Monday 19 February 2018

From lack of housing to soaring rents - how to fix the housing crisis revealed

We have two big housing problems: too few houses and soaring rents. Kicking off the Irish Independent's series on ­solutions to the housing crisis, Dan O'Brien makes the case for the State to take a carrot-and-stick ­approach to builders, but says more ­social housing won't solve the problem

Dublin’s Docklands: commercial construction has taken off with gusto in the area with cranes in abundance. Photo: Arthur Carron
Dublin’s Docklands: commercial construction has taken off with gusto in the area with cranes in abundance. Photo: Arthur Carron
Dan O'Brien
Dan O'Brien

Dan O'Brien

The construction sector is booming and demand for new property is being met. That statement refers to the commercial property sector. It does not apply to the housing side of the industry, which is malfunctioning badly. That, in turn, is creating difficulties and distress for a growing share of the population.

It is for this very reason that this newspaper is beginning a series on the national housing shortage and related issues.

Let's start with the obvious: too few houses are being built. Everyone, on every side of the debate is agreed on that. But there the consensus ends.

To get to the nub of why the supply of new homes, though rising, is far below the numbers needed, it is instructive to compare the two parts of the building/development business - residential and commercial (although there is a difference between construction companies and developers, for simplicity's sake I refer to them both here as builders).

Consider first the well-functioning side of the sector. When the economy began to recover, prices of commercial property - offices, hotels and the like - began to rise. That made it more profitable to build, and so building happened. Today, construction companies are meeting demand for non-residential buildings, and the supply of new property they are putting on the market has cooled price increases. Both prices and rents for all kinds of commercial property remain below peak levels of a decade ago, according to figures compiled by property company Jones Lang LaSalle.

House prices relatively low

Dublin’s Docklands: commercial construction has taken off with gusto in the area with cranes in abundance. Photo: Arthur Carron
Dublin’s Docklands: commercial construction has taken off with gusto in the area with cranes in abundance. Photo: Arthur Carron

The big question now is why the same is not happening in the residential property market. Before trying to answer that question and discussing what can be done to increase the supply of new homes, let's narrow the focus to where the problem is most acute.

There is a lot of talk about rising house prices.

Though an issue, it is important to say that they are still far below peak everywhere and they are well below peak in terms of average incomes. A recent study by Davy stockbrokers showed that even Dublin house prices, relative to incomes, are much lower than in many parts of the UK.

This is important because it shows there is not a bubble in prices (rising prices now are being caused by a lack of supply, not the sort of crazy bank lending that causes bubbles). Fears that the crash of a decade ago is about to be repeated are wrong and should be discounted, not least because they complicate discussion of an already complicated housing market picture and serve as a distraction from the central issue of boosting supply.

While there are serious issues around getting on the property ladder as a buyer, the problems are much worse for renters (there is, admittedly, some connection between the two in so far as people who want to buy, but don't have the wherewithal to do so, are adding to demand for rented accommodation).

Rents above Tiger-era peaks

In contrast to prices, rents are well above Tiger-era peaks in a growing number of places and rising faster. This is the main cause of worry and hardship for renters, would-be renters and the homeless.

So, let's pause for breath and recap: too few homes are being built and the biggest problem by far is in the rental sector.

If that much is clear, why is an industry that could build too many homes a decade ago now be building too few?

As is often the case in big social, economic and political conversations, the debate has broken on largely ideological and interest group lines. One side blames too much interference by the State, claiming that if the Government got off builders' backs they would deliver much needed new homes; the other side blames too little state intervention and says that the market has consistently failed to get the provision of housing right.

Voices blaming the Government come mostly from the building industry and associated interests. They say that up to 45pc of the final price of homes goes to the Government in taxes and charges. That, given the other costs of building - including land, labour, materials and interest on borrowings - means that they can't turn a profit. They are, they say, better off building commercial property, if they build at all.

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The red-tape factor

Another charge the industry makes is that the State further hinders homebuilding by heaping regulations on builders. These come in two forms. The first, which add directly to costs, are obligations such as the inclusion of underground car parking spaces for all new-build apartments. The second is red tape, which delays getting construction projects up and running. Just this week, the Royal Institute of the Architects of Ireland published a lengthy list of complaints in this regard.

At the other end of the spectrum, many commentators and analysts see builders as the villains of the piece. They are hoarding land and refusing to build, this line of reasoning goes, because they are orchestrating ever-higher prices so that they make higher profits in the future. The disaster of the property crash shows that the housing market never works in Ireland and that the State must roll up its sleeves and start building.

Both sides have good and bad points. Of the latter, red tape and conspiracy theories are the most obvious. While planning delays are an issue, a 2011 study by the OECD shows that Ireland was average among peer countries when it comes to the time it takes to get planning permission. Staff shortages in planning offices have stretched that time lag in recent years, but if planning were such a problem, the commercial side of the businesses would not be booming as it is.

As for the notion that greedy builders are conspiring to hike prices even further, it just doesn't stack. Getting a group of people as large, disparate and avaricious as homebuilders to agree to anything would be hard enough. Getting them to stick to a secret deal in which they postpone making money would be harder than herding cats. It should be added that the usual suspects will always blame business folk for society's ills - builders were too greedy when they oversupplied homes in the past and they are too greedy now because they are not supplying enough.

The State's role

But that is not to say there is not a role for the State to use a stick to get builders to build. The tax system, if well designed, can make markets work more efficiently. Taxing land based on its value does exactly that, by, for instance, disincentivising the use of hugely valuable sites in the middle of cities for parking buses.

The Government that came to power in 2011 in the midst of crisis and with a thumping majority had a golden opportunity to put such a system in place. It didn't take it. It meekly announced that a vacant-site tax would be imposed, but not until 2019, and the proposal is riddled with loopholes.

Hitting owners of zoned land harder and sooner, as is being mooted for Budget 2018, would work as a stick to move owners to build on their land, or else sell to someone who will. It would also show that the Government isn't in thrall to the construction sector once again.

That will be important politically if the Government decides to offer carrots to the industry - while the anti-capitalist brigade will shriek at any incentive for any sector, plenty of saner people are rightly suspicious of tax breaks for builders given their inglorious history.

That is why a temporary reduction in VAT on new build sales, as proposed by Fianna Fáil, was not met with much enthusiasm. But it is an idea that should not be ruled out.

There are almost 50,000 registered construction businesses in Ireland. If they were building one house each, there would not be a housing shortage. They are clearly not doing so.

Low or no profits because of high costs is a part of the problem, although exactly to what extent is hotly contested.

The case for a VAT break

Officials in the Department of Housing are currently slaving on a detailed study looking at the matter. If it is found that all-in construction costs make building unprofitable even at today's rebounding prices, then there will be a strong case to cut the Government's take, either via reducing development levies or the sort of VAT break that was given to the hospitality sector (and switching that tax break from hospitality, which is booming and should no longer have it, to the building industry would cover the cost).

Read more:

It should be added, and in spite of what Fianna Fáil has claimed, such a VAT break would not bring down the price of homes, but it would help to make building worthwhile for many operators who are now at the margin, thus help to address the supply problem.

While the issue of building costs is the central issue, there are many other aspects to the housing debate. Not all of them can be discussed in one article. Let me touch on two to conclude: the banks and social housing.

A big reason for the lack of building is too little and too costly bank lending to small and medium-sized builders. This is the price being paid for a far too timid approach by the Government in the past to forcing the banks to clean up their act. Irish banks still have one of the highest-in-Europe levels of bad loans on their books. Lots of bad loans always means fewer new loans. That won't change overnight and it will continue to inhibit housebuilding.

As regards social housing, there are many aspects to public provision of homes, many of which are neither analysed nor discussed in the debate. Suffice it to say here, that social housing, even if ramped up radically, would address only a small part of the undersupply problem.

When asked by a voter about rising rents and prices last Monday, this is what one politician said: "A shortage of housing and exploding prices have led to the fact that well-to-do people can't even afford rent and those on smaller incomes have no chance at all… we have to invest in housing construction and we need more subsidised housing, so that affordable housing is created."

The politician in question was Germany's Martin Schulz who was speaking on his country's undersupply of homes. The point of citing him here is to show that housing, like health, is hard to get right and is a contentious matter in most countries, as anyone who listens in to political debate in our nearest neighbour knows.

Cold comfort though it may be, but Ireland is not alone in having serious housing problems. No comfort at all is that, given the scale of Ireland's problems and the time lags involved in building homes, it will remain a problem for years to come.

@danobrien20

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