Wednesday 26 June 2019

Brendan Keenan: 'How the 'squeezed middle' gains from the value of home ownership'

Construction work on the Ó Cualann Co-op’s affordable housing scheme in Ballymun which managed to cut prices by building on State land at a fraction of the usual cost. Photo: PA
Construction work on the Ó Cualann Co-op’s affordable housing scheme in Ballymun which managed to cut prices by building on State land at a fraction of the usual cost. Photo: PA
Brendan Keenan

Brendan Keenan

On the Ballyogan road, in the foothills of the Dublin mountains, there is a fine illustration of the past and future of housing. On one side are the houses built a couple of decades ago - the typical semi-detached, vaguely mock Tudor job, with garden front and rear.

On the other side, a very different type of house is under construction. They come in blocks, rather than individual units, and are interspersed with apartments. I have no doubt they will sell very well, with Luas stops almost at the front door. And they are the future in a city and country which needs a huge expansion of its housing stock at less cost than in the past.

The latest Central Bank estimate is that 23,000 residential units will be completed this year, rising to 27,000 in 2020. Very, very slowly, supply is catching up with demand. Beyond that, it must catch up with the backlog of unfulfilled demand.

These issues were the subject of a conference last week organised by the Raise the Roof pressure group, which is associated with the trade union movement. The big story was the claim that half of all residential-zoned land in Dublin is controlled by the State, either through being owned by a local authority or Nama.

Architect Mel Reynolds said this would be enough to provide 71,000 new homes. The use to which Nama land can be put is a tricky business, and I wish them well extracting assets from other State bodies.

Only Charlie Haughey could frighten State bodies and department sufficiently to part them from their family silver, however unused, and his motives were not always the purest. In any event, we are unlikely to get 70,000 houses worth.

Besides, as the developer Michael O'Flynn said on RTÉ's 'The Business', the first thing is where the houses are needed, not where land is available.

Mr Reynolds rightly concentrated on affordability, arguing that low- and middle-income earners are priced out of owner-occupation. The maximum affordable price from them was put at €245,000, but the average paid by a first-time buyer in Dublin was €370,000.

A key insight into the problem came when he said the Ó Cualann Co-operative Building Association was able build three-bedroom houses in Ballymun for €219,000 by being able to use State land.

There may of course be a hidden subsidy from other citizens in making the land available at below its full value. The extent of any such subsidy should be made clear.

More alarmingly, the Ballymun figure is only 10pc below the affordable limit, showing the near impossibility of matching supply and demand given current costs. An added complication is that, when it comes to social housing, history suggests local authorities would not be able to provide three-bed units at €220,000.

It is also the case that everything being offered at more than €300,000 is snapped up. As more houses are built, we may run out of such customers in the next few years. If nothing else changes, much of the estimated 30,000-a-year demand will have to be met by rental accommodation. That may have some strange consequences, on things like inequality, and even pensions.

One would hazard a guess that, all other things being equal, the houses on the south side of the Ballyogan Road will be more expensive than those on the north side. But a new paper suggest that any home ownership brings advantages. In many cases, the Bank of Mom and Pop know's what it's doing.

A new piece of research tries to capture the financial benefits of owning your own home. According to the analysts, from the universities of Maynooth and Galway and the Luxembourg economics institute LISER, the impact is considerable, both for the individual and for the economy as a whole.

The key benefit is 'imputed rent' - the amount the owner would have to pay if they were renting the property. That is a considerable amount on almost any dwelling nowadays. The research, supported by the John and Pat Hume doctoral scholarships at Maynooth, cleverly combines two sets of data to get estimates for different areas, not just nationally, for the first time.

Among other criteria, they are also able to break things down by age group. This tells its own story. While the 36-50 age group has the highest annual income, with a median figure of €21,200, their limited home ownership leaves imputed rent of just €1,400. By contrast, the 51-65 group had median wages of €16,200 but benefited from imputed rent of €5,000.

Putting all the figures together gives the older group an advantage of €5,000 a year. This incorporates another statistical wheeze where the research calculates what the owner could get by borrowing against the value of the house to provide an annual income.

These 'reverse mortgage annuities', or RMAs, are available on the market but for some reason are not very common in Ireland.

People seem to prefer to leave their assets to their descendants rather than enjoy their wealth now. Irish financial institutions seem to encourage them in this view but the researchers regard these RMAs as a good way of calculating true income, whether spent or not.

In real life one would expect the over-65s to use this kind of scheme. If they did, the benefits of their 98pc home ownership would become remarkably clear. Although they had cash income of just €16,300 in 2011, the last year for which data is available, when their housing wealth is included they become the best-off group, at €38,000.

There are no real surprises when it comes to different regions but the differences are even greater than might be imagined. When the value of houses is taken into account, almost all the top fifth in terms of adjusted income live in the greater Dublin area.

The paper breaks this down into clusters comparing incomes and rental costs. Outside the greater Dublin area, only Cork city showed a cluster of high incomes combined with high property values. Galway, Limerick and Waterford cities did not contain any such clusters (and of course there are also pockets of low incomes/low value clusters in Cork and Dublin).

On the wider scale, the data shows a corridor of low incomes running through the Midlands from the south-east to the north-west. This is hardly surprising, given what happened to property values there but things have been changing.

According to the Central Bank, the Mid-West showed the fastest price increases in the year to October, with a gain of 21.5pc. The lowest increase was in South Dublin, with a 5pc rise. It is also the case that the price of low-value properties is increasing much more quickly than high value.

Prices for the bottom half of properties were up 10.5pc and the cost of the top fifth of houses actually fell by 1.6pc. This will have reduced the 2011 inequality caused by home ownership which the paper calculates.

It is one area where the 'squeezed middle' gets out of its corset. They show the biggest gain when property is taken into account; mostly at the expense of the bottom tenth of the population, whose income share fell from 3.1pc to 1.4pc once housing wealth is included.

When it comes to straightforward money incomes, such differences are smoothed out by high taxes on the middle groups. But the idea that similar taxes should be levied on the value of home ownership evokes paroxysms of horror.

Under duress from creditors, the local property tax was introduced, but is badly stalled. The researchers note that it is on market value and falls on tenants as well, whose rent is anything but imputed. The net effect is to increase inequality, beyond that as measured by incomes alone.

On current trends they will also reach retirement without the same levels of home ownership as their parents and grandparents and will continue to be disadvantaged.

Today's elderly home-owners are the group which gains most from ownership but, as with the property tax, may be short of income when it comes to paying tax.

Measures to encourage reverse mortgage annuities would allow them to pay a tax based on imputed rent, as well as having more cash to live on, and the money could be used to reduce inequality, present and future.

Not this side of an election, though.

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