Sunday 19 November 2017

Get Ireland building again: can we reform our way out of crisis?

Ireland has plenty of land, but we're not building on it. Environment editor Paul Melia asks if restructuring the way we tax land and property could solve the housing crisis

Bríd McGrath, head of social policy with housing body Respond! Photo: Justin Farrelly
Bríd McGrath, head of social policy with housing body Respond! Photo: Justin Farrelly
Galway builder Peter Walsh. Photo: Andrew Downes
Architect James Pike. Photo: Steve Humphreys

In 1957, aged just 18, Galwegian Peter Walsh travelled with the first-ever Irish team to enter the WorldSkills competition in Madrid for skilled tradesmen.

The carpenter and joiner took first place, and was presented with his winning trophy by General Franco.

Over the following years, he received awards from the President of Italy and the UK's Prince Philip for his work, and in 1970 he established his housebuilding firm, Peter Walsh Construction.

Today, the 78-year-old works a 70-hour week. Despite his pedigree, and demand for homes, business has never been so bad.

"It's the worst it's ever been in Galway," he says. "We specialise in building on a person's own site. Until 2007, we used to build up to 10 houses a year, and then the world came to an end."

His firm builds anything from an extension to a bespoke home. It also offers four extendable house types, each with an A3 energy rating, solar panels and wood pellet stove. He is insured, tax compliant and on the Construction Industry Register.

But despite doing everything right, there's little business to be had.

"We can build a three-bedroom bungalow for €165,000, plus site works, but people don't have the money, it's as simple as that. We could price an extension, but the client can't get the money from the bank. We live in hope."

It seems perverse that in the midst of a housing crisis that a company with a track record like Peter's is struggling.

Scant supply, soaring prices

At least 25,000 new homes are needed every year to meet pent-up demand, and in 2016 just under 15,000 units were connected to the ESB network, the metric used to assess new supply coming on stream. Some 18,000 are forecast by year-end, but given the low rate of delivery over recent years, the real requirement is probably far higher.

Chair of the Housing Agency, Conor Skehan, says that a large part of the problem is the lack of homes coming on to the market.

"One of the things people aren't picking up on is the difference between a shortage of houses and a shortage of houses for sale. Transactions are impeded by negative equity, and that prevents churn, where people downsize and move and free up family homes. There's 20,000 to 30,000 transactions not taking place because of that."

He says the issue of mortgage arrears needs to be dealt with, to help people in difficult situations but also to free up homes.

The lack of supply - whether through new build, utilising existing stock or converting commercial units or older buildings for residential - has resulted in soaring prices.

The Central Statistics Office (CSO) says house prices have risen by 12.3pc in the year to July. National monthly rents now average €1,017, 14pc higher than the peak of the boom. That's an extra €63 per month, more than €750 a year in after-tax income. But there are other issues too, and plenty of good ideas out there to help solve this crisis.

Among the concerns include the Government's take on the cost of a new home through VAT and development levies. Regulations around utilising commercial buildings play a part, as does the cost of finance.

But most agree that at the heart of the crisis is land.

There is no shortage. Some 17,434 hectares of zoned and serviced lands are available across the country, which could enable delivery of more than 410,000 homes.

The hoarding factor

But there is nothing to force landowners to utilise their sites, despite the necessary services including power and water all being in place, and provided at the taxpayer's expense.

State bad bank NAMA has said that developers are hoarding, noting earlier this year it had sold sites capable of delivering 50,000 units. Only 3,000 are being built.

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DIT housing lecturer Dr Lorcan Sirr says our attitude needs to change.

"Land is a finite resource, and the sooner we realise that owning it is a privilege and that holding it should be a liability then the sooner we'll be able to reform our dysfunctional system of housing delivery," he says.

The Government is planning to introduce a vacant site levy from January 2018, although the first bills won't be levied until 12 months later. It will oblige owners to pay an annual 3pc levy based on the market value of the site.

But head of social policy with approved housing body Respond!, Bríd McGrath, says this is unlikely to release new sites.

"You're still quids in with the vacant site levy at 3pc, because land is increasing in value well above 3pc. If it was an accumulator tax - if it was 2pc above rising values - it would make a difference," she says.

Most agree the solution is a complete restructuring of how we tax land and property.

The site tax solution

Chairman of O'Mahony Pike architects, James Pike, says a site-value tax is needed to replace commercial rates and the local property tax (LPT).

This idea was cited both in the Troika deal, and in the 2011 Programme for Government. But instead of introducing a system based on land values, a quick fix was decided upon - the LPT, based on the value of the house.

The Smart Taxes group, of which Pike is a member, says a site-value tax is fairer.

"If you get a block of land in a town or city centre, the land more or less has the same value, but valuing the buildings may be more difficult," he says.

"With taxing the land you incentivise use of vacant sites and you incentivise making maximum use of buildings. Existing residents who benefit from, for example, a Luas line would pay, and not just new developments.

"That would spread the load but you also wouldn't need to charge development levies. Because the local authority would have guaranteed incomes, it could borrow long-term for infrastructure instead of charging upfront.

"It might take five years to get a better system, but it would be worth it."

Engaging the State

Given the market's failure to deliver homes, many argue the State must now step into the breach, utilising its massive landbank.

Karl Deeter, of Irish Mortgage Brokers, suggests that sites be released for social and affordable housing schemes, or private homes, in return for equity. Developers would have little cause for complaint.

"On a vacant site (in Dublin city centre), you could build an eight-storey building with 75pc of the building rented at 20pc below market, and for the rest you have a guaranteed upward-only rent review of 2pc a year," he says.

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"If we do it on a build to sell, or build to rent, we share the profits..

"We need to flood the land market. People want to talk about the law of the jungle, but you can't be a lion, and when a rhino comes along you complain."

Affordability is by far the biggest issue. Under Central Bank lending rules, to buy a home costing €350,000 - considered 'affordable' in the ­capital - an income of €90,000 a year is required.

Builders suggest that VAT adds around €40,000 to the cost, but if the rate fell from 13.5pc to 9pc, it would reduce the price per unit by €10,000. Development levies should also fall.

The concern from Government is that any cuts would not be passed on to buyers, but Construction Industry Federation boss Tom Parlon says it must act.

"The Government has to ask if it can afford to take €40,000 (in VAT) from each unit? Can the local authority take €15,000 (in levies)? If Government swallowed the accusation they were bailing out developers, it would stop this from getting worse.

"A much bigger political hump will be this time next year, when the parties are going for election, and we have an increased number of homeless people and rents are going up."

But there are tax breaks and incentives which could be used to increase supply.

"We hear about under-occupancy of properties," says Karl Deeter. "If a lot of these houses had backyards, we could give a planning exemption to build a 70 square metre home provided it meets certain criteria. The owner could rent out the house under the rent-a-room system, where they would get €14,000-a-year tax free."

The Government plans to build 47,000 social houses by 2021 under a €5.35bn package outlined in its Rebuilding Ireland strategy announced last year. Housing bodies and others suggest the approvals process needs to be quicker, and warn that the cost of securing some social units is too high.

Under the Part V process, up to 10pc of units in a development must be offered to the local authority as social housing. In recent weeks, it emerged that Dún Laoghaire-Rathdown County Council was told that a social apartment in a Dalkey scheme would cost €520,000.

"Instead of taking property, we should take land instead," Lorcan Sirr says. "And also, your planning permissions will expire if the land isn't handed over within six months. Why would you buy houses when you can build them yourself for €200,000? I think that could be a game-changer."

The affordability question

The big gap is catering for families or individuals in the €35,000 to €75,000 income bracket who don't qualify for social housing, but struggle to secure reasonably-priced accommodation.

With assets of more than €13bn, there is a role for credit unions to finance housing, particularly affordable rental, and achieve a steady return over time. There is no logical reason why the garda credit union couldn't build homes for its members.

James Pike, who is also a board member of the Túath Housing Association, says it has proposed a 'rent and save' scheme. The State leases the land, and gets 10pc of rental income. Rents would be 80pc below market rates, and index-linked to provide certainty.

Because it would be low-cost, well-managed housing, it would also be occupied, providing certainty to investors. A small portion could be sold to fund development. Tenants could buy their units over time.

"Affordable homes will never be provided by the private sector. For a fund operating in a precarious stock market, it's a steady 3pc," he says.

Planner Tom Phillips, who is also chair of Property Industry Ireland, says while there is a fast-track planning system in place for schemes of 100 units or more, other reforms are needed. "There is nothing in legislation which requires local authorities to respond (to the developer). It's open ended," Phillips says. "The local authority may never respond, despite the builder having tight timeframes, and that adds to costs."

In addition, standards are interpreted in different ways by different planning authorities, adding to delays.

Funding remains an issue, particularly for smaller builders keen to deliver 20 to 50 units a year. Action is needed on this. Banks also appear reluctant to lend for one-off homes or smaller projects, impacting on builders like Peter Walsh. With around two-thirds of houses in Dublin being suitable for families, higher densities are also needed.

But the low-hanging fruit, without doubt, are the 180,000 vacant homes dotted across the State. Even bringing 10pc on stream would have an impact.

Tom Phillips also points to the benefit of employing town architects, which has helped transform Westport in Mayo, and could be used in areas including Limerick city, Youghal and Boyle which have enormous potential to re-use existing buildings as homes.

The construction industry says the internal layout of protected buildings should be capable of being altered to provide homes, which is currently banned. There can also be too much red tape around converting commercial units to homes. There is potential for 4,000 units in Dublin alone, and a one-stop-shop for necessary approvals around planning, fire and disabled access is needed.

But there are also unexplored opportunities including worker housing for those employed in a city for a number of days before returning home.

There's vocational housing, for nurses, gardaí and teachers, and housing for the aged which is largely ignored here. Delivering all three would help free up family-sized homes.

Conor Skehan says the most important thing now is not to get in the way of delivery by introducing new policies.

"We're at the classic year four of a five-year cycle. This is always when panic sets in. The reality on the ground is the long, slow slog of permissions is in and they are being built. Well-intentioned interventions create uncertainty, so don't change the goalposts. The recovery has started. The short-term solution is don't get in people's way."

Tom Phillips agrees.

"There are plenty of policies, but it needs a bit of umph to get it going."

@paulbmelia

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