Friday 28 July 2017

Why we must address sky-high building costs

When the final figures come in, it is likely that 2016 will have seen 15,000 new dwellings completed. Stock photo: PA
When the final figures come in, it is likely that 2016 will have seen 15,000 new dwellings completed. Stock photo: PA

Ronan Lyons

Last year, 6,200 newly built homes were sold in Ireland, an increase of almost 100 on the total for 2015, and twice the number of new home sales seen in 2011, 2012 and 2013. Given the early part of 2015 was a period of significant activity - as borrowers rushed to use their mortgage approvals from before the Central Bank rules - the fact that volumes increased again in 2016 can only be viewed as a good thing.

So far, so good. However, the bulk of what is being built still does not come on to the market. When the final figures come in, it is likely that 2016 will have seen 15,000 new dwellings completed. Thus, out of every 10 dwellings built, only four ever come on the market - the other six are self-builds. Indeed, of the 80,000 new dwellings completed since the start of 2010, just 32,000 have come on the market.

This huge gap is not normal - in most countries, the bulk of new homes built would be for the market, rather than self-build. It reflects a long-standing problem with land usage in Ireland. Those building for themselves often do so on family land, which is free, or else as one-offs on cheap land far away from urban centres. Such building imposes huge costs on the rest of society, with knock-on effects for services, such as healthcare and broadband, which rely on density to be cheap.

Overcoming this problem will require a fundamental rethink about how we use land in Ireland. One aspect of this is about regional development. A narrative has emerged that "Dublin is too big". This misses the point completely that in any economy, and certainly in an economy the size of Ireland, leading cities determine the size of the rest of the economy: in simple terms, if we want our fifth, 15th and 50th biggest cities to be bigger, we need our biggest city to be bigger. This is not something we get to choose - these are the laws of economic geography.

In addition to rethinking the role of our cities, we also need bottom-up measures that encourage far better use of land. As I've written previously in this column, our cities and towns are riddled with "last use" rather than "best use" examples of land usage, with army barracks, industrial estates and bus depots taking up sites that would be far better used for residential or commercial purposes. To encourage public and private organisations to use land better, we need to introduce a land tax - a measure that would also penalise speculation, land hoarding and cynical vacancies.

But that is only part of the problem. A far bigger part of the problem is not that there are 9,000 self-builds but that there are only 6,000 dwellings built for sale. In a country growing as rapidly as Ireland, between 40,000 and 50,000 new homes are needed each year. Allowing 10,000 of those to be self-builds, this means that construction of homes for sale needs to be roughly five times the size it is now.

And that huge gap between what is needed and what is happening is due largely to the high level of construction costs in Ireland. This refers to hard costs, so issues around profit margins, VAT and site costs are contributing to this. Experts say that it costs roughly 50pc more to build a home of 100 square metres in Ireland than in other parts of Europe. This is the nub of the problem.

The second half of 2016 saw two important changes to the housing market. Firstly, first-time buyers of newly built homes were given access in the Budget to their past income tax, of up to €20,000, to lower the deposit needed.

Secondly, the minimum deposit requirement for first-time buyers was lowered even further by the Central Bank. These measures will boost prices and, in so doing, the argument goes, stimulate new supply.

Unfortunately, such measures do not address the underlying problem in the new home segment today. Ireland - with its rapidly declining average household size - desperately needs new homes other than three- and four-bedroom semi-detached houses in estates. It needs student bedrooms near universities, central apartments in high-rise blocks for young professionals, and suburban mid-rise apartments for well-to-do downsizers, as well as many more types of home.

Until the high cost of building in Ireland is addressed, though, we are likely to see only baby steps towards a sector building at least 40,000 dwellings per year.

The Minister for Housing announced an audit of construction costs in Ireland, compared to its peers, last October. The results of that study can't come soon enough.

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

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