Thursday 24 January 2019

Coveney walking a tightrope in risky bid to end housing crisis

A homeless boy begs on Dublin’s O’Connell Bridge
A homeless boy begs on Dublin’s O’Connell Bridge

David McWilliams

Imagine Simon Coveney in a translucent, skin-tight leotard, high above the political swamp, walking the tight-rope between the social reforming objective of rent control and the hard commercial reality of dormant housing supply. Get the picture? This is the minister's position.

He realises that rents are out of control and that, socially, it is untenable for a person of conscience to do nothing as homelessness rises and tens of thousands are caught in a high-rent trap. However, economically he sees that rent controls or a rent freeze might hinder supply.

So what does he do?

He does a bit of both.

He has created rental zones where rents can go up by only 4pc per annum over the next three years, but he has exempted new builds from this to try to encourage builders to lay foundations urgently in these areas.

Could it work?

Yes, it could.

Is it risky?

Yes, it is.

Was doing nothing an option?

No, it wasn't.

When something is broken, you have to try to fix it. Anything other would be reckless and irresponsible.

You know that when a prominent Fine Gael minister brings in a form of rent control, things are not normal. These are clearly not normal times. Rents are far too high in much of our major urban areas. This has to be brought under control but, equally, house/apartment building needs to be accelerated.

Some people argue that these are mutually inconsistent objectives - rent certainty and accelerated house building - in the sense that you can't cap rents and encourage supply. The line of argument goes that if you cap rents, builders will stop building because people won't invest in housing because the rent (the yield) will be limited.

If you buy this argument, then ask yourself, why do we have a housing crisis? Surely in an era of rising rents, housing supply should be abundant? It's not, so there is something else going on.

Before we analyse, let's examine what the Government did yesterday.

The main proposal would result in a 4pc annual limit on rent rises in designated areas. The system will last for a maximum of three years.

The limits will first be introduced in the "rent pressure zones" of Dublin and Cork city. These zones are neighbourhoods where annual rents have risen by at least 7pc in four of the last six quarters and where the average rent in these areas is above the national average in the last quarter.

In terms of politics, Fine Gael is not supposed to do things like this, which makes the minister's intervention even more interesting.

If this came from the left-of-centre, that would be one thing. But coming from Fine Gael - the party that has traditionally represented the interests of landowners - means that things are out of control and this is a minister who wants to fix things.

But will it work?

In short, yes - because old arguments are not valid.

Traditionally, economists argue against rent controls in the assumption that the free market will provide. But sometimes it doesn't and certainly in Ireland, the free market doesn't work for accommodation and housing.

You have to address the reality on the ground, not on the blackboard.

For the past two decades, the free market for housing has been dysfunctional.

In the boom, we built far too many houses in places that far too few people wanted to live. An unholy axis of banks, developers and government hijacked the country, and used and abused the housing market to such an extent that the entire economy was set up to fail. It wasn't a question of whether the economy crashed, it was just a matter of when.

And when it did, society paid a huge price.

In the subsequent recovery, rents rapidly rose as the housing supply failed to respond to demand. These are the facts.

Therefore, intervention is necessary. By targeting certain areas, where rents are most expensive, the Government has done the right thing. Renters - 20pc of our society - can't wait for the market to rectify itself.

Ireland has two rental markets in reality: The urban market, where rents are rising rapidly, and the rural market, where rents are not high enough. Therefore, a country-wide rent cap is not the option, it has to be targeted.

In the third quarter of this year, rents were 8.6pc higher nationally than in the same quarter of 2015. Rents are now 5pc higher in Dublin than their previous peak in 2007. While increasing outside of Dublin, rents remain at 7.3pc off their peak levels.

Within cities, there are enormous disparities and the State has to act because the only way it can prevent rents rising more is by imposing a freeze in what it calls "rental pressure zones".

In identifying these "rental pressure zones", the State has made a distinction between the existing supply of houses (which is covered by the new rent controls), but it has omitted new builds. It hopes therefore, to encourage - or at least not to discourage - new house/apartment building.

Typically, economists argue that rent controls benefit only those who already have a rented house/accommodation.

Those who want to get a place to live suffer because, economists believe, the supply of houses will be affected because investors won't want to buy new apartments because the yields on these will be capped by the rent control.

This line of thinking concludes that with rent freezes, ultimately fewer houses will be built because there are fewer compelling reasons to buy to rent.

The State has tried to get around this logic by omitting new builds.

Intervening now is the right thing to do.

Property interests shouldn't impose their will on society.

The fact that this move comes from a Fine Gael minister underscores the extent of the problem and let's hope it is the first of a number of measures to rectify the housing problem.

It's a fine line Mr Coveney is walking. He needs to cap rents while accelerate building. This is a difficult thing to do for obvious reasons, but finally a government has moved, with all the risk that entails.

Doing something urgently is far better than doing nothing.

Irish Independent

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