Business Property & Mortgages

Monday 22 September 2014

Ireland's housing system is in need of urgent repair

Rory O'Donnell

Published 24/07/2014 | 00:00

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Stephen Byrne's illustration
Rory O'Donnell

THE crisis which began in 2008 should not be seen as an economic, fiscal or banking crisis which broke our housing system. The time has come to really think about our housing system and what we get from it.

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Before, during and after the boom Ireland did not have a cost-effective system of housing which provided homes for people in a fair and equitable manner. This despite current expenditure on housing supports of over €1bn per year, plus significant tax expenditures in the region of another €1bn.

Our system of housing remains open to the vagaries of housing and financial markets, with significant risks for individuals and the State.

Immediate actions are necessary to address the acute housing pressures now in evidence. However, given our experience of the past two decades, it is of great importance that we adopt short-term measures that move the housing system in a desirable and sustainable long-term direction. To use an analogy from housing: we need to renovate, not just repair.

The renovation needs to be comprehensive. It must include social housing, owner occupation and the private rented sector. In each there is a need to increase supply, to finance this in a sustainable way and to ensure that the cost of the resulting homes is affordable.

The National Economic and Social Council (NESC) is working on these three issues -supply, finance and cost- to identify how each can be adapted and made more mutually supportive. This work is intended to assist the 
preparation by government of a strategy to support housing construction 
and a comprehensive policy for social housing.

As part of our work on social housing, a report, Social Housing at the Crossroads, published recently by the council, identifies the key issues and challenges facing local authorities, housing associations and the private rental sector. Serious problems are evident in all three.

In the case of local authorities, there is almost total lack of new supply because of borrowing constraints and the fact that building costs are not covered by differential rent.

Although housing associations are seen in current policy as the main channel of future social housing provision, there has been limited uptake of the mechanisms introduced to promote this and, in any case, this approach, as currently configured, exposes the 
State to rising rents in the private rental sector.

The increasing use of the private rental sector is also problematic, as seen by rapidly rising rents, the pricing out of low-income tenants, the risks of overcrowding and homelessness, State exposure to rising private rents and the limited availability of secure, affordable, long-term tenancies.

In response, Irish policy must now devise effective new approaches on three fronts. Financial mechanisms to fund the quantity and quality of housing are needed; rents must be linked to costs so as to gradually shape the overall rental sector; and direct public-policy influence must be applied to housing supply and urban development.

New institutional arrangements will be required to move policy on each front. The creation of a 'financial aggregator' or special purpose vehicle to facilitate borrowing off the government balance sheet for onward lending to housing providers, will help address the issue of finance.

However, such a vehicle will require an engine capable of planning, driving, delivering, allocating, protecting and maintaining the supply of affordable rental homes.

A key question that remains to be addressed is what body or bodies will provide the engine, performing these roles itself or co-ordinating their execution by otherS.

This question is critical because there are enduring doubts about whether several of the key housing functions can be adequately performed by the existing institutions. Despite the important role of Ireland's housing associations - a role which we expect will increase - there are reasons to doubt their ability to undertake the necessary scale of borrowing and development.

Nor is it clear what bodies have the responsibility and capability to analyse and plan the provision of housing in line with the changing needs of the society and the economy. Experience shows that existing rental, management and allocation policies make it extremely difficult to fund the upkeep of social housing and preserve the social housing stock.

It is not certain that the various construction sector playerS - contractors, builders and developers - will be in a position to provide housing and urban neighbourhoods at the scale, quality and cost that is required; or that the Irish banking system will be in a position to fund either public or private housing in a satisfactory way.

While there is, on paper, a strong logic for large international institutional investors in search of stable long-term returns to invest in rental housing 
provision, it remains to be seen 
whether this materialises.

To these doubts must be added uncertainty about whether any existing body will be capable of achieving integrated housing, mixing different income groups, on a reasonable scale.

Consequently, further institutional and organisational changes are required. We need to create institutions capable of achieving a resumption of provision by the local authorities or an equivalent body, such as a national housing trust. At the very least, this requires a combination of the capabilities developed in NAMA, the Housing Agency, local authorities and other bodies - as is emerging in current policy initiatives.

It is in this sense that NESC is arguing for renovation not just repair. The conditions that made the elements of our traditional approach effective and sustainable -fully funded local-authority provision, differential rent in a secure local-authority tenancy and tenant purchase-have largely disappeared.

For several decades, there has been insufficient investment in new social housing provision. As a result, policy relies on a strong queuing system and an unsatisfactory, greatly-increased reliance on the private rental sector.

In the present financial climate, there is a danger of an unstable policy compromise involving a wish to retain differential rent and tenant purchase, combined with budgetary pressure to limit spending on rent supplement and leasing. We need to find the institutional means of enabling a more constructive compromise between economic reality and social solidarity.

Rory O'Donnell is director of the National Economic and Social Council.

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