What needs to be done to solve problems in the housing market

‘In the same way that we can’t have democracy without politicians, we can’t have development without developers’

‘We need a vibrant social housing sector in an environment where proper development is encouraged and appropriately rewarded, as well as a lending market that encourages responsible and creative development enabling owner occupiers and investors to purchase.’ Photograph: Getty Images

‘We need a vibrant social housing sector in an environment where proper development is encouraged and appropriately rewarded, as well as a lending market that encourages responsible and creative development enabling owner occupiers and investors to purchase.’ Photograph: Getty Images

 

In March 2012 I attended a very interesting lecture given by Baroness O’Neill, a Northern Ireland crossbench member of the House of Lords and an Emeritus Professor of Philosophy in Cambridge University.

It was at a juncture in Ireland where the repercussions of lax regulation were painfully evident. Her perspective on self-regulation was that it was always “an invitation to cosiness” but, on the other hand, after a period of lax regulation, “a cat and mouse game can develop between the regulator and the regulated, where the interests of people are forgotten”.

She went on to opine that regulation hits a barrier when it’s too complex for people on the ground, quoting the example of a London midwife who had observed that “It takes longer to complete the paperwork than deliver the baby!”

In the intervening three years as a society we have all had to experience creeping regulation which, while often motivated for noble reasons, does cause additional stress and strain for people, never mind the additional costs incurred.

The property tax was one example of this, followed by water charges, which put many people over the edge. The sight of the forms in two languages coming through the letterbox cast a gloom over people already exhausted by the recession. Equally, with people in their own lives forced to be organised, accountable and competent, their patience with perceived incompetence and waste has worn thin. As Baroness O’Neill commented, “We live in an absolute culture that doesn’t take cognisance of the fact that people make mistakes”.

In recent months we have had the Central Bank assert itself in a manner that we are not used to. Part of people’s response has been, “It’s good to see that somebody is in charge” and that the common good is at the heart of prudential policy.

While I absolutely acknowledge the Central Bank has a duty to act as it deems fit, I do wonder if the totality of what it has proposed is an over-reaction. The loan to income limit of 3.5 times income is hard on first time buyers and the overnight reduction of 90 per cent loan-to-value mortgages to effectively 85 per cent is also a sudden and harsh measure for those who are impacted.

Implications

At the heart of the policy is a desire to control the price of residential development land and to focus on maintaining competitiveness by encouraging the reduction of house building costs. With 90 per cent loan-to-value mortgages set at €220,000, the policy is carefully nuanced to put pressure on the Government to reduce construction costs through a reduction in the VAT rate from 13.5 per cent to 9 per cent, combined with reductions in development contributions in the forthcoming planning bill. Moreover, pressure is likely to come on local authorities, already under pressure to increase housing supply, to moderate housing density policies and certain design aspects to apartment construction.

It is clear that the markets in our key cities require a mixture of apartments and houses and these can be contained in a high density environment if the current regulations were less strict and more flexible.

The density criteria for housing in Irish cities are more restrictive than in other countries eg, the UK, the Netherlands, Sweden, Finland, Denmark and Germany. Additionally, with Dublin becoming the IT capital of Europe, more flexibility is required around smaller apartments and the design approach to student housing. If there is one lesson learned from the world over the past decade, it is that countries and cities need to anticipate rapid change and plan for it in advance.

There is also the motivation by the Central Bank to moderate rent increases in the short term by using a policy initiative of encouraging a new set of property investors to enter the market through allowing up to 70 per cent mortgages for buy-to-let properties. During the recession and prior to January 27th, 70 per cent mortgages for buy-to-let properties were unheard of. It would have been difficult three years ago to envisage our Central Bank encouraging residential property investment, but that is what is now happening and it is in the public interest.

By way of background, of the approximately 43,000 residential dwellings sold in Ireland in 2014, 18,000 had been investment properties of some description, but only 6,000 were purchased by investors as buy-to-lets. In a nutshell, owner occupiers have been replacing tenants and, with little or nothing being built, this has led to a daily depletion of rental stock in the order of 30 units, with the consequent rise in rents.

In my view, the Central Bank has set out its stall in seeking to ensure that Ireland retains its competitiveness, while also attempting to guard against the creation of a city state where Dublin is all dominant. The short-term effect of the recent directive has seen an increase in demand for conveniently located but moderately priced houses in Dublin suburbs such as Drimnagh and Crumlin, but ultimately the policy is likely to encourage development in Kildare, Meath and Wicklow, as well as stimulating development in Cork, Galway and Limerick.

The crash

Equally, the public and private sectors will, in the public interest, need to work a lot more closely, with trust and transparency. This will require a new approach of more professional interaction and analysis of what will work and what won’t work in terms of market demand, balanced against long-term societal needs.

We need a vibrant social housing sector in an environment where proper development is encouraged and appropriately rewarded, as well as a lending market that encourages responsible and creative development enabling owner occupiers and investors to purchase.

In the same way that we can’t have democracy without politicians, we can’t have development without developers.

Mark FitzGerald is chairman and chief executive, Sherry FitzGerald Group and is also a director of Property Industry Ireland

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