Thursday 26 April 2018

Housing Agency report gives us a lot more heat than light

Given that the cost of construction is arguably the single biggest contributor to the housing supply crisis, it is worth delving into this report in a little detail.
Given that the cost of construction is arguably the single biggest contributor to the housing supply crisis, it is worth delving into this report in a little detail.

The Ronan Lyons Column

This week, a flurry of new reports came out about the housing sector. One, published by the Housing Agency, compares residential construction costs in Ireland with those in other European countries - the cost of building in Ireland with costs in the UK, France, Germany and the Netherlands.

Given that the cost of construction is arguably the single biggest contributor to the housing supply crisis, it is worth delving into this report in a little detail.

The underlying data came from the European Council of Construction Economists (CEEC) and Eurostat, as well as country-specific data sources, such as the Society of Chartered Surveyors and the Central Statistics Office in Ireland. The figures are ultimately from 30 completed projects across the five countries, with most projects completed earlier in the decade and 'scaled up' by cost indices.

As is true of any cost comparison, it had to make a number of assumptions in order to come up with results. In this instance, it only focused on what are known as 'base construction costs'. In other words, in addition to excluding site costs, profit and VAT, a host of other costs integral to the provision of regular housing were excluded too.

Professional design fees, as well as sales, marketing and legal costs, are not included in the study. In addition, substructures - especially basements - are specifically excluded, as are all external works such as roads, paths and fencing, and site utilities.

While the exclusion of site costs and VAT is perfectly understandable, it is less obvious that professionals' fees and the cost of a basement should be excluded. This is particularly true if the construction of a basement is mandatory in Ireland but not in other countries. As basements are very expensive to dig, what may look like similar costs could be very different once plans meet reality.

Similarly, the choice of countries is somewhat unfortunate in both scale and scope. A comparison with four other countries is not nearly as useful as a comparison with 14 - the number of CEEC members - or 40, not far from the total reported by Eurostat.

The countries chosen were done specifically because they have the labour costs that are "broadly comparable" with Ireland. This is somewhat cart before horse. If labour makes up roughly two-thirds of base construction costs, then to focus only on countries with a similar labour cost will drive the results.

How does Ireland compare with Denmark, Sweden, Estonia or Austria? Those are not meaningless comparisons. In fact, it may be more meaningful to compare with countries of a similar size, rather than with the UK, France and Germany.

Perhaps just as importantly, the idea of comparing countries with each other is also of limited value. Within the UK, as the report itself notes, construction costs are almost twice as high in London than in Belfast.

A more natural unit of analysis is the city, not the country. Large cities do appear to have more expensive building costs than small ones, and this study has put Dublin, Cork and Galway in with some of Europe's biggest cities.

It is, therefore, not as surprising as it may seem that the headline finding of the report is that construction costs in Ireland are similar to the UK, France and Germany. They are, however, almost 20pc more expensive than in the Netherlands, something that the report is oddly silent about.

However, perhaps the single biggest limitation of the report is that it is only in index form. Costs in Ireland are expressed as the number '100', and other countries are given relative to this. It is impossible to convert this into affordability and into policy.

We know, for example, from reports by Turner & Townsend, that inflation in Dublin build costs is higher than almost anywhere else they analyse in their reports. Istanbul and Buenos Aires were the only cities, of 43 covered, with higher cost inflation than Dublin. Thus, it is somewhat hard to believe the findings of this report that say costs haven't changed since 2010.

We also know something from Turner & Townsend reports that is not reported in the Housing Agency's study - the level of costs. The Turner & Townsend report for 2017 estimates that the cost of building low-rise apartments in Dublin was almost €2,000 per square metre in 2016.

Once you have per-square-metre costs, it is possible to work out a baseline for overall costs and, therefore, for the minimum rent needed for a project to break even. Crucially, this break-even rent can be compared with incomes in the real economy. With an index, none of this is possible.

This is where I believe further concerns arise with the Housing Agency figures - they just don't seem to tally with anyone's experience of the construction sector right now.

Going back to that Turner & Townsend report, it believed that based on prevailing inflation, the per-square-metre cost was expected to rise to above €2,100 in 2017, and if pressures in the market do not change, to almost €2,300 this year. This would put costs in Dublin almost 50pc higher than in Paris or Amsterdam, 70pc more expensive than Munich and more than twice the level in Madrid.

The report released this week by the Housing Agency is so starkly at odds with both sentiment in the sector and other reports such as the one cited above. For that reason alone, it would have been helpful for the report to dig into those differences.

Without that analysis, it is likely that this report will generate more heat than light - on a subject about which much ink has already been spilled.

If vision drives strategy, then details drive tactics. Unfortunately, I believe the new costs report does not have the detail that can enable policy to boost housing supply.

  • Ronan Lyons is assistant professor of economics at Trinity College Dublin and author of the Daft.ie Reports.

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