Saturday 24 February 2018

Ronan Lyon: Should the State be building social housing?

'A measure of a good social housing system is that it steps up construction when the economy is shrinking - as demand for social housing rises with unemployment - but here, our system is failing us.' Photo: PA
'A measure of a good social housing system is that it steps up construction when the economy is shrinking - as demand for social housing rises with unemployment - but here, our system is failing us.' Photo: PA

Ronan Lyon

Last week's column was the third in a series examining how the new government should address the housing challenge, when it takes office. It looked at how to make real a right to housing for all citizens, regardless of their level of income. It called for replacing the mishmash of legacy schemes we currently have to house those on lowest incomes with a single income top-up for those who don't earn enough to cover the cost of their accommodation.

A few of the details, though, are worth teasing out - particularly when it comes to arguments about whether the Government should build itself. At the heart of good social housing systems are construction costs.

Take a home that costs €250,000 to build - its 'break-even rent' covering all costs is roughly €1,250 per month. How does this compare to the real economy?

A family that earns €45,000 a year has monthly disposable income of about €3,000. The golden rule is that you shouldn't spend more than one-third of your income on accommodation, so this family shouldn't be spending more than €1,000 a month on housing.

In other words, if they are to afford the property that costs €250,000 to build, they'll need a monthly subsidy of €250 from society to bridge the gap between the €1,000 they can afford with the €1,250 in break-even rent.

Hopefully, this example shows just how closely related build costs and social housing are. The more expensive it is to build a home, the more of a top-up those on lower incomes are going to need to find somewhere to live. And just as important, the more expensive it is to build a home, the greater a fraction of society is going to require a subsidy.

A family earning €45,000 a year is actually above the median income, while €250,000 is roughly the cost of building a two-bedroom apartment excluding land costs in Ireland currently. So Ireland in 2016 is in the worrying situation where a family in the top half of the income distribution is not able to afford even a two-bedroom apartment, let alone something larger. This is a reminder that we can't fix the social housing crisis in Ireland until we address the very high level of construction costs.

The term "social housing" means all the systems the State puts in place to ensure that all can access housing, regardless of income level. In particular, social housing should be about making sure those on lower incomes do not end up living in certain types of accommodation, for example, only the oldest or most decrepit homes, and similarly that they do not live apart from the rest of society.

What we have currently though is a system very far removed from these goals. For example, rent supplement is what you might call a zero-one subsidy. You either get the whole thing, or you get nothing. This creates a barrier to taking up employment as well as being inherently unfair, as it gives those just below the threshold far more than those just above the threshold - and the same as those who have no income at all of their own.

A housing subsidy that varies with your income is completely different. Those who need the most help get the biggest top-up, while those who are very close to being able to afford their own place to live are not treated much differently to those whose incomes are just above that cut-off. This subsidy would need to be calculated based off official earnings, both private (Revenue Commissioners) and public (Social Welfare).

So who decides the cut-off between getting a subsidy or not? This is where construction costs come in - but as above, once the subsidy varies with income, it avoids the 'rent trap' of people being discouraged from working. The Government would finally need to take charge of the lack of housing supply by having a set of definitive figures for how much it costs to build a home. And it would need to make sure that those costs are sensible, relative to average incomes.

How does this relate to the Government building homes? By providing a top-up related to the cost of building new homes, the Government immediately creates the perfect collateral for approved housing bodies such as Clúid and Respond to build social housing in large volumes.

Currently, they are limited in what they can do because there is no connection between the rent systems their tenants would pay and the costs they face. A measure of a good social housing system is that it steps up construction when the economy is shrinking - as demand for social housing rises with unemployment - but here, our system is failing us. Indeed, done well, an income subsidy gives a slight edge in the market to non-profit developers over their for-profit counterparts.

To see why, take a one-acre site worth €2m, on which both a for-profit developer and a social housing provider would like to build a block of apartments. Both are entitled to take tenants in receipt of a housing top-up. They face the same hard costs of labour and materials and the same finance costs.

Allowing for site costs, and its margin of profit, the for-profit developer would need to charge a break-even rent of roughly €1,600 on a two-bedroom apartment. As the social housing provider takes no profit on its units, its break-even rent would be €1,450, giving it the edge when bidding for the site. And if the social housing provider were gifted the site by a local authority, rather than purchasing it, the break-even rent would be as low as €1,100.

In this way, central government can put in place conditions where local authorities can partner with developers - either non-profit or for-profit - and deliver housing that will be accessible to all, regardless of income. And by creating an unbreakable link between rent and build costs, there would be no shortage of capital to fund social housing in Ireland. The way to provide social housing is not complicated - we just need the new Government to step up to the plate.

Ronan Lyon is Assistant Professor of Economics at Trinity College Dublin and author of the Reports

Sunday Independent

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