Wednesday 17 January 2018

Land hoarding is pushing up price of new houses

With few houses being built but land zoned for 415,000, are developers now hoarding sites?

Nama chief executive Brendan McDonagh wants restrictions eased on the height of new apartment blocks, especially in city centres
Nama chief executive Brendan McDonagh wants restrictions eased on the height of new apartment blocks, especially in city centres
Dan White

Dan White

Average house prices rose by 11.9pc in the 12 months to April, according to the CSO. The annual rate of house-price inflation has more than doubled over the past 12 months. Yet the construction of new houses and apartments remains at very low levels.

Just 1,474 new houses were sold in the first five months of 2017. Even if one uses stamp-duty filings - which many analysts believe give a better indication of likely sales over the next few months - rather than completed sales, the figure still only rises to 2,164.

This is despite there being sufficient land upon which to build 414,712 new houses and apartments, according to the Department of Housing's residential land-availability survey.

At current levels of construction activity, it would take 93 years to build on all of the existing zoned land.

Even in the booming Dublin market, there has been very little new building, with just 554 new houses sold so far this year and 1,810 over the past 12 months. This is despite there being sufficient zoned land to build a total of 116,705 new houses and apartments in the four Dublin local authority areas.

The Department of Housing points out that figures for house sales doesn't include social housing. There was a 39pc increase in planning permissions, to almost 18,000, in the 12 months to March and a 42pc increase in site commencements notices, to almost 15,600, in the 12 months to May. The Government's Rebuilding Ireland plan projects an increase in annual new housebuilding to 25,000 by 2021.

However, with prices rising rapidly, but so little new construction activity taking place, the question is being asked: are many developers now 'hoarding', rather than building on zoned land?

Addressing the Joint Oireachtas Finance Committee last week, Nama chief executive Brendan McDonagh said: "There is no doubt that land-hoarding is an issue, although it is not the full story.

"For any given site, there is little disincentive to hoarding so long as the owner expects house prices to rise. Costs remain relatively fixed and any rise in house prices translates into profit on land."

McDonagh then went on to illustrate a hypothetical example, whereby a 20pc increase in house prices resulted in a doubling in the value of the building land.

One of the few developers building significant numbers of new houses in the Dublin area is Stock Exchange-listed Cairn Homes.

At the time of the publication of its full-year results last March, it had a 12,100-unit landbank, to which another 500 will have been added following the purchase of the Donnybrook site from RTE for €107.5m last month.

Cairn plans to build up to 400 new houses and apartments in 2017, a further 850 in 2018 and 1,200 in 2019.

A spokesman for the company said: "Cairn absolutely does not fall into the category of hoarding any of its land. Cairn is currently active on eight residential development sites in the greater Dublin area and its strategy of scaling its business will see it deliver in excess of 1,200 unit sales in 2019 when its business will reach maturity."

While land-hoarding is certainly a major obstacle holding back new residential construction, it is by no means the only one. Nama's McDonagh was highly critical of the local authorities and planners. He pointed out that it was not possible to begin construction on many sites until critical infrastructure, such as roads, sewerage, water and schools, are provided.

He was also highly critical of planners' insistence that urban apartment blocks have basement car parks, pointing out that each basement parking space added about €30,000 to the cost of a development.

However, he directed most of his ire at the height restrictions that most local authorities, particularly in Dublin, impose on new apartments blocks.

"There are particular difficulties with the viability of developing apartment blocks, which are, at best, commercially marginal at present," he said. "We need to build many more apartment blocks if we are to make a serious impact on new supply.

"Height restrictions which apply under current planning policy have an impact on the viability of commercial apartment development.

"In some cases, statutory development plans set a height restriction which is less than the most cost-effective scale. A city centre apartment development project that is not commercially viable at six to seven storeys is more likely to be commercially viable at, say, 12-15 storeys.

"In our view, the height restrictions currently applied, particularly in city-centre locations, are no longer appropriate, given current and prospective housing needs.

"Amending height restrictions to 15 storeys in city-centre locations and to 10 storeys in suburban areas merits serious consideration."

Vat at 13.5pc, local authority levies and other government charges now constitute an average of 36pc of the price of a new house, according to the Construction Industry Federation.

It has called on the Government to reduce the Vat rate on new houses to 9pc until annual new housing output hits 25,000.

The Department of Housing statistics put the number of new houses and apartments built in 2016 at 14,932, a figure that most independent analysts believe significantly overstates the actual total. In addition, the department's new housing figures also include an estimated 6,000 one-off houses in rural areas that never come on the market.

While factors such as inadequate infrastructure, low apartment-height restrictions and government taxes and charges go some way towards explaining the current very low levels of building, one keeps coming back to the issue of land hoarding.

And it's not just the usual suspects, the "vulture funds" who bought assets on the cheap from Nama in 2011 and 2012. Among the worst offenders are public bodies, says Trinity and Daft.ie economist Ronan Lyons.

His answer to the problem is a land tax. This would be based on the full value of all development, commercial and public land and would be charged at a rate of between 3pc and 5pc a year. Someone holding land and not building on it for five years would face a cumulative tax bill of between 15pc and 25pc of its total value.

"If you go lower than that, say to 1pc, then it would be easier to bear," says Lyons.

The 3pc vacant site levy, which comes into force at the beginning of 2019, is effectively discretionary as it will only be levied on sites deemed vacant by the local authority.

Although a land tax would go a long way towards freeing up building land, it probably won't happen. Not alone would it be fiercely opposed by private landowners, there would also be, as Lyons concedes, "huge push-back" from public bodies faced with massive land tax bills.

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