Thursday 24 May 2018

Ronan Lyons: Could cost rental housing help to kick-start the market?

'Social housing must be in addition to market housing, not a chunk taken out of it.' Stock photo: PA
'Social housing must be in addition to market housing, not a chunk taken out of it.' Stock photo: PA

Ronan Lyons

Last week, a Dail motion on cost rental housing was successfully passed. Proposed by Green Party TDs Eamon Ryan and Catherine Martin, it gained coverage primarily because of the locations suggested by the Green Party for pilots: Cathal Brugha Barracks and the Broadstone Depot.

Both of those sites are near the epicentre of the housing crisis.

Over the last three decades, there has been a return to urban centres across the world, including in Ireland.

This likely has a number of contributory factors, one of which is the banning of smoky fuels, which made urban centres visibly dirty.

This move back to city centres was hidden from view somewhat in Ireland during the Celtic Tiger, as policymakers and the private sector were more comfortable with extending the cities, through motorways and greenfield developments, than recycling the cities.

But re-using the same site for a new purpose - what is known in the business as brownfield development - is central to what keeps a city thriving.

And this is where Cathal Brugha Barracks and the Broadstone Depot come in. Cathal Brugha Barracks - or Portobello South, as it would no doubt become - is a sprawling 17-hectare site.

It is situated between Dublin 6 and Dublin 8, both areas in very high demand in recent years. In Dublin 6, rents have risen 82pc from their lowest point, while in Dublin 8, they have almost doubled in a few short years.

The picture is not much better near Broadstone Depot, or Stoneybatter East, as I'm sure it would be known. Rents in Dublin 7 have risen by over 94pc from their lowest point.

So how could cost rental help? The idea behind cost rental is that the rent paid by the tenant relates to the cost of making their home, not its market value.

This is a crucial distinction. Social housing supports that are based on market values, such as market rents, merely pit the so-called 'working tenant' against the so-called 'welfare tenant'. There is no guarantee that market rents are enough to encourage new supply.

Social housing supports that are based on the cost of providing new homes, however, are - by definition - linked to new supply. And thus, if we as a society want to guarantee a right to a home for all our residents, then cost rental is a key ingredient.

Social housing must be in addition to market housing, not a chunk taken out of it.

There is likely to be a significant positive spill-over from such a system.

In particular, once they are meaningfully involved in the provision of new homes, local authorities are much more likely to be cost-conscious.

A raft of new regulations pertaining to newly built homes were introduced in the aftermath of the Celtic Tiger. They are most commonly justified with reference to what was built during the Celtic Tiger.

However, if the regulations that had been in place had been actively enforced, the various shoddy developments that spring to mind would never have occurred.

The answer to poorly enforced regulation is not to bring in lots more - it is to enforce what is there in the first place.

The net result is that cost rental would be very expensive if introduced tomorrow.

The likely break-even rent for a two-bedroom apartment in the market today is at least €350,000, or €1,800 per month given the yield needed by the ultimate owner.

Setting profits and the cost of land to zero, it is still in the region of €1,250. Scrapping local authority levies and VAT, and taking advantage of low interest rates available to the State, the up-front cost is still in excess of €175,000.

These rents are simply not affordable to those in need of social housing.

But that huge gap in itself may make local authorities and national policymakers finally pay attention to what housing market commentators such as myself have been saying for close to five years now: lowering costs, not increasing rents, is the best way to solve the lack of housing supply.

Suppose policymakers do finally grasp the nettle and bring housing costs down by, say, one quarter.

The break-even or 'cost rent' for a two-bed is still likely to be in the region of €1,000 per month. For many - indeed perhaps most in need of social housing - this will still not be affordable.

This is where the second key element of social housing kicks in. Cost rental is just one part of the solution - the other is an income-varying subsidy. Typically, this works by taking a fraction of the disposable income of the tenants, usually about one third.

So a household with a monthly disposable income of €1,800 would pay €600 to their housing body for rent. If the cost-rent is €1,000, this means that the taxpayer covers the remaining €400.

If the household's income increased to €2,100, their contribution to the rent would increase to €700 and the subsidy falls to €300.

There are many attractive features to such a system. It means that those in most need - for example those with disposable income close to zero - get the most help. It means that there is no disincentive to getting a job, overtime or a promotion.

If, in the example above, the tenants' income went above €3,000 a month, they would simply pay their cost rent of €1,000, with no help from the taxpayer.

And social housing, by being based on cost rents, not market rents, means it is no longer the afterthought in the housing sector. In fact, if done through non-profit housing bodies, rather than local authorities, social housing can be first on the page, rather than last.

This would be where non-profit housing bodies partner with for-profit developers, to bring a mix of social and market housing to a site.

And all the while, the local authority can retain ownership (and ground rents) on the site. But first and foremost, such a system would focus those same local authorities on costs, the root problem of Ireland's housing crisis.

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

Sunday Independent

Life Newsletter

Our digest of the week's juiciest lifestyle titbits.

Editors Choice

Also in Life