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Cliff Taylor: The housing market is heading for a viability squeeze

Rising interest rates threaten to change the calculation for both funders of new housing and buyers

No wonder the Government parties are starting to get really edgy about the housing market. If there is to be noticeable progress before the next general election, then housing starts need to rise in the months ahead – and quickly. But while there has been some increase as the industry got going after the pandemic, higher interest rates and rising building costs now risk sending activity in the opposite direction. The danger for the Coalition is that this leads to a stalling, or even a decline, in housing starts in the months ahead, probably after the second half of next year. And as Ministers spot this risk, we can expect a lot of money to be thrown at this issue soon.

The Central Bank had reasons to change its mortgage lending rules. At the moment, many are being forced to pay more in rent than a mortgage would cost – the lending rules mean they cannot get a loan but there are no such rules in the rental market. The decision will have some impact on the market – but not a fundamental one. It is just another sticking plaster in a housing policy jigsaw which isn’t fitting together and where drastic problems in the rental market remain central. It will help some prospective buyers to get over the line in the short term – and, in turn, this temporary boost to demand will help some developers to get funding to finish out projects. But, as interest rates rise, fewer are going to be able to meet the stress-testing rules which banks are obliged to apply to mortgage borrowers – to ensure they can repay if interest rates rise yet further – and will remain locked out.

With supply remaining constrained, the Government has resorted to demand incentives – for example via the Help to Buy scheme, which offers a tax refund towards the deposit; and the new First Home scheme, under which the State will take an equity stake. These are understandable moves to help younger buyers. But the risk is that they eventually feed through to prices higher than they would otherwise be – and we are back again to square one.

In a market as messed up as the Irish housing and rental market, there are few rights and wrongs, only really difficult trade-offs. The eviction ban will protect tenants, but will do nothing to encourage private landlords. Inadequate supply lurks behind every decision.

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Rising interest rates

In terms of new housing starts and the ability of developers to finish out existing housing, rising interest rates are now coming into play. They will increase the cost of funding to start with. And higher interest rates also provide other, risk-free outlets for big international investors who have been key funders of Irish building in recent years.

With interest rate returns on safe investments such as the government bonds of big countries like the US and Germany on the floor for years, big funds have been forced to search for a return across the world and housing markets – including the Irish one – have been a typical hunting ground. International funds provided some 78 per cent of the funding for Irish real estate development between 2017 and 2019, according to a study by Ronan Lyons of TCD.

Now, with the benchmark safe haven investment – US government 10-year interest rates – at 4.25 per cent (compared to 1.6 per cent a year ago), the game has changed. And the “sure bet” that Irish property prices will continue to rise, providing another source of return to investors, now looks a lot less certain. Funding of all types for the Irish housing market will be harder to attain and it remains to be seen whether Irish banks, which have much less exposure in property and housing compared to 2008, will become bigger players again.

The whole sector will face a viability squeeze as the cost of building rises. Builders – and those funding them – will ask whether there will be buyers at prices which make development viable. Already, in the rental market in particular, the rents required to yield a return on building costs are affordable only to a minority.

Latent demand

Building levels have recovered since the great recession – property expert John McCartney of BNP Paribas reckons there could be 28,000 completions this year. The Government target under its Housing for All plan is 33,000 per year. But the backlog to be made up increases year on year. Central Statistics Office figures show the median age of house purchasers is now close to 40. Part of this reflects social trends, but it also shows a huge latent demand from young people who want to move out of their family home but can’t afford to.

The hill for State housing policy to climb will thus become even steeper. Recent reports suggest that Fine Gael TDs have been brainstorming ideas to accelerate housing provision, including new measures on vacant properties and expanding the role of the Land Development Agency. State investment in housing has risen fast in recent years and further increases seem inevitable. But delivery is slow. The protracted time it takes to get through the planning process is the subject of soon-to-be-released proposals from the Attorney General – these could be important, but objections to development and delays through the courts are likely to remain a big issue.

The detailed work needed to accelerate supply, speed planning, provide funding and direct appropriate subsidies at buyers and renters remains the only way forward. There are also real questions about the Government’s spatial planning and where houses can and will be built. There are good ideas in the Government’s plan – including the development of a cost-rental sector. But speed of implementation remains a big issue. These same problems of delivery would face a Sinn Féin-led government. But Government TDs know that they are now the ones in the firing line. As the market changes, they are right to be nervous.