Kevin O'Higgins Solicitors

New housing plan fails to address the elephant in room

Sunday, 24 July, 2016
Colm McCarthy

Policies and zoning are behind high cost of homes in the capital but fixing the issue is a political quagmire, writes Colm McCarthy.

The Government's new housing plan has received a cautious welcome at best. There are good reasons for caution.

The dysfunctional housing market was at the heart of the 2008 banking crash which brought down the broader economy and destroyed the solvency of the Government. It took several decades of policy mistakes to create the disaster and there will be no quick transit back to a rational and well-functioning system.

The key problem with Irish housing, whether owned or rented, is affordability, as the Housing Agency has pointed out time and again. If prices were affordable there would be no sense of crisis.

In most parts of Ireland this is happily the case - there is no housing crisis.

In Dublin and a few other urban areas housing is becoming unaffordable even for people with decent jobs. Lending more money than banks can prudently lend, or than purchasers can prudently borrow, is an evasion, a choice to finance the problem rather than solve it. It has been tried in the years up to 2007 and the Central Bank has wisely flagged that there will be no repetition.

Policy mistakes in many areas can simply be acknowledged and the failed policies reversed without great cost.

Things are not so easy when it comes to housing. An enormous edifice of long-term debt for some and an illusion of household wealth for others has been built on the foundations of house prices divorced from economic common sense.

A house in the outer suburbs of Dublin is currently priced at double, or more than double, the price of an identical dwelling in most provincial areas. There is no economic rationale for this disparity and it is entirely a creature of policy.

It is moreover a creature of two damaging popular myths. The first is that Dublin is a very large city, the second that there is an absolute shortage of land around Dublin suitable for residential use.

Dublin is not a large city. The population is a little over one million and there are numerous larger cities around the world where housing is affordable for most people.

There are some with equally dysfunctional housing policies and identical problems. Dublin city is surrounded by rolling prairies of empty land zoned for low-value agriculture, interspersed with small pockets zoned for housing.

These pockets have become vehicles for a destructive speculation industry which corrupted local government, has infected national politics and produced a banking system dangerously focused on long-term housing finance.

When it released the results from the April 2016 census last week, the Central Statistics Office prepared a map which shows the geographical distribution of vacant homes.

Excluding holiday homes, just under 10pc of the national stock was vacant on census night. But the vacancy rate varied hugely across the country, with vacancies over 25pc in many parts of the West and the North Midlands.

In Leinster and most of Munster vacancy rates are much lower, testament to the failure, during the housing bubble, to build in the areas of strongest demand. Not merely did Ireland build too many houses, they were built in the wrong places. An inevitable result is that houses are for sale in many areas at less than the cost of construction.

The Central Bank rules permit 90pc mortgages up to a house price of €220,000. There are parts of Ireland where it would be difficult to find a house that costs that much. In the Dublin area it is difficult to find very many that cost any less.

Salary levels do not vary greatly across the country, so the problem of affordability, whether for rent or purchase, is largely a Dublin problem.

An annual income of around €50,000 puts an individual into the upper reaches of the Irish income distribution. But this will not be enough to command a mortgage adequate to buy a starter home in the outer suburbs.

The housing plan fails to address this central issue of affordability in the Dublin area. Sky-high prices for properties in the fashionable inner suburbs are not the crux of the issue.

The excess price of modest homes in the outer suburbs and the surge in rental costs across the city are what matters. Reducing those prices back towards construction costs requires a steady increase in the availability of residential zoning on the city's outskirts and the allocation of all available land in the central areas to apartment construction.

Achieving this outcome will depress prices, inflame homeowners and damage the collateral value of mortgage loans, the principal component of Irish bank assets.

Indeed the long-term profitability of the banking system benefits from the survival of a dysfunctional housing policy in the Dublin region.

If prices bore a more realistic relationship to construction costs, negative equity for mortgage holders would be even more prevalent and the collateral value of bank lending undermined. It is not hard to see why the politics of fixing affordability is so difficult.

The plan contains some measures which will make matters worse. The planned reintroduction of the first-time buyer grant in October's budget, even if confined to purchases of new homes, will tend to stimulate demand and circumvent the Central Bank's lending restraints.

Despite the reservations of many housing experts, the local authority tenant purchase option has been reintroduced with even bigger discounts than were available in the suspended scheme.

This has the potential to deplete the available stock of social housing even as local authorities scramble to get construction under way again.

It provides a further incentive to get on the waiting list for local authority accommodation - with average rents around €50 to €55 per week the deal is already a bargain and a free option to buy out the property at up to a 50pc discount is quite a sweetener.

This scheme is likely to be particularly popular in the urban areas where the discount is most valuable, precisely where pressure on the social housing stock is greatest.

One method of financing social housing in Ireland is the so-called Part V requirement on builders to provide up to 20pc social units in each development, with the costs recovered through loading the price of the remaining 80pc.

In effect there is an earmarked tax on the purchasers of these homes, the proceeds going to pay for social housing provision off the Government's books. It would be fairer, and would help affordability, if this cost was levied on the generality of taxpayers.

There is also a host of charges and compliance costs dating from the days when local authorities could not levy any local tax on residential property. With property taxes reintroduced all homeowners, not just the purchasers of new ones, could reasonably be expected to share these burdens.

The largest elephant in the room remains the exorbitant, and policy-induced, price of building land in Dublin and a few of the other urban centres.

This problem will not be resolved until the planning and zoning restrictions which have contributed so much to the current crisis are addressed.

Sunday Independent