Imagine a low-cost housing company. Let’s imagine it is established by a guy called Elon O’Leary — he has experience of technical innovation and low-cost business. He spotted an opportunity in the inability of the Irish market to meet a surging need to supply affordable housing.
At the time Irish society had allowed itself to believe it was a uniquely Irish problem — despite the reality that the real cause, the financialisation of housing, was behind a wave of crisis in the sector that was sweeping the whole world.
It reminds him of how a similar opportunity presented itself in the airline industry back in the early 1990s, when his low-cost carrier began offering fares that were half that of the established competitors.
The received wisdom of the airline industry was that flying was glamorous, expensive and could only be afforded by the few. It suited the incumbents to perpetuate this myth of expensive airline travel.
Those original low fares were achieved by a single-minded pursuit of affordability. This involved examining and questioning every single aspect of the business to remove all surplus costs. An early awareness of the reputational threat of equating ‘cutting cost’ with ‘cutting corners’ also led them to insist on building a record as the world’s safest and most modern fleet.
Imagine Elon’s delight when he turned his attention to the Irish home building sector and found it abounding with opportunities for cost-cutting. Elon wanted to know the price of every nail and latch that went into a house.
His aim was to supply the market with houses and finance packages at a cost that never exceed four times the annual disposable household income — at the impossibly low price of €200,000 per unit. Elon liked the word ‘impossible’.
“You want an affordable starter home? I’ll build to your budget. Let me tell you what you can afford and what you can’t,” he insisted.
A new starter home was handed over with a fully finished shell. Inside was a completely empty interior, with just the modular core of an energy and water services system, one bathroom and one kitchen unit. Fitted kitchens, fancy bathrooms, built-in wardrobes, decorative fireplaces, balustrades, carpets and wallpaper were all left for the new homeowner to gradually add as funds allowed over the years.
The houses came with full planning permission to extend the property by a further third over the next 10 years — allowing people to grow into their homes.
In the early days Elon had to fight off a lot of critics claiming he was only selling ‘cheap bunny hutches’. Pointing out that Ireland allows itself the luxury of one the highest rates of rooms per person soon stopped that line of attack.
The original purchase price came with a finance package. This delivered lower-cost funding at highly competitive rates that out-competed traditional financial institutions — in the same way he had been able to help lower air fares by side-stepping the slow-moving, anti-competitive large airports in his early days.
The powerful Irish construction industry originally lobbied hard to contain him as an existential threat to their wasteful and inefficient but lucrative practices. He responded, just as he did with aircraft, by arranging volume and value deals with the main suppliers of materials to drive down costs which he then passed on to his customers.
The East European window and door manufacturer wasn’t happy to agree a 50pc reduction in list prices — but swallowed the pill because it was part of an agreement to supply Elon with €25m-worth of goods every year, guaranteed for each of the next five years. When you are producing 10,000 units per annum, then bulk purchasing makes all the difference.
It was the same with all of the other parts of the house — they were all bought at huge discounts that were made possible by bulk purchasing.
A similar pattern emerged in the management of the labour required to build the homes. Very large components were quickly assembled in off-site factories — full walls, ceilings and floors with all of the wiring, switches and sockets already in place, tested and certified. Factory-finished homes were faster and cheaper because they were freed from the tyranny of wet weather delays.
Elon treasured a comment from an early happy customer: “Once you’ve experienced a factory-built house, you’ll never again be satisfied with a site-built once-off.”
His company catchphrase became: “We make the lowest cost and highest quality homes — faster than anyone else.”
Elon was no fool either. He understood houses were also homes and that they played a huge part in people’s identity. His houses may have been inexpensive, but they never looked cheap.
As a young accountant he was amazed to learn from one of his mentors that talent is the cheapest thing in the market. His homes quickly became icons of high-quality design because he lavished fees on this cheapest ingredient while providing encouragement, publicity and advice to the best upcoming talent of designers. His designers seemed to relish the challenge of working with his iron-clad and inexpensive ‘kit of parts’ which had already been bought at huge discounts.
His boldest stroke was the most counterintuitive — “What’s rare is wonderful,” he’d say, explaining why he never produced a development of more than 60 units and never within 2km of another of his own schemes. This also meant he didn’t have to compete for big sites with the traditional big house builders.
Local authorities and housing associations soon realised they could never compete with these prices — and they too became avid customers.
To the disgust of the anti-growth brigade, his affordable home company thrived and grew and is now Europe’s largest and most profitable housing provider — just like his airline.
Only Elon O’Leary had fully grasped the fact that the only thing that trumps financialisation is innovation, not nationalisation.