Wednesday 21 August 2019

Brendan Keenan: 'Better laws and foreign money needed to overcome worrying homes shortage'

Dublin continues to face a shortage of housing, as job vacancies in the capital rise
Dublin continues to face a shortage of housing, as job vacancies in the capital rise
Brendan Keenan

Brendan Keenan

There is a district in Belfast known as the Holy Land. Not because of its religiosity, but because the streets - Jerusalem Street, Damascus Street and so on - are called after places in that region. Once, there were others; Little Crimea, India, and so on. Seemingly, houses were built so quickly for the city's huge expansion in the 19th century that it was too much trouble to think up original names. They eventually gave up altogether, so far as names were concerned. The Shankill area got First Street, Second Street etc, all the way up to Tenth.

Many of the terraces soon became slums. But they had served their purpose and in the beginning, were superior to the rural slums their new inhabitants had left. The difficulties of matching supply and demand in housing have a long history.

It appears that housing is more often in short supply than in balance or surplus. Shortage means rationing. Just as now, the pressing political problem has always been deciding who gets what, and how.

The default is rationing by price. That is highly effective and requires no particular action from the authorities, but depriving the poorest of accommodation is rarely acceptable. To make matters worse, financial logic will see paying tenants evicted in favour of those who can pay higher rents. Lots of ways around this conundrum have been tried down the years. One difficulty is that they often favour those who have accommodation over those who require it. That is usually more politically acceptable, even if its fairness, not to mention efficiency, can be questioned.

Although the arguments are much the same everywhere, there has been limited hard information on housing policies. Now, a remarkable piece of data collection from the German think-tank DIW sets out to provide some statistical meat for analysts and policymakers to chew over.

It covers 64 countries and dates back more than 100 years. The clever thing is that the information is used to create indices of the degree of rental market regulation in the different countries over that period, covering rent control, protection from eviction, and housing rationing.

The detail of creating such an index is best left to experts but we can all understand the resulting system, where the figure zero means no regulation and one represents comprehensive regulations. The higher the index, the more limited the landlord's powers, which typically means stronger tenant protection.

In Europe, things were complicated by the two world wars, when governments more or less took over the accommodation market. These controls were largely abolished after 1918, but often only modified after 1945. Controls were gradually eased until the 1990s but faster deregulation then saw the overall European index fall from 0.6 to 0.3. The pattern was different in North America, where most wartime regulation was abolished in the 1950s, but the overall index has remained at around 0.3 since. Rent control is the most widely discussed and controversial intervention. Before inflation became a problem in the 1970s, the actual level of rent was often set by government.

Since then, it has been more usual to try to control the growth in rent over particular periods.

Many such policies begin as intended temporary measures until supply catches up, but become permanent. There is clear evidence that at some point, such regulation damages the market and reduces the supply of acceptable accommodation, rather than increasing, or even preserving, it. The doubt is over where that point actually lies. No developed countries now fix the actual level of rent. The Swedes became sufficiently alarmed by the impact of their widespread controls, which ranked as one on the index, that nine years ago they abolished them all the way down to 0.5. The Danes have gone from 0.66 to 0.44 in the past five years.

'But what about Ireland?' I hear you cry. Few surprises here. It had zero regulation in the days of the tenant landlord, but a measure of rent control in the 1980s got us to 0.25. Increased tenant protection and the new limits on rent increases brought the country's index to 0.5. This is more restrictive than the British system but easier than the rules in most EU countries. The difference is that Ireland has increased tenant protection in response to the shortage, at a time when most EU countries are reducing theirs.

Much of the argument is based on atypical, highly restrictive regimes in some US cities in the past. But as the research found, there is a very wide range of possible interventions. The Swedish experience is further evidence that harm can be done, but that does not prove that no good can come from intervention. There is plenty of evidence that it can.

A study by the Investment Property Forum found that tenant protection is associated with markets which attract institutional investment into rental property. It suggested this might be because regulated rent levels and security of tenure attract a broader range of households inclined to rent for longer periods of time.

The city of Berlin is attracting a lot of attention by trying to test the limits of what can be achieved. It already has a comprehensive system of regulation but now intends to ban all rent increases for five years - the kind of control which would rank close to one in the DIW index and has tended to make things worse in other places in the past. The impetus is one familiar to Dublin: an acute shortage of property in an expanding city driving up rents. Other than that though, Berlin is very different from Dublin.

It is one of those mature markets where many people live in apartments and the landlords tend to be big commercial companies, rather than the small-scale owners typical of Dublin (or Ireland and Britain generally, where almost all landlords come into this category). It looks like that is changing rapidly here. Recent reports from Davy Research and AIB highlight the arrival of significant foreign capital to build accommodation for rent. According to Davy, over €1bn came in last year, compared with just €200m in 2017.

Finance on an even greater scale will be needed if the acute housing shortage is to be reduced, never mind eliminated.

Davy estimates that housing demand is at least 35,000 units per annum, compared with completions of 18,100 in 2018.

Completions of 6,924 in Dublin represent a fifth of the 35,000 jobs created in the capital, which probably needs close to 10,000 new units per annum.

Developing a construction industry which can turn the money into concrete will be more challenging than finding the money itself, even if one is uneasy about the scale of Irish assets being acquired or created by overseas capital since the crash.

There is a shortage of building capacity across Europe, and Ireland does not have a tradition of creating the large multi-unit, medium to high-density developments which are seen as the future.

The reduction in building standards was probably necessary, but the danger of creating new slums is clear, without even the Belfast consolation that they were better than what went before.

Nor can they be thrown up at the same speed and low cost as was the case back then.

Regulations have eased but one Dublin development has been stalled because the position of resident bats was not properly dealt with in the documentation.

AIB economist Pat O'Sullivan went to the heart of the matter when he said the costs of developing higher-density apartments are so great that they are commercially viable only in parts of Dublin where there are institutional purchasers either buying to rent or for their own needs.

The unrelenting focus on security of tenure and homelessness deals only with rationing, while the supply stutters.

Last week, Goodbody Stockbrokers interpreted the apparently good news of house prices stabilising as evidence that unsold stock is rising and builders may be cutting back on their plans.

There is broad agreement that the Central Bank rules have prevented a house price bubble and kept individuals out of dangerous debt, but they cannot negate the imbalance between housing demand and supply, with a growing population on one side and untenable costs on the other.

It is the Irish costs mystery again. It has long been an expensive place to live, but if it becomes too expensive to live in at all, no amount of protective rationing will save it.

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