Government thinking on housing remains confused and populist

In terms of housing policy, Ireland has been poorly served by successive governments. Until recently, however, the incoming administration appeared to have improved things. First, it recognised the need for urgent intervention to correct market failures that have left us with a drastic undersupply of accommodation. And, while one might quibble with aspects of it, the Rebuilding Ireland document has been accepted as a comprehensive and broadly credible plan for housing.

However, after a promising start the Government has faltered, and ominous signs are emerging that its thinking on housing remains confused, inconsistent and populist.

The widely criticised Help-To-Buy (HTB) scheme is a case in point. This is a demand-side intervention – it provides tax rebates to first-time buyers who are consumers rather than providers of housing. Nonetheless, Minister for Housing Simon Coveney calls it a supply-side measure. The only justification for such a claim is that HTB will drive up prices, creating profit opportunities for developers, thereby encouraging construction.

Curiously, the Minister also insists HTB will not be inflationary. I respectfully disagree, but that is beside the point. The real issue is the inconsistency of the Minister’s story – it is irrational to believe HTB will stimulate supply if it does not first drive up prices.

Ironically, the outcome the Minister wants – increased building without higher prices – is within the Government’s gift. Cutting VAT on new homes would create profit opportunities for developers through reduced costs rather than higher prices. Unfortunately, the Government baulked at this in the budget, apparently because cutting VAT is a blunt measure which would have applied universally in all locations. But surely this criticism is equally true of HTB which will subsidise first-time-buyers in affordable locations as much as it will assist those in Dublin?

Dubious

If the underlying principle of HTB is somewhat dubious, the nature of its implementation also gives rise to concerns.

By name-checking the governor of the Central Bank in his budget speech, Minister for Finance Michael Noonan created a perception that the bank was fully behind HTB. This illusion was shattered, however, when the bank raised issues that necessitated alterations to HTB between budget day and publication of the Finance Bill.

In practical terms this suggests that the original HTB proposals were not particularly well thought through. The Government’s perceived need to co-opt the Central Bank also suggests a lack of faith in HTB’s ability to stand on its own merits.

Further evidence of confused thinking in policy circles can be seen in the plan to restore full mortgage interest relief for landlords.

At first glance this seems reasonable – rents are rising, so incentivising landlords to boost the supply of rentals should take some heat out of the situation. However, public policy should not use taxpayers’ money to incentivise what is already happening anyway, and investors have been happily piling into the housing market without incentives.

Perhaps policy-makers are unaware of this, or have been influenced by vested interests pedalling the fantasy that landlords are fleeing the market. But it is Government’s responsibility to check the facts before legislating, and it has ample data with which to do this.

Official figures show that of 53,680 housing sales in Dublin between Q1 2011 and Q2 2016, 15,334 units (28.6 per cent) were bought by investors.

Other CSO figures show that, in net terms, the number of Dublin households in private rented accommodation rose 61.3 per cent during the same period – investors clearly represent the supply-side of these tenancies. And if that is not enough, data from the Residential Tenancies Board indicate an increased number of landlords and tenancies.

Displacement

If “deadweight” (incentivising activity that would have happened anyway) is an issue with the restoration of mortgage interest relief so too is “displacement” (negative outcomes in another area due to incentivising the target area). With housing supply effectively fixed in the short-run, incentivising investors to buy properties means that fewer dwellings will be available for owner-occupiers.

The new Government deserves credit for its determination to tackle the housing crisis. The problems can’t be solved overnight, and perhaps there is political pressure to buy time with popular schemes even if they do not stand up to rigorous scrutiny.

But this is a dangerous game. Whatever happens Ireland’s housing crisis won’t be resolved without large-scale private investment. The problem is that once rational policy-making gives way to populism, the future becomes harder for investors to predict and investment outcomes become more uncertain.

Dr John McCartney is director of research at Savills