Herd mentality condemns generation to rental housing
Fearful macroprudential caps on house prices are extreme and inhibit building
Home ownership: Rather than being an Irish obsession, this model means people do not have to pay rent when their income falls on retirement and they have an asset of value. Photograph: Bryan O’Brien
Ireland has a housing crisis and the approach we have been adopting in recent years simply isn’t working.
There are a number of reasons for this. The causes of this crisis are numerous and complicated and finding a resolution is complex. There is no quick fix and no easy option.
We should stop pretending that there is, and instead look to the key blockages to building enough homes to house our people – the pursual of policies that actively work against what the Government is trying to achieve and, most importantly, the current macroprudential rules that prevent people from ever owning a home.
It has been said that home ownership is an obsession in this country. It is not. Rather, it is a model which allows people to pay to a bank a monthly amount similar to – and sometimes less than – what they would otherwise pay in rent but which will ultimately lead to them owning their home. The model means that they do not have to pay rent when their income reduces on retirement and they have an asset of value.
We are replacing the risk of a property bubble with the risk of a locked-out generation forever dependent on social housing or the private rental market
On death, that asset can give a financial leg up to their children. This model has, over the years, lifted many families out of relatively poor circumstances to having some level of financial security. Unlike those dependent on renting, the whims of investors and changes in policy do not affect their homes or their financial security.
The mortgage market in Ireland was projected to grow by 17 per cent last year. Instead it grew by only 9 per cent and only one in three were first-time buyers. This is not just a statistic – it is a living reality for many families who may now never own their own homes.
The so-called macroprudential rules, overseen by the Central Bank, put limits on how much a family or individual can borrow in order to buy a home.
I support the principle of such rules, which seek to avoid another credit-driven property bubble but have been critical for some time about the harshness and inflexibility of our Central Bank’s income multiples relative to those in other jurisdictions.
At present, mortgage borrowers are restricted to 3.5 times their annual income when seeking a mortgage. In New Zealand where the incoming Central Bank governor is from, those hoping to buy a new home can borrow up to five times their total income.
The middle ground can be found in the UK, where the limit is 4.5 times one’s annual income, which seems a suitable, sustainable limit.
While many in this country are celebrating the fact that the macroprudential rules have succeeded in capping house prices, hardly anyone is looking at how this is inhibiting housing delivery.
The limit of 3.5 times one’s annual income is too low. Consider the fact that a household earning €80,000, which is not a small income and is above the average industrial wage for a two-income family, is allowed borrow only €280,000 for a new house at a time when the average price of a home in Dublin stands at over €380,000.
The herd is ignoring the needs of a generation of people who cannot own their own home
This creates unrealisable demand and results in houses and apartments not getting built, simply because there are not enough people who can buy them.
This has further negative effects. As rents are often prohibitively higher than the amount of mortgage repayments on equivalent properties, the only remaining option for those squeezed out of the market is to apply for social housing.
Therefore, by refusing to allow a slightly higher level of borrowing, as well as inhibiting supply of new housing, we are also creating a social-housing-dependent society. We are simply replacing one risk – the risk of a property bubble – with a far greater one: the risk of a locked-out generation forever dependent on social housing or the private rented market.
There is a school of thought emerging that those who cannot afford to buy should just accept that they must rent. Even if that was a desirable outcome – which it is not – we are not even adopting the right policies to meet this objective.
For instance, we are recklessly pushing the traditional smaller landlord out of the rental market. Taxation and regulation have resulted in 8,000 traditional landlords exiting the market in the past 12 months. If we do not urgently revise relevant policies, smaller urban areas which are of no interest to the large-scale landlords will be left with an even greater deficit of rental properties.
Added to these policy failures are the high cost of land and VAT, which are both major factors in driving non-viability when it comes to the development of houses and apartments.
The current housing strategy is failing the current generation, who are increasingly despairing of a system that is not delivering. It is frustrating to see this happen when one can see obvious solutions that would deliver housing far more quickly than many of the policies being pursued.
In the mid 2000s, I recall scratching my head when I heard many people expressing a view that 90,000 housing units per annum was sustainable. For my own part, I bought into the “soft landing” proposition at the time. Perhaps that was the most convenient thing to do given the level of production that we were at. We all got it wrong: developers, agents, economists, banks, government and indeed the media.
We need to be careful of the new herd mentality. Then, the herd ran towards unsustainable numbers of new housing units. Now the herd is ignoring the needs of a generation of people who cannot own their own home and is starting to run towards a model of home rental that is neither desirable nor sustainable. We must think again.
Michael O’ Flynn is chairman and chief executive of the O’ Flynn Group