Friday 24 May 2019

Capital needs cheaper homes, not higher debts

There is a property bubble on the way, says Colm McCarthy, and planning restrictions on the outer suburbs are having a significant negative impact

Crisis: The dysfunctional property market has already re-emerged just a few years after the biggest housing bust in the country's history
Crisis: The dysfunctional property market has already re-emerged just a few years after the biggest housing bust in the country's history
Colm McCarthy

Colm McCarthy

There is another house price bubble under way in the Dublin area. Notwithstanding the efforts by the Central Bank to keep mortgage credit under control, some extraordinary prices have been quoted recently for the small parcels of land that become available.

A site with planning permission is for sale on Vernon Avenue in Clontarf, on the north side of the capital. This is a nice area, close to the sea and only about four kilometres from the city centre.

The site is small, just under an acre, which equates to half a soccer pitch or about seven tennis courts. The permission is for 17 three-bedroom houses, so it will be a bit of a pinch. The guide price quoted for the site is €3.85m, which works out at an average €226,471 in site cost per unit. Given construction costs on smaller sites in the city and the various levies and taxes, if building goes ahead, these homes will need to sell for prices in the €500,000 bracket.

There is a three-bedroom semi-detached house available on the property websites currently, also on Vernon Avenue, which runs to 1,313 square feet. It is priced at €640,000, which should help explain the €4m per acre expected for the 17-house site.

The Phoenix Park contains 1,752 acres and is worth over €7bn on the per-acre Clontarf valuation. The Government alone must own enough Dublin land, on this basis, to wipe out the national debt.

This is not a proposal to carpet the Phoenix Park in three-bedroom houses, it is an illustration of the dysfunctional market that has already re-emerged in the city just a few years after the biggest housing bust in the country's history. There are working farms inside the M50, which is about 8km from the city centre through most of its length.

That is to say there is vacant land, not zoned residential, in the inner suburbs of Dublin, while demand pressure is sufficient to push the price for ready-to-go sites to €4m per acre. Huge rolling prairies of land can be found north and west of the ring road, further out, but some of it no more than 10km or 12km from the centre, which the planners have designated for agriculture (or 'amenity', whatever that means).

Meanwhile, would-be first-time buyers working in Dublin are eyeing properties in the midlands, 70km and 80km from the city, which are available at prices they can afford, but from which they must contemplate a daily commute of up to two hours through the vacant countryside.

On Joe Duffy's radio programme on Friday one young woman explained that she owned a five-bedroom house in Mullingar which she loved, but that the daily commute was a grind. Mullingar is 80km from central Dublin. She reckoned she could sell the Co Westmeath property for about €200,000, which is probably just over the cost of construction. But it is not enough to buy a site in Clontarf.

Commuters from the midlands who travel into central Dublin along the M3 motorway pass to the left a district called Pelletstown,, well inside the M50 and convenient to the Phoenix Park and many other amenities. There has been some residential construction around the area in recent years, mainly apartments.

The suburban railway line to Maynooth, upgraded at considerable expense in recent times, runs through the area which, like Clontarf, is just 4km from the centre. There are large tracts of undeveloped land around Pelletstown, inside the M50, including some currently devoted to agriculture, a curious obsession for urban planners. Prices in Pelletstown and adjoining districts are below Clontarf levels - it's a nice area too, but not close to the sea. Prices in the €300,000 bracket are nonetheless beyond reach of Dubliners on average incomes, or of the owners of fine five-bedroom properties in distant Mullingar.

There is a scheme for 318 new homes in Pelletstown headed for appeal to An Bord Pleanala. The area has been zoned residential since 1999, but existing residents object that the new development will add pressure to inadequate school provision in the area. They also complain that a promised railway station (on an existing line already built and paid for) has not been provided.

The merits of their objections are for An Bord Pleanala to adjudicate, but it is lamentable that this squabble continues. The residents may well have a case: public authorities, including the Department of Education and transport providers, can be a part of the problem too.

There are local disputes about numerous other residential sites in the Dublin area which actually enjoy residential zoning but where necessary services have not been provided. It is vacuous to point to the availability-on-paper of zoned land if it is impossible as a practical matter to proceed with development. But the deeper problem is the absolute prohibition by the planners of residential development in the outer suburbs of the city. There is enough land between Mullingar and Dublin to build a mega-city. Indeed there is enough land along the outer side of the M50 to meet current and future demands, some of it already close to decent transport links.

Two researchers at the London School of Economics, Christian Hilber and Wouter Vermeulen, have just released a paper in The Economic Journal looking at the development of house prices in the United Kingdom in recent decades and the role played by planning restrictions.

They conclude that planning restrictions have had a critical cumulative impact and that the areas of the UK with the most unaffordable house prices are the ones with the greatest regulatory interventions. The UK system of planning and zoning, and the system of housing finance, have been copied in this country and the resulting dysfunctionality of the housing market is not a coincidence. Housing costs are not a huge issue in Britain outside London and the southeast. Sounds familiar - there is no great issue in Ireland either, outside Dublin and a few other urban centres.

There are two bad answers to the Dublin affordability crisis. The first is to relax the mortgage lending rules, placing both banks and borrowers in the path of temptation. It is not prudent for banks to lend people very large multiples of income for house purchase, nor is it prudent to head back towards 100pc loan-to-value ratios. Remember how well that worked out?

The market valuations in Dublin are anyway distorted upwards by the artificial restrictions on supply. Housing is not a reliable form of collateral for long-term secured lending if there is a risk of sensible valuations, and hence negative equity, once a sane housing policy is instituted. Even if banks were permitted by the granite-faced supervisors to loosen mortgage finance, would it be wise for them to do so, or for the borrowers to avail of their imprudence?

The second bad answer would be to permit a renewed bout of pay inflation driven by the inability of Dublin-area employees to aspire to home ownership at current prices.

The last credit bubble saw government concessions to escalating pay demands, notably in the public service. Why not offer cheaper homes, instead of higher pay and higher debts?

Sunday Independent

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