Tuesday 27 September 2016

It's basic maths - the cost for builders to construct apartments just doesn't add up

Fundamental changes are needed if we're to solve the rental shortage in the housing market, writes Ronan Lyons

Ronan Lyons

Published 22/11/2015 | 02:30

Excluding the cost of the actual land, it would take a monthly rent of €1,400 to justify the construction of a two-bedroom apartment. Outside Dublin's golden triangle, that is unsustainable in most of the country.
Excluding the cost of the actual land, it would take a monthly rent of €1,400 to justify the construction of a two-bedroom apartment. Outside Dublin's golden triangle, that is unsustainable in most of the country.

The country is crying out for houses and apartments for rent, so why aren't builders buying land and tapping in to this market?

  • Go To

The answer is simple. Excluding the cost of the actual land, it would take a monthly rent of €1,400 to justify the construction of a two-bedroom apartment. Outside Dublin's golden triangle, that is unsustainable in most of the country.

This is perhaps not what many politicians want to hear ahead of the election, but the latest figures from the rental market show the indisputable pull of our urban centres as recession turns to recovery. The detailed figures in the accompanying table, on what has happened rents over the last four years, reveal a stark divide between urban and rural locations.

The monthly rent for a two-bedroom home in central Dublin has increased by nearly 50pc in that period, with slightly smaller percentage increases seen in larger family homes in the capital. At the other end of the spectrum, the cost of a five-bed family home in Donegal is almost unchanged, while rents in Clare, Tipperary and a number of other rural counties have seen single-digit increases.

Clearly, much of the talk about the rental sector is working within political time frames and what can be done ahead of the next election, in particular. However, this longer time frame shows us something that runs deeper. Rental prices reflect supply and demand but, as no new rental homes have been built in the last few years, this tells us about demand.

Demand for living in the capital has pushed rents up since early 2011, the entire lifetime of this Government.

The figures show us something that most developed countries know well, but is rarely heard in Ireland: our cities drive our economic growth. We know, from urban economics, that cities allow us to enjoy higher standards of living. This happens from enabling a greater variety of services - including public services - but also a bigger labour market. In short, the bigger the city, the more specialised a worker can become, thus giving them higher wages.

Cities also offer a far more basic service, though: better protection from unemployment. The decade to 2006 in Ireland saw an aberration in economic development. Because of loose credit, there were homes and jobs available everywhere. But once that loose credit stopped, it became clear to those in need of a job that urban centres were the places most likely to generate them. For many, they moved to cities abroad, such as London, Sydney and Toronto. For others, it was Dublin, Cork or Galway.

The pull of the city is a healthy part of being a modern economy. It can turn unhealthy, though, if no housing supply is available. And this is the situation now facing Ireland. The graph above shows supply on the rental for each of five regions in the country - where, for each region, 2009 is set as 100. In Dublin - and now throughout the country - there is only one fifth the availability of rental accommodation now, compared with 2009.

This is where the problem lies - and capping rent increases will do nothing to solve the problem for those homeless or thinking of starting a family. Ultimately, to stimulate supply, the Government must think like a supplier. Foreign-owned institutional developers, and our new REITs, work from construction costs up and see if current rents will cover all their costs.

As mentioned, the best figures we have so far suggest that, even excluding land costs, it would take a monthly rent of roughly €1,400 to cover the costs of building a two-bedroom apartment. There are only a handful of areas in the country where rents are that high - and even then, this excludes the cost of land. In order to get the new homes that this country so badly needs, we need to understand why Irish construction costs - at close to €2,000 per square metre - are so much higher than in Northern Ireland and many other countries.

This will be tricky, politically, as one of the areas we will need to review is development plans. There are very tight restrictions on building apartments, regulating things like car parking spaces, orientation, balcony depth, ceiling height and the number of lifts per floor. These may be well-intentioned but discriminate against those on lower incomes by raising the cost of building too high. Planner preferences, however, are completely separate to safety standards, which should not be sacrificed.

Many arguments about why so few new homes are being built focus on Irish developers and Irish banks - one group being bust, the other cautious after being burnt. However, this is too local a view. Plenty of international developers and finance are interested in Irish real estate. We can see this in the huge amount of activity currently in commercial real estate.

Recently, the Central Bank stepped in, capping house prices relative to our incomes, in order to secure the country's financial stability. Nothing similar is being done to cap construction costs relative to our incomes, thus securing affordability. This is where policymakers will need to act.

Ronan Lyons is Assistant Professor of Economics at Trinity College Dublin and author of the Daft.ie Report.

Sunday Independent

Read More

Promoted articles

Don't Miss

Editor's Choice