The recent explosion in property prices in the Dublin area, combined with the latest finding that almost 80,000 housing units are required over the next five years, raises the question of why the construction of new developments is not happening at a pace. Whichever way you look at it, it’s a puzzle. If, as we’re being led to believe, first-time buyers are clamouring to get on the property ladder and almost 10,000 new houses are required nationally this year alone, why isn’t someone meeting this demand – and making a quick buck in the process? It may be a case of two plus two doesn’t always equal four.
The concern about new development comes against a background of rising prices in the capital, with estate agent DNG the latest to weigh in on the issue, reporting that Dublin prices rose by a hefty 8.9 per cent in the first three months of this year.
And tight supply is a contributing factor. According to property portal myhome.ie, in the first quarter of 2011, some 6,792 properties were for sale in Dublin. Fast forward to the same period in 2013 and this had dropped by 47 per cent, falling further to just 3,010 for the first three months of this year.
“It’s no surprise to anyone close to the property market that there is a potential for a housing crisis in the not too distant future,” warns Michael Walsh, head of legal firm Byrne Wallace’s property practice.
So why isn’t there more construction taking place? To start with, funding remains tight, with banks still reluctant to lend for property.
And where finance is available, Jimmy Healy, public affairs manager with the Construction Industry Federation (CIF), says that developers have to put up 50-60 per cent of the equity themselves, which is "making life difficult".
Strategic development zones
Where development is happening, it is often being funded through other sources – New Generation for example, which is launching a new development in Sutton, north Dublin, is funding its developments itself, with the backing of cash-rich investors.
This begs the question as to why cash- rich international investors aren't spotting an opportunity to come in and build in Dublin. After all, US property outfits such as Kennedy Wilson are happy to acquire completed or partially completed apartment blocks, so why not build from scratch?
But it’s not just about funding. The industry says that it is simply not economical to build – despite the fact that land prices have plummeted.
Walsh points to the experience of developer clients who have land banks and “are simply saying that it’s uneconomical to develop”.
Healy agrees.“While there has been a slight reduction since the boom years, it’s still not really competitive,” he says, adding, “land costs have diminished but beyond that nothing else has really changed. Material costs are the same, labour costs are the same, and the various taxes and levies are the same.”
Figures from the CSO support this, showing that construction costs have held steady, while the price of some elements, such as insulating materials, has soared. Healy suggests that the cost of building a typical three-bed semi-detached house would be about €197,000 – and this excludes taxes and land costs.
But what about a developer who has recently bought land at a knock-down price? For Walsh, this “certainly helps”, but he notes that they will still be faced with increased development costs.
One factor that can help developers undertaking new construction is planning certainty, and in Dublin there has been a significant roll out of strategic development zones (SDZ), with four (Grangegorman, Monard, Cherrywood and North Lotts and Grand Canal Docks) introduced since 2010.
“The benefit of an SDZ is certainty for the developer, seeing as much of the thinking around property development for a designated area is frontloaded. Greater certainty leads to more and better development. We need more SDZs,” says Walsh.
But despite the zoning, industry commentators say that development levies remain too expensive.
For chartered town planner Tom Philips, the expense of levies can negate the value of a zoned area of land. In Kilternan for example, the cost of levies and financial contributions could be €250,000 per hectare for the Luas, and €60,000 per unit.
“You couldn’t make a scheme in Kilternan stack up financially,” says Philips.
Another inhibiting factor is the Part V regulations, which require developers to make available up to 20 per cent of any development for social housing. This results in a cost of between €6,000-€30,000 per unit for the developer, Healy says, while Walsh notes that it “severely limits viable development and requires reform”.
A centralised planning authority could be helpful, and the impending reduction of planning authorities from 88 to 34 is welcomed, but the role and timeline of an independent planning regulator still remains unclear.
Yet another issue is the density of developments that planning authorities still request, with views differing as to whether this is the right road to go down.
High vs low density
John Moran, secretary general at the Department of Finance, recently argued that we need to move on from the ideal of three-bed semis. Walsh agrees with this view, saying "we need to build a housing strategy that extends beyond the three-bed semi."
However, others suggest that high density is not the way to go.
“Some local authorities have higher expectations of density than is appropriate,” Philips says. In the Dún Laoghaire Rathdown area for example, the council looks for 35 units per hectare – even though this may not be appropriate in more rural areas such as the aforementioned Kilternan.
However, Philips maintains that councils appear to be reluctant to row back on high density planning – despite the market appearing to take a different view. Meanwhile buyers continue to favour a “house” over an apartment or duplex, hence the rapid rise in Dublin prices.
In south Dublin for example, a new apartment development of about 100 units constructed by Shannon Homes beside St Raphaela's school in Stillorgan is being rented out, rather than sold, while NAMA has indicated that it will rent or sell apartments in two developments in south Dublin it is funding to complete depending on what offers the best return.
“The market wants lower density but planners are insisting on higher density,” says Philips. Healy agrees: “there is no real desire in the market for apartments”.
In the meantime then, for new developments to really take off, it appears that property prices will continue to rise until the risk/costs/reward ratio reaches a level that makes new construction financially worthwhile.
But is this what we really want?
One way of easing the problem would be for local authorities to reduce their development charges, and change how they view their sources of income, ie if more new houses are built, revenues from local property taxes will increase.
“They should decrease their charges having regard to the revenue that is flowing, and is likely to flow on a recurring basis for any new houses that are developed,” argues Walsh.
While members of the Government have made pronouncements on the property market in recent times, a coherent strategy, which could offer some solutions to the current stalemate, has yet to emerge. Indeed for Walsh, there is no strategy “which we can say is fit for current purpose”.
Minister of State with responsibility for housing Jan O’Sullivan said last week that the Government’s construction strategy, due to be published within weeks, will examine the planning process to ensure it is fit for purpose.
In the meantime, there may be a chance for a planning strategy which better reflects what people want, with Dún Laoghaire-Rathdown county council currently embarking on a revision of its development plan for 2016.
