Fianna Fáil says it's "going all out on housing", promising to build 200,000 homes over five years if elected. Fine Gael has responded with a pledge to double the State's housing output to 40,000 units per year, which also works out at 200,000 over five years. What's wrong with these numbers?
Just about everything. For one, the State isn’t building these homes, the private sector is, which makes a nonsense of politicians promising massive ramp-ups in construction. Second, the building industry here is already running at near full capacity with significant skills shortages across the board, which means it doesn’t have the scope to build at this level, not without a significant influx of foreign labour. But worst of all is the presumption that a jump in supply of this magnitude will deliver on affordability; it won’t.
The bulk of housing in Ireland is built via a private sector speculation model, which is no longer able to produce homes at affordable rates for people on low to middle incomes. And that's because the cost of residential construction is terminally out of kilter with wages and a big uptick in supply is not going to change that.
Take the average dual-income household earning €80,000 and qualifying for a mortgage, under the current rules, of €280,000. Their purchasing power is nowhere near the median price paid for a house in Dublin last year (€370,000). And you’d be hard pushed to find a house for that price on MyHome.ie or Daft.
So if the private sector builds these 200,000 homes as both Fianna Fáil and Fine Gael have promised, who will buy them? Sean Mulryan of Ballymore property group posed the same question in an article in last Saturday's Irish Times.
“There may be demand for 35,000 new homes a year but people can’t afford them – and that’s largely down to the high standards buildings must meet in Ireland, ” he said. He also estimated that about 10 per cent of houses completed in Ireland last year have not been sold, due to affordability issues, with those houses priced to give a 10 per cent profit margin, below the 15 per cent builders normally aim for.
Bricks to benefits
Accelerating land values, high construction costs and the exorbitant cost of credit – some builders are paying interest rates of up to 15 per cent on their loans at a time of historically low rates generally – have made residential construction here high risk and high cost.
At the same time, the State, which in the past picked up the shortfall in private sector construction via local authority building, now favours rental supports over social housing – the shift from bricks to benefits as it’s referred to internationally – which only adds further price pressure to the rental sector.
If market failure is defined as an inefficient distribution of goods in a given market, this is it. And by making policy tweaks here and there, the Government is unwittingly making matters worse.
Its tweaks to planning – lifting height restrictions; reducing the amount of Part V social housing units developers must provide; loosening the regulations for co-living schemes – were all intended to make it more viable to build, resulting in cheaper housing, but they have ended up inflating land values, which factor back into higher prices.
They have also delivered niche markets within the property sector, generating windfall profits for certain developers while diverting resources into specific areas, often with unintended consequences.
Land values
Similarly subsidies like the Government’s Help to Buy scheme for the first-time buyers merely support prices without making housing more affordable. We’ve had two decades of measures and very little to show for them.
Even when the State is acquiring housing on its own land, it can't seem to square the circle. Take the case of Dublin City Council and its O'Devaney Gardens' scheme, which is being redeveloped by private developer Bartra and where the affordable units are projected to cost an average of €350,000. These prices are in some cases higher than local market rates even though the units are being built on State land.
In the wake of the crash the then government had two principal objectives: the rehabilitation of the banks; and the successful execution of its National Asset Management Agency (Nama) plan to deal with bad loans removed from the banks' balance sheets. Rising land values and property prices, which also helped people out of negative equity, might not have seemed like a bad thing at the time, but it has come back to bite us.
The original target in the Government’s Rebuilding Ireland was to “ensure that an average of 25,000 homes are produced every year in the period to 2021”. But that just ended up being a statement with little or no bearing on reality, which brings us back to the 200,000 pledges.
When the political parties auction themselves with these back-of-the-envelope numbers, it’s obvious they’re not addressing what has become a complex and chronic problem for the country.
