Wednesday 16 October 2019

Colm McCarthy: 'A failure of policy and politics lies behind a self-inflicted housing crisis'

The loan scheme is another evasion and too many vested interests are happy with crazy prices, writes Colm McCarthy

The high cost of property in Dublin forces workers to move away, causing a social and an environmental crisis and leading to jammed roads
The high cost of property in Dublin forces workers to move away, causing a social and an environmental crisis and leading to jammed roads
Colm McCarthy

Colm McCarthy

Last Tuesday, Leo Varadkar was asked in the Dail about an emerging shortfall in local authority mortgage lending.

The current Rebuilding Ireland home loan scheme, operated through local authorities, was launched early last year with a budget of €200m to boost lending to low-income borrowers.

The scheme offers cheaper interest rates, and lower deposit requirements, than mortgages from banks.

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The qualification rules are different from those operated by commercial lenders. Overseen by the Central Bank, commercial banks impose loan limits which are pre-set multiples of borrower income and they can choose high-income borrowers. They have incentives to stay solvent by selecting the borrowers least likely to default.

Borrowers with higher incomes and hence better capacity to service loans are excluded from the government scheme.

There is an explicit selection mechanism which guarantees high credit risk for the local authorities: prospective borrowers must demonstrate that they have already been refused mortgage finance by two banks.

The scheme, designed to identify and accommodate high-risk borrowers, has been oversubscribed.

The Taoiseach responded to the demands of Dail deputies from all sides and assured the House that he would consult with the Central Bank about the advisability of increasing the €200m cap.

If the government scheme was proposed by a lender under its supervision, the Central Bank would refuse permission. With lending rates low and a high risk of non-performing loans, the lender will likely lose money - the scheme is deliberately targeted at high-risk borrowers.

The Central Bank will no doubt concur with the Government's wishes, but the lender, ultimately the Government, is not a licensed bank and it is not clear why the Central Bank's opinion has been sought at all.

Local authorities borrow the money lent under the current scheme, as they did with its predecessors, from a state body called the Housing Finance Agency. If the borrower profile is risky, it would be prudent for the local authorities to make adequate balance sheet provisions and to write off promptly any bad debts which arise.

There are no advance provisions in the accounts of local authorities, nor do they show separately the bad debt amount written off for historical losses. It is thus not possible to be sure that all loan amounts shown as assets will be realised.

A note to the 2017 accounts of the Housing Finance Agency explains that no provision is made by the provider of the funds, borrowed in the market by the HFA under government guarantee, and the agency has been posting regular profits on its lending to the local authorities.

The accounts record that "…all loans advanced to local authorities are approved by the Minister for Housing, Planning & Local Government" and noted "..the Board's understanding that central Government supports local authorities in meeting their obligations to the HFA". Accordingly, the HFA makes no provision.

As a result, there seems to be no adequate provision anywhere for loan losses, in the accounts of either the local authorities or their state-owned funding conduit, the HFA. Nor is there a contingent liability (to make good the losses of local authorities) shown in the central government balance sheet.

Data available on the website of the Department of Housing, Planning and Local Government show that about €900m is outstanding and that there are substantial arrears.

The €900m is not an enormous sum and there is no crippling write-off hidden here but the accounting is reminiscent of the banks during the bubble.

As with so many of the proposals to deal with the housing crisis, the scheme is an evasion. The problem is that the purchase of even a starter home is unaffordable for people on modest incomes in and around the city of Dublin and in a few other parts of the country. Only a steady increase in supply, with a consequent reduction in house prices and rents, will address the problem.

Given the widespread availability of derelict sites in Dublin, in both private and public ownership, and the rolling prairies of undeveloped and unzoned land which surround the city, the crisis is self-inflicted, a failure of policy and politics.

Numerous other non-solutions are available and have obvious appeal for politicians unwilling to face the music. Browbeating the Central Bank to relax its lending guidelines is another example. Any policy which increases the availability of mortgage credit in the face of fixed supply will make the affordability problem worse.

Other wheezes with political appeal surface from time to time - why not impose statutory control on rents? Would any politicians out there like to contemplate the logical corollary, a statutory reduction in house prices?

There are new apartments in leafy Dublin 6 for sale this weekend, extending to all of 1,300 square feet, the size of a bog-standard suburban semi, at prices in the €800,000 bracket.

Prices for starter homes much further out are €350,000 and upwards, double the price in many provincial locations. Young people on normal incomes have given up and the average age at which people commence home ownership has risen to the high-30s for the dwindling numbers of Dubliners who can afford it.

This is a pensions policy timebomb - paying off mortgages has been an important component of retirement saving in Ireland for two generations, threatened by the sharp decline in owner-occupation.

Many Dublin workers commute through the rural fastnesses of Meath and Kildare to find affordable accommodation, an environmental as well as a social disaster. Residents of the city and inner suburbs have the lowest car ownership rates and clock up the lowest mileage in the country.

Construction industry capacity was depleted during the bust and the available resources are stretched. If the Government is serious about delivering affordable accommodation in those parts of the country most afflicted, policy needs to admit that the crisis is regional rather than national.

A diversion of available resources into Dublin and the mid-East region will happen gradually, but only alongside extensive re-zoning of the prairies and the derelict sites, and the freeing-up of planning permission.

As the May local elections approach, most candidates are instead establishing their credentials as defenders of dysfunctional zoning and as opponents of every planning application submitted in the capital.

Policies that are failing sometimes assemble a blocking coalition devoted to their indefinite retention, and so it is with the Dublin-area housing crisis.

One of the listed residential building firms has €600m of undeveloped sites on its balance sheet, the banks are excessively reliant on lending secured by residential property, the election candidates appeal only to the contented home-owner.

There are simply too many vested interests happy to persist with ridiculous house prices.

The growing cohort of those priced out of home ownership, and stiffed for exorbitant rents, are politically unrepresented.

The opposition to planning applications even extends to the revolutionary left, consistent, to be fair, with their antipathy to the taxation of residential property.

It would be quite something if every single political party and grouping lines up for the nimby home-owner vote at the local elections.

Candidates should be careful though - according to the 2016 census, owner-occupiers are in a distinct minority in many electoral divisions in Dublin city and its inner suburbs.

Sunday Independent

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