Tuesday 25 October 2016

Addressing our housing sector's complex, long-standing failures

Despite what you hear about vacant units or reform of mortgage rules, there are no easy answers

Published 12/06/2016 | 02:30

Review: Central Bank deputy governor Sharon Donnery and governor Philip Lane. A consultation on mortgage lending is due shortly Photo: Sam Boal
Review: Central Bank deputy governor Sharon Donnery and governor Philip Lane. A consultation on mortgage lending is due shortly Photo: Sam Boal

The 200-page draft report of the Oireachtas Committee on Housing and Homelessness is due to be finalised over the coming weeks, and its recommendations will be influential. The dysfunction in the system of housing supply and in the market for housing finance was at the heart of the banking collapse, and the sector's failings are complex and of long standing.

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The draft touches on three important aspects that have been in the news in recent months. These are: the extent of vacant housing stock nationally, which the Housing Agency has highlighted in a recent report; the re-introduction of tenant purchase schemes by local authorities around the country; and the Central Bank's mortgage lending rules, currently the subject of consultation and review.

The chairman of the Housing Agency, Conor Skehan, has noted the large stock of vacant dwellings, even in Dublin, despite the upward pressure on rents. He has argued that better utilisation of the existing housing stock is, at least in part, an alternative to new construction. The report from the agency shows that vacancy rates are about 8pc in Dublin and the East region, but reach double that level in most rural counties and more than 20pc in the north Midlands.

The figures are from the 2011 Census, and exclude holiday homes. In a real-world housing market, some level of vacancy is inevitable, but the Irish numbers, even for Dublin, look very high. The report notes that Ireland's 230,000 empty homes (almost 12pc of the national total) compares with 600,000 in all of England, based on tax returns to local authorities, which equates to just 2.6pc of England's dwelling stock.

But the comparable 2011 census figure for England is 4.3pc, so the like-for-like comparison is not quite so stark. A higher 2011 vacancy rate in Ireland is not a surprise: England did not over-build as dramatically as Ireland and there was no proliferation of ghost estates in remote areas. Of course, England did not abolish residential property taxes for 40 years either, so there has always been a cost to owners of vacant housing.

Only about a fifth of vacant units in England, as measured in the census, are estimated by local authorities to have been unoccupied for six months or more. They reckon the six-months-unoccupied figure is 200,000, versus the 980,000 vacant on census night back in 2011. Length of vacancy is important: homes for sale or rent can easily be unoccupied for six months or even more despite being actively on the market.

Moreover, some of the 230,000 Irish units unoccupied on Census night in 2011 may no longer be vacant given the negligible pace of new construction and the recovery in demand. The 2016 census results will become available later this year, and may well show a decline in vacancies.

The Housing Agency has proposed a closer study of the status of vacant units, and the new Census data will facilitate this. I am not sure it will fully confirm Conor Skehan's optimism on the potential to mobilise vacant units in the excess demand areas, especially Dublin.

Local authorities have been free, since January, to devise new tenant purchase schemes for those renting from the stock of 129,000 local authority units. The previous scheme was suspended in 2012 in response to the emerging shortage of social housing. The new scheme will entitle eligible tenants to discounts of 40pc to 60pc on the price of their homes, and the local authorities may also extend a mortgage for the balance.

Irish local authorities have built 173,000 units since 1970, but there are 44,000 fewer in today's inadequate stock, which moreover contains some pre-1970 units. There is a very large hole in the bucket of social housing stock.

The suspension of the tenant purchase scheme in 2012 was a rational response to lengthening waiting lists, a problem that has worsened in the interim.

Coinciding with the commitment to build more council housing, the Government has decided, somewhat bizarrely, to resume giving units away at half-price, an even more generous discount than the 30pc maximum under the scheme discontinued in 2012. In Dublin city alone, as many as 11,000 units will be available, and eligible tenants would be foolish to decline the State's invitation to join in this bargain privatisation plan, particularly with vendor finance thrown in.

The unfortunate timing has been criticised by voluntary housing bodies, to whose 30,000 units nationally an extension of the plan has been threatened. Simon Brooke, head of policy at the housing body Cluid, has described the scheme as "selling off the family silver at a knock-down price". The Oireachtas committee should consider the case for deferring tenant purchase schemes until a better demand/supply balance has been attained in the social housing sector.

The Central Bank's deputy governor Sharon Donnery announced last week that public consultation will commence shortly on the review of mortgage lending rules. The Bank has imposed prudential limits on loan-to-value and loan-to-income ratios designed to protect banks from risky lending and borrowers from assuming too much housing debt.

Research conducted at the Bank has confirmed the common-sense expectation that Ireland's banking bust would have been less severe had such rules been in place early in the bubble. Both taxpayers and delinquent mortgage borrowers have every reason to regret that Ms Donnery's predecessors took too lenient an approach. Indeed, it is rather remarkable that Ireland's surviving banks appear to require adult supervision so soon after every single one of them went under due to undisciplined property lending.

The intense lobbying for a relaxation of the mortgage rules comes in part from housebuilders and owners of zoned land, who of course have nothing to lose, but it is a surprise that lenders should be joining in.

The phrase 'loan-to-value ratio' is in any event a misnomer. Banks lend a portion of the price paid, not the 'value', and must have learnt that long-term value might turn out to be a lot less than what over-financed buyers are unwise enough to pay. In Dublin prices are already well ahead of construction costs. Borrowers are again facing a risk of negative equity, particularly if policies are pursued to zone and service additional land for housing on the rolling prairies of un-zoned land that surround the city.

Every politician in the country appears to believe policy should seek to make housing more affordable. In Dublin and some other urban areas this is equivalent to seeking a reduction in prices from today's levels, never mind the levels they might have reached had the Central Bank been remiss in its duty.

It has been reported that about half of those with existing council mortgages are in arrears, a failure in lending policy that is hardly a surprise. On its website, Dublin City Council outlines one scheme where two prior refusals from mainstream lenders are needed in order to qualify, a designer sub-prime lending debacle. Any bank operating such a rule would expect sanction from the regulator and there seems to be a sizeable off-balance-sheet black hole in the making. Who supervises the lending practices of the local authorities?

Sunday Independent

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