the unsold homes off its books.

In 2011 the government officially abolished the affordable housing schemes. In their lifetime 7,679 homes were supplied nationally under the local authority build scheme and 9,534 though the Part V developer scheme.

The peak of the local authority sales had been in 2003 when 1,524 houses were provided. The private developments became the main source in the following years, reaching their highest levels in 2008, when 3,018 Part V homes were provided.

In 2009 there was a stock of 3,700 unsold affordable dwellings held by local authorities. Councils have since managed to offload around 2,000 of these in bargain-basement sales, with the rest being leased to housing associations for use as social housing. However, the State’s Housing Agency has described this as a temporary measure, and the debts associated with these, which remain with the local authorities, still have to be paid off.

Minister for Housing Eoghan Murphy is not unaware of this problem, referring to the “overhang of unsold affordable homes” at a recent Oireachtas Housing Committee.

His solution to avoid the same pitfall with his new affordable purchase scheme is to “only target affordable housing interventions in areas that require them”.

He told the committee that local authorities in Dublin, Cork and Galway had identified lands with the potential to deliver 4,000 homes, but he could see that “level of ambition increase to at least 10,000 new affordable homes from local authority-owned land”. He has not specified who would build them.

Available sites

However, Dublin city’s head of housing Brendan Kenny has said there were limits on the amount of land the council could put forward for the affordable purchase scheme, and available sites were likely to be in areas of high social housing concentration – Darndale and Ballymun being two of the most likely locations. He said it was questionable whether they fall into the category of “areas that require them” and if they were places that people wanted to buy houses.

The State’s Housing Agency chief executive John O’Connor has sounded the alarm bell even louder, cautioning against local authorities getting involved in the business of selling affordable housing.

Mr O’Connor notes that the local authorities who applied the rules most rigorously last time out – insisting on developers providing the housing instead of a cash settlement – were the ones left holding the baby.

“They should have been given more support in dealing with the unsold affordable homes than they have been given – they did the right thing and then were penalised for doing the right thing.”

Orla Hegarty of UCD school of architecture questions whether the State should be introducing an affordable purchase “scheme” at all.

She said while the possible solutions to this Gordian knot were multifaceted, one key element required was the return of small developers to the market and a move away from a reliance on big solutions, from big players, who could wait to release houses at the point they felt was most advantageous to them

“It’s not that sites aren’t viable, it’s the development model isn’t viable,” she says. “If we wanted to feed everyone with cheese sandwiches we could go to a high-end store and pay €7 or €8, we could go to the lower-end multiple retailer, buy the ingredients and put them together, or we could go out to the market to every small café and deli and start taking orders all over the place to try and meet the need.

De-risked

“The big advantage of that is that you don’t put all your eggs in one basket, you have de-risked your proposition. The other advantage is you are supporting recapitalising those small businesses and you can get quality control – if someone isn’t doing the job properly they go off the list.”

It could be argued that it is at this level that the only current seller of affordable housing, Ó Cualann Cohousing Alliance, fits.

A not-for-profit provider, it has built houses in Ballymun starting at €140,000. While it received the site from the council for a nominal fee, it is not seeking the State to compensate it for not earning a profit from discounting homes but can still break even.

Again the eggs shouldn’t all go in this basket, but as a model it is probably the best chicken to opt for.

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