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A big gap is appearing in the funding of new home construction

With banks still constrained post-crash and investors switching money out of construction, the State will have to get even more involved in financing the building of homes

Ireland has gone through a roller-coaster in terms of funding housing activity over the past decade and a half. During the Celtic Tiger era, Irish banks literally threw loans out the door to mortgage borrowers along with finance for commercial property projects, much of it funded by cash borrowed from abroad. It didn’t end well.

Then, in a reaction to this, there was a collapse in financing for the Irish property sector from the banks, with the sector being bailed out and some of the original big lenders – notably Anglo-Irish Bank – going bust. As the property market slowly recovered, other international financiers gradually stepped in – from the vulture funds to longer-term pension investors. Their role has been controversial, particularly as funders of buy-to-rent apartments – but now they are pulling back, as higher interest rates change the calculations for them.

And all this this creates a problem. Who is going to pay for the development of the tens of thousands of new homes that Ireland needs to build, year after year? State and private sector financing will continue, of course. The banks will go on lending. But there is a gap opening up. Because there will be less private sector money invested in the Irish housing market and because the Irish banks have limited ability and a limited appetite to support domestic housing or lend to mortgage borrowers, either the State is going to have to get even more involved or the houses won’t be built.

Already we see housing starts falling and planning permissions for new apartments on the decline – and there are concerns in the industry in particular about the viability of apartment building now as interest rates rise, squeezing affordability for purchasers and providing risk-free investments elsewhere – such as in US government bonds – for the funds which had been putting cash in here. The sharp rise in building costs is, of course, the other key thing changing the viability calculations on projects.


Property collapse

The domestic banks can, under current circumstances, only do so much. A new Economic and Social Research Institute (ESRI) report on increasing future housing supply points to the constraints on lending faced by Irish banks, tied down by new rules introduced after the crash which require them to match loans with deposits and limit their exposure to the property sector in particular. Once bitten by the Irish housing collapse, European banking regulators are now twice shy. The ESRI finds that total new lending by the banks has picked up since 2014, but housing-related lending has grown more slowly. And this has affected both demand for and supply of housing.

Investing more State money will not solve all the problems of course – from the planning system to shortages of construction workers, there is a host of other issues. But unless the money is there, the houses will not be built. And there is really vital analysis needed here on the best way for the State to do this. Some of it will involve stepping in and managing the whole process on some projects to a much greater extent; for example a new project off Dublin’s Sean McDermott Street involving voluntary housing association Circle and Government funding is the first such scheme in many years not to involve a developer. There will be more, a lot more, of this to come.

But the State will have to find ways to unlock private money, too. Pretending that State cash can do it all is as unrealistic as hoping that a few new tax incentives can persuade private developers to do so. How it should do it needs to be carefully planned to deliver the kind of sustainable housing development which is part of national planning and climate programmes. But this has not yet been “sold” to the public as a concept.

State interventions

In a recent presentation to a Housing Agency conference, Goodbody chief economist Dermot O’Leary estimated that some €12 billion would be needed annually to fund the provision of 35,000 new homes – and with the increased size of the population, the likely required annual target will probably move above 40,000.

As well as direct building, he suggested the State needed to get more involved in other ways too to encourage private development, such as making greater commitments to buy properties in new developments, funding projects now under way which would otherwise be mothballed and doing all that it can to reduce risk in areas like planning and service provision. In turn, these kinds of interventions can help private developers and builders get funding from banks and other sources.

There is clearly a big job here for the Land Development Agency (LDA) which is charged with planning and developing projects on State lands. Reports a few months ago suggested Government frustration at how long it was taking for State boards to identify land and transfer it to the agency. Feet need to be held to the fire here. The ESRI report says that the LDA could be given compulsory powers to acquire public and private land for housing development, as a way of accelerating building and providing more affordable homes. It is an idea which is surely worth considering.

The State has already committed significant funding under its Housing for All programme and is pushing forward with some important projects, for example in the area of cost-rental properties. But there is still a feeling of racing to catch up with the housing crisis. Vital reforms of planning are only now coming on to the table and will take time to implement.

Higher interest rates will increase the cost of borrowing cash for more State investment. But as the funding gap widens, the State has no alternative but to wade in even deeper, given that housing is now the central social and economic issue we face. It just has to make sure it does so in a way that really makes a difference.