Tuesday 27 June 2017

Lower build costs are key to lower rents

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Click to enlarge

Ronan Lyons

Earlier this week, the latest Daft.ie Rental Report was released. The picture it painted of the rental sector was grim. Here are five worrying statistics from the report:

1 The average monthly rent nationwide reached a new all-time high of €1,077 in the third quarter of 2016, up from a low of €742 five years previously.

Construction costs of new apartments in Dublin were found to be significantly higher when compared to other cities
Construction costs of new apartments in Dublin were found to be significantly higher when compared to other cities

2 Not only did rents reach a new high, but so did annual rent inflation, which was 11.7pc in the year to September, the highest ever in the Daft.ie Report, which extends back to 2002.

3 The increase in rents has been particularly acute in recent months, with the increase between June and September equalling the highest ever three-month increase in rents of 3.9pc nationwide.

4 This is not a Dublin phenomenon - all 54 markets around the country saw rents increase in that three-month period, the fifth time in the last two years that rents rose in every single market.

5 The number of markets where there is double-digit rates of inflation annually has risen from 17 out of the 54 analysed in late 2015 to 37 in the most recent report.

These rapid rises in rents are occurring at a time when inflation in the general price level for consumers is effectively zero - and has been for years. No matter which way the numbers are cut, therefore, it is clear that problems in the rental sector are getting worse, not better.

A tempting response would be to ban rents from increasing. Indeed, much of the political response to the report's release was framed in such terms. However, while this may seem like it's tackling the problem, it's important to remember that rising rents are the symptom. The underlying problem is actually a lack of homes.

This is most acute in the Greater Dublin Area. Between the 2011 and 2016 censuses, those five counties added an average of 650 new households a month - but in not one of those 60 months did the Greater Dublin Area see 650 new homes built. Ultimately, over the last five years, just about 10pc of the required new homes were built.

Preventing rents from rising does nothing to address this. In fact, it may make the problem worse, not least for those who are already homeless and who thus are now locked out of the market. A far better solution is to reduce construction costs - for all construction, both social and private. By lowering costs, this improves affordability and thus viability.

To assume that the lower costs will simply result in more profits for the developer is to miss the point. Professional developers work off a percentage margin - so lower costs means smaller euro profits per unit, which is compensated by building more units.

More importantly, in a city where effectively no apartments are being built, there is a lose-lose: developers get no profit and renters have no homes. If apartments are built, there is a win-win: renters have somewhere to live, with the side-effect - if you want to view it in those terms - of a developer making a return.

Lastly, at least one third of homes being built should be social housing. Here, there is no profit motive and all cost savings are passed on to the taxpayer.

How bad are construction costs in Ireland currently? In September, one of the keynote sessions at the Dublin Economics Workshop's annual policy conference was on Ireland's housing supply and included a presentation from some of the professionals involved in the building of Cherrywood. They analysed the various construction costs involved in building an apartment in Dublin and in three other cities, including Amsterdam, Calgary and Krakow. Their findings are summarised in the chart accompanying this piece.

It could be argued that Krakow is not a high-income city and thus it is to be expected that the cost of construction there is less than half of what it is in Dublin. But leaving Krakow aside, the comparison with Amsterdam and Calgary is hardly any better. Either excluding or including VAT, the cost per square metre of building apartments is about 40pc higher in Dublin than in Amsterdam or Calgary.

In each of the six cost headings used by construction professionals, Dublin and Ireland are more expensive than the other two economies - and significantly so. For example, structural works are more than 50pc dearer, while facades are one third more expensive.

In round numbers, the all-in cost of construction per square metre, excluding VAT, is €2,000 in Ireland compared to €1,400 in Amsterdam and Calgary. This €600 per square metre saving is effectively the target that Ireland's policymakers and construction sector need to reach - and urgently.

By lowering costs by one third, the break-even rent would fall by the same fraction. This would make it viable to build apartments - and related forms of accommodation, such as purpose-built student accommodation and options for downsizers - in much more of the country. Currently, it is only viable to build apartments in a handful of areas, such as Dublin 2 and Dublin 4. This is simply not good enough.

Ronan Lyons is assistant professor of economics at Trinity College Dublin and author of the Daft.ie reports

Sunday Independent

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