Shiver of fear that could save the property sector
The housing crisis will not be resolved by simply easing the availability of finance, writes Colm McCarthy
Published 14/02/2016 | 02:30
How about this for a policy achievement: over-provide finance for houses, over-produce houses, bring down the banks and the country to its knees and end up with, would you believe, a shortage of houses.
Fortunately, there is no housing crisis in large parts of the country. Five minutes on any of the property websites will confirm that perfectly acceptable homes are for sale at prices below the cost of construction, or to rent at affordable cost, in most places outside the Dublin region and a few provincial cities. But the burden of mortgage arrears on households around the country and the shortage of affordable housing in urban areas, especially in Dublin, are genuine crises and have a common source. Ireland has burdened itself with a housing policy and a system of housing finance whose failures were at the heart of the financial collapse and which cry out for reform.
The proposals on housing supply and housing finance which have emerged from the political parties during the election campaign propose no fundamental changes to either system. Some are voter-friendly palliatives that will make little difference. Some, ominously, are repetitions of boom-time errors guaranteed to make things worse.
It should now be clear that the bubble saw too much money lent for house purchase, stretching the capacity to repay of even those who held on to their jobs. The house price bubble which wrought so much destruction was fuelled by an excess availability of housing finance. There was an enormous increase in housing output, with more than 90,000 a year built at the height of the lending (and borrowing) frenzy. But the evidence is on the websites that many of the houses were built where builders could get planning permission, not where there was economic or social need.
Homes of modern construction are for sale in some counties for prices below €100,000; and €150,000 will buy a modern three-bedroomed semi-detached house almost anywhere in rural Ireland. Not surprisingly, there is no construction in these areas. But in the outer Dublin suburbs it is difficult to find anything comparable below €300,000. Where houses are for sale at no more than the cost of construction, and moreover at only three to four times average income, there is no housing crisis. This is not a national problem, it is largely a Dublin problem.
In our low-density capital city, surrounded by rolling prairies of agricultural land, the crisis will not be resolved by easing the availability of housing finance. Ireland tried that and the builders leap-frogged the rolling prairies, where zoned and serviced land was not available, for the welcoming local authorities 50 and 100 kilometres from the city. That some of these half-completed houses are now being demolished while a serious housing crisis simmers in the city is evidence of a remarkable policy failure. It is fair to blame the banks, their regulators and the developers and, indeed, the imprudence of borrowers. It is a mistake to absolve a dysfunctional housing policy and the politicians, local and national, along with the planners, who devised and implemented it.
In a thinly populated country, the price of a new home should equal the cost of construction plus the value of the land in its best alternative use. Outside the sought-after inner suburbs of Dublin and a few provincial cities, the alternative use is agriculture, and agricultural land is worth around €10,000 per acre. The site 'cost' regularly quoted for the outer Dublin suburbs equates to half-a-million, in cases a million euro, per acre. This is not a consequence of scarcity, it is a consequence of policy. There is no shortage of land, there is a shortage of zoned and serviced land. There is no point complaining about developers around Dublin, currently in possession of the few sites suited for early construction, if they hang on for the right price. Nor is there much point to an undeveloped site tax. The answer is to create a shiver of fear that the sites to the north, south, east and west, currently zoned for agriculture or "amenity", will shortly be zoned for residential use.
The apparent scarcity in the outer Dublin suburbs is a predictable consequence of policy, a supply problem that only a policy change can address. On one issue the political parties appear to be agreed: local authorities need to build more public housing to augment the 125,000 units currently available at subsidised rents to those who qualify. There are also proposals to help voluntary associations that provide a further 25,000 units. Demand for low-rent social housing far exceeds what is available and there are long waiting lists. But the parties are unanimous in ignoring a weakness in Ireland's policy on publicly-subsidised housing. Local authority tenants have been sold 26,000 units in the past 20 years at substantial discounts. These homes are permanently removed from the available social housing stock.
The policy of sell-off at large discounts was temporarily phased down some years back, but the outgoing government is committed to its restoration, as are all of the opposition parties. There is a hole in the bucket of available public housing and politicians are hell-bent on making it bigger, even on forcing the voluntary housing associations to join the sell-off. In the UK, a cross-party committee of MPs recently revealed that more than 40pc of sold-off council houses around Britain are being offered for private rental, and there has been widespread fraudulent abuse of the system.
One of the biggest housing associations has expressed publicly its opposition to the sell-off policy. Writing in the Irish Times last year, the head of policy at Cluid, Simon Brooke, informed readers that: "I have spoken to many politicians about this, and most admit privately that tenant purchase at a discount is a disastrous policy - yet only a tiny number are prepared to say publicly what they believe. There is nothing wrong with tenants having the right to buy their homes at the full value; and Cluid would support a modified shared-ownership scheme that would enable people on lower incomes to purchase a proportion of their home. But while tenant purchase at a discount is very good news for a very small minority, it is very bad news for other tenants, the taxpayer and the State."
The public housing sell-off is not the only mistake that political parties are keen to repeat. There are promises to bring back the boom-time first-time buyer's grant and to reintroduce mortgage interest relief. These measures would increase demand without expanding supply and would result in higher house prices and an intensified affordability problem. Rent control, another popular elixir, would benefit existing tenants, diminish supply and freeze out future renters.
The Central Bank wisely introduced a cap on loan-to-value ratios for mortgages early last year. As a result, would-be buyers must actually put up some money, less than the price of a car in many parts of the country. Calls from politicians to relax this policy are reckless and irresponsible. There is no solution to excessive house prices in the outer suburbs of Dublin which does not address the restrictions on supply.